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M & A On Their Mind?

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Sun Pharma recently completed its acquisition of Ranbaxy. It has also set aside a record $7 billion for further acquisitions. And its not the only one, pharma companies are scouting for suitable targets to expand their product baskets and enter new markets as they adopt a wait and watch approach. By Shalini Gupta

As the tug of war between Shire and Baxalta continues, those on the sidelines speculate that should the deal come through, it would make Shire the world’s biggest maker of rare disease drugs as it would enter the club of  Top 20 global pharmaceutical companies. It would also bring the transaction value of global pharma deals announced so far to $284 billion, making 2015 the biggest year for pharma dealmaking (Source:Dealogic). If reports are to be believed, the spate of acquisitions is not going to die down any further and is only slated to gain momentum in the coming months with more deals in the pipeline. India is also gaining momentum in its own way.

United States: On a high

Laura Vitez

According to data from Thomson Reuters analysed by PricewaterhouseCoopers (PwC), the US saw 4,654 M&A deals worth a record $875 billion from the beginning of 2015 to May 31. The year is also speculated to be best for the US since 2007 for M&As. Pharma’megadeals’ — like AbbVie’s $21 billion deal for Pharmacyclis and Pfizer’s $17 billion deal for Hospira, together accounted for 17 per cent of the total deal value, coming in at $150 billion. Pharma acquisitions thus  represent a highly significant portion of the aggregate dollars being spent on M&A.

Informs Laura Vitez, Senior Deals Analyst, Thomson Reuters, “The numbers of deals and aggregate dollars spent have both increased in H1 2015 compared to H1 2014, with all of 2014 greater than 2013, and 2013 up over 2012.” The key drivers include the accelerating progress being made scientifically and clinically combined with the still-open window for IPOs.


“Companies that may previously have held back on doing a transaction or may have preferred a licensing event are today stepping up and acquiring biotechs to ensure access to the assets and technologies of interest. Also, with pharma past the bulk of the devastating patent cliff, the biggest companies have been able to re-strategise and are today heavily focused on deal-making to fill out their pipelines,” she adds.


Companies are also not shy to divest businesses that no longer fit their updated strategies. Those which had previously inverted their tax status by acquiring companies in domiciles with lower corporate tax rates are now using their tax-advantaged status to win M&A auction processes and are driving acquisition prices ever higher, she notes.

Kalpana Jain

According to Kalpana Jain, Senior Director, Deloitte India, “Pharma, medical and biotech together accounted for ~$205 billion worth of deals, which is ~12 per cent of the total Global M&A deal value of ~$1.7 trillion. In H1 2014, pharma accounted for ~$188 billion worth of deals, which was 12.2 per cent  of the total global M&A deal value of ~$1.5 trillion.Value-wise, there has been an increase of ~10 per cent in deals in the pharma space in H1 2015 over H1 2014. Also, pharma deals have maintained their share in the overall M&A pie.”

Nearly all large pharma companies are interested in drugs for orphan and other rare diseases, with only GSK having stated a contrarian interest. However, the decision to be acquired is driven by the company’s corporate strategy says Vitez. It depends on whether they want to continue to grow and develop products on their own, holding all the risk but potentially selling later for a larger price, or if they made a strategic choice to sell the company now and let someone else harvest the upside.


This does not mean that smaller firms are at any disadvantage. Rather such companies in the novel drug space (unlike specialty/ generic space) are in the catbird’s seat, meaning they have a variety of very appealing strategic alternatives available to them, points out Vitez.

“There is a great deal of money flowing now and strong funding is available, publicly and privately. The M&A market is hot. Licensing transaction activity and valuations are also seeing their strongest year ever thus far in 2015, for all kinds of novel molecules in a wide range of therapeutic arenas.” Even with larger specialty pharma, there is not pressure to sell – shareholders are very happy with valuations right now and many wish to ride acquisition pricing up still further, she goes on to say further.

Sujay Shetty

Sujay Shetty, India Leader, Pharma and Lifesciences, PwC is of the opinion that cheap money, consolidation, a market that rewards innovation and generic companies such as Mylan, Teva bulking up for size will lead to the emergence of a few large players eventually in both the innovator and generic space.

India: Crafting its own story

Jain believes that what we are seeing in India now is the ‘return of the outbound M&A’ post the financial crisis (The financial crisis hit India in 2008, deepened in 2009, gained some stability from 2010-2011, slid back again 2012-2013 and finally recovered in 2014) which was a cooling period for such deals. In the pre-financial crisis era, driven by a strong rupee, the outbound acquisition ambition was visible with tier-II pharma companies as well, to ensure low-cost production within India and marketing and distribution of the drug in the US, the largest pharma market globally. She points out that today most of the Top 10 pharma companies are scouting for acquisitions both in India and globally. The proof is in the pudding. Lupin’s recent acquisition of  Novel and Gavis in the US for ~$ 880 million is one of the largest outbound acquisition by an Indian pharma company and its sixth acquisition since February 2014. Sun Pharma (six companies since 2012) and Cipla (five companies since 2013) follow close suit.

Big pharma’s hunt for branded molecules in H1 2015

  • Pfizer’s acquisition of Redvax, which gave them access to a preclinical human cytomegalovirus (CMV) vaccine candidate, as well as intellectual property and a technology platform related to a second, undisclosed vaccine programme
  • Astra Zeneca’s acquisition of Actavis’ branded respiratory business in the US and Canada for ~$ 600 million
  • Takeda’s acquisition of Neutec (~$ 122 million) for a portfolio of 13 products in GI, respiratory, metabolic and musculoskeletal therapeutic areas

“Companies in India are closely watching developments globally. Sun has done a monumental deal. Lupins recent acquisition of Gavis is a step in that direction. Not everybody will be able to do such acquisitions. Given that global generic companies have gotten bigger, also consolidation among distributors on the downstream, the idea is do M&A to bulk up,” affirms Shetty. He concedes that  balance sheets of Indian companies do not allow for big buys as those seen globally, a few companies being an exception. While there isn’t much activity on the surface, a lot of companies are on a hunt.


However, the strategy of Indian companies differ from their US counterparts. “Indian pharma companies still do not have the ability to compete and win a global auction process of a major pharma player. Their M&A strategy generally revolves around spotting a niche player in a particular therapeutic segment and negotiating on a one-on-one basis with the potential seller. We are witnessing more of creeping acquisitions, wherein the Indian player would enter a new geography by acquiring a majority stake in the business and would ask the existing management team to continue running the day-to-day operations of the business,” says Jain.

The Indian company would slowly acquire 100 per cent stake in the business bringing the operations completely within its fold. She is quick to point out that even though domestic companies continue to be interested in inbound M&A, valuation expectations are still prohibitive. Also, US FDA’s latest stand on domestic manufacturing facilities (post the clampdown on Ranbaxy) has not helped in building confidence with MNC players.

Amit Mookim

Amit Mookim, Head of South Asia Consulting, IMS Health offers a realistic perspective. “2013 witnessed a total of 32 deals in the pharma space worth $6.5 billion, 2014 saw 40 transactions totalling $5 billion while so far 2015 has seen 19 transactions worth $1.2 billion. There has been no significant rise in deal value and volume not as much as last two years. Majority of the deals have been small ticket, only a few being $100 billion plus,” he says. However, he is buoyant about companies in the M&A mode. “Almost all pharma companies are aggressively looking at acquisitions as a part of their growth strategy to either expand internationally or to bring a new technology to India. Specialty portfolios in dermatology, opthalmology, neurology are sought after while Latin America, Scandinivian countries, South East Asia especially Indonesia continue to be attractive  markets,” he adds. PE activity on the other hand has registered an increase in number terms. While the PE money flowing into pharma was 33 per cent of the aggregate in 2013, the figure stands at 60 per cent for 2015 so far.

The road ahead

Vitez gives a global perspective. “Commercialisation is very expensive so it will always behoove many small companies to access help in that arena. However, there are many, many ways to do this without selling the company. The development-stage pipelines of the world’s top 20 pharma companies (none of these are Indian) range from 15-80 per cent  externally sourced – that is, brought in via in-licensing or M&A.” Companies like Teva and Allergan, who do rely upon search, not research, and development stand at the top of that list. Big Pharma (Pfizer, J&J, Merck, etc.) is at the middle of that range at 30 to 50 per cent of their pipes externally sourced. Struck by the double whammy of the recession and the patent cliff, these companies still have powerful and robust internal R&D engines. At the low end are the smaller and more specialised companies such as Boehringer Ingelheim and Novo Nordisk who, presumably by strategic design, have lower portfolio needs. Niche biotech companies in India according to Jain are eager to  participate in the upside of a successful research if the molecule actually becomes a drug.

“If an appropriate structure (one that captures the value of the molecule as on date, along with an upside sharing model if the research is successful) is agreed upon between the potential buyer and seller, then we do not see any road-blocks in such deals,” she says.


At the same time Jain doesn’t mince words to say that smaller companies are facing a ‘sell’ pressure due to a levered balance sheet. “A lot of the listed / unlisted players have leveraged their balance sheets for setting up a US FDA approved plant (beyond optimum capacities) or spent the money on R&D of a new molecule. Without enough capacity utilisations / failed R&D, it is unsustainable to run these businesses,” she adds.

Shetty, however, does not see  intra India deals as well as consolidation among generic makers owing to valuation issues between promoters, and says that a Torrent-Elder/ Reddy’s UCB are a once a year phenomena.


“Companies are cash rich, banks are willing to lend, PEs are willing to invest, and so acquisition is a core part of the growth strategy of top 20 Indian pharma companies across the board. The primary focus is on marketing- good distribution channel, sales or a good brand. A lot of manufacturing is coming to Indian especially on the CRAMS side, and with the FDA getting stricter, there is interest in looking for facilities both on  the API and formulations side. Few companies are looking at going up the value chain by looking at targets with specific R&D or regulatory capabilities such as injectables and biologics,” he emphasises.

Sun-Ranbaxy deal is transformational, however, when asked if we can see more such in the future, analysts believe that they’ll be far and few given the size and scale of Indian companies. In the last 10 years, there have been only four instances of over $ 1 billion deal size in India, out of which Ranbaxy changed hands twice. The other two were inbound acquisitions (Abott-Piramal; Mylan-Agila). There is momentum on the ticket size of deals though as Mookim of IMS Health notes.

Lupin’s acquisition strategy

Lupin continues to lookout for meaningful acquisitions that would enable the company to build and consolidate its position as an emerging global speciality pharmaceutical powerhouse. The company’s acquisition strategy is engineered to meet the aspirations of creating a meaningful global specialty business, bolstering its existing global brands business specifically in the US, acquiring technological capabilities, entering new markets where the company has no presence as it continues to make its presence as a world leader in the generics space. The company has a very balanced geographic spread right now of 60 per cent in regulated markets and 40 per cent in emerging markets. It is looking at acquisition in the US, Latin America (Brazil, Mexico), specific markets in Europe (Russia, Turkey etc.), Japan, China and India. Global targets would be specific to segments such as inhalation, complex injectables and dermatology.

“In 2014-15, there were three $ 100 million plus deals, one $ 50 million plus, in 2013 there were two $ 100 billion deal, in 2012 there were none,” he says. It seems as if Indian companies are adopting a wait and watch approach, weighing up the pros and cons in a market that has always been dynamic and more so now. With companies such as Sun growing big in size and few others following suit, there is pressure to expand and grow to reach economies of scale. While some have openly declared their acquisition plans others are strategising since an aggressive M&A strategy  could lead to loss in valuations over time.

Anand Bhageria, Partner, Singhi Advisors offers the final word and says, “The potential shareholder value of a merger is also ‘destroyed’ in many cases because companies fail to efficiently integrate their operations. The focus should be on good planning, solid integration, handling reputations, keeping an eye on valuations and just doing strategically those things that differentiate the company in the marketplace after the acquisition.”

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