Indian pharma giants change tactics

Indian pharmaceutical majors, such as Ranbaxy Lab and Dr Reddy's, are changing their tactics to concentrate on brand acquisitions and strategic investments rather than risky big ticket cross-border acquisitions to boost their global business.

Year 2007 witnessed only 25 M&As, with 15 cross border transactions with an estimated value of about $600-700 million in the Indian pharmaceutical sector. (This figure excludes Sun Pharma's unsuccessful attempts so far since March this year, to take over Israel's Taro for $454 million).

The domestic pharmaceutical companies had executed more than 40 deals with 32 cross-border transactions worth about $2,000 million in 2006, including big ticket deals like Dr Reddy's acquisition of Betapharm of Germany for Euro 480 million (Rs 2,550 crore) and Ranbaxy's Terapia buy in Romania for $324 million (over Rs 1,250 crore), according to industry observers.

The major pharmaceutical M&A deals in 2007 were Wockhardt's acquisition of the French company Negma Laboratories for $265 million (Rs 1,045 crore) and the US-based Morton Grove Pharmaceuticals for $38 million (Rs 150 crore), Jubilant Organosys' acquisition of Hollister-Stier Laboratories of the US for $122.5 million (about Rs 500 crore) and Alembic's buyout of the entire domestic non-oncology formulation business of Dabur Pharma for Rs 159 crore.

Industry experts cite relatively small deals like Lupin's acquisition of Rubamin Laboratories, Baroda, to enter into the contract research and manufacturing services (CRAMS) business and Zydus Cadila's buyout of Liva Healthcare of Mumbai to strengthen its dermatology product portfolio as glaring examples of an emerging trend of brand and strategic buyouts.

"Focus on brands will be an emerging trend in future, both for domestic companies and overseas firms looking at India. Almost all companies are strategising innovative opportunities that suit them to build brands in India as big deals become more expensive," said Shailesh Gadre, managing director, ORG-IMS, a leading market research based consulting company.

Experts also said that most of the domestic deal activity so far is focused on small asset or brand purchases with the exception of the Liva and Dabur deals and are yet to see domestic consolidation in the mid-cap or large-cap space.

"This can only be driven by farsighted boards that put senior managements through a systematic internal and competitive review, scenario planning and regular review of progress against corporate goals. Rationale for domestic consolidation requires more analysis than cross-border transactions but can have a significant impact if the right parties come together," said Rajiv Shukla, executive director of Avendus Capital and a seasoned pharmaceutical M&A expert in Mumbai.

Ranbaxy, which executed five cross-border acquisitions in 2006 (Ethimed of Belgium, GSK's facilities in Spain and Italy, Terapia and Be-Tabs of South Africa), refrained from any acquisitions in 2007. Instead, it made a strategic investment in the Hyderabad-based upcoming company Zenotech Laboratories to hike its equity stake to 45% for Rs 214 crore.

The investment was to access Zenotech's pipeline of specialty injectibles, cancer and off-patent biotechnology drugs. Though Ranbaxy was in fray to acquire the generics business of Merck KGaA, it withdrew from the bid mid-way due to the high valuations. Dr Reddy's and Ahmedabad based Torrent were also reported to be in fray for Merck Generics assets, which was eventually taken over by Mylan Laboratories of US for $ 6.6 billion.

Similarly Dr Reddy's Laboratories, which is yet to recover from the Betapharm acquisition due to various reasons and Aurobindo, which acquired a manufacturing unit in the US and Milpharm of the UK in 2006, did not buy any new facilities in 2007.