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Will Pharma Lead The Pack For Deal Making In 2009?

01 June, 2009

<!–New Delhi : –>

As big pharma companies face challenges of a drying R&D pipeline, reduced block buster drugs in the horizon and cost containment, they have to evaluate current business models to create a sustainable business going forward.
 
 
Over the past few years the global Pharma industry has been consolidating with mega transactions being announced. Year 2009 has commenced with a big bang with three Big pharma M&A deals; Pfizer – Wyeth, Merck – Schering Plough, Roche – Genetech and this trend is likely to continue.
 
As big pharma companies face challenges of a drying R&D pipeline, reduced block buster drugs in the horizon and cost containment, they have to evaluate current business models to create a sustainable business going forward. Two major trends that is being witnessed is
 
_ Big pharma acquiring Biotech businesses – rationale being that the next round of block buster drugs will emerge from this sector
 
_ Big Pharma increasing strategic alliances and acquisitions with generic companies; Pfizer – Aurobindo, GSK – Aspen, Daiichi – Ranbaxy, Sanofi – Zentiva
 
Historically only a few Big Pharma companies had an interest in generics. However recently, presence in generics business is increasing considerably.
 
This trend has ramifications for Indian pharma market. MNC’s are likely to engage in big ticket transactions in India. MNC’s view India as an attractive and growing market. Due to historical reasons they have remained under penetrated. However with the changes in the patent regime etc, MNC’s have increased their focus in building out their India footprint. The recent initiatives by MNC companies to further increase their holdings in the Indian subsidiaries are a testimony to this fact.
 
Indian pharma is one of the largest branded generics market in the world and is growing at a blended rate of 20% pa. Main drivers are healthy baseline growth and strong export growth. Introduction of new product & revenue segments like CNS, CRAMS and greater presence in regulated markets are driving the growth.
 
At the same time the domestic industry is also undergoing significant structural changes across multiple dimensions:
_ Product patents
 – Pipeline issues
_ Increased manufacturing regulations
_ Pricing pressure
 
In addition Indian domestic companies are also faced with issues like:
 
_ Challenging international market (intense pricing pressure )
_ High funding requirements for NCE developments
_ Patent challenges
_ Technology
 
Key question that Indian companies have to ask themselves is whether they have the strategies in place as the going gets tough. Thus, the skill sets required to succeed in the future would be considerably different from the past.
 
The domestic industry is highly fragmented and consolidation is over due. Historically founder promoters have been reluctant to sell or merge with other companies. But with generational changeovers taking place this trend is likely o change over a period of time. The recent sale of a flagship Indian pharma company (third generation) at a strategic price has created serious deliberations amongst promoter groups regarding long term value creation.
 
Like the MNC’s, select domestic companies are also likely to undertake acquisitions to increase their market share and fill product gaps in their portfolio. Select domestic companies are well positioned in terms of capabilities to raise capital to undertake M&A.
 
Valuation expectations continue to be a major hurdle and are one of the key reasons for lack of many more M&A transactions. Given the macro economic challenges and the performance of pharma companies in the past few quarters it seems that revenue and earnings growth slowdown is here to stay at least in the short to medium term.
 
Consolidation in the pharma segment may have just begun with a few significant deals in 2008 and likely to accelerate over the next few years.
 
(The author is Gautam Dhawan- Vice President, Ambit Corporate Finance)

 


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Will Pharma Lead The Pack For Deal Making In 2009?

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