labels: pharmaceuticals, m&a
Opportunities for India in generic drug spacenews
21 March 2007

The global ambitions of Indian companies, underpinned by unprecedented overseas acquisitions, are now playing out in the pharmaceutical industry, says Bundeep Singh Rangar, chairman of the UK-based IndusView Advisors.

Bundeep Singh RangarIndia is expected to become the world's second largest economy by 2050. Booming technology exports, rising domestic consumption from a burgeoning 300 million-strong middle class and macro economic reforms are the key drivers behind the 9 per cent annual growth of India's $800-billion economy. The Indian economy is on the threshold of unlocking huge opportunities for international investors keen to become part of the India growth story.

There is a growing realisation across the board that economies need to co-exist: if one segment of it serves as the market for the other, the other serves as the source of expertise and economical, efficient, manpower and resources.

Under this changing scenario, the Indian economy that has grown at more than 9 per cent in the last couple of quarters has been at the centre stage and focus of the governments and global companies alike. This is the sixth quarter out of the past seven that GDP growth has exceeded 8 per cent and was among the strongest increases the country has ever recorded.

The exciting phase that India is going through is marked by growth that has come about as a result of almost homogenous contribution from across industry sectors.

The vast pool of English-speaking skilled managerial and technical manpower matches, if not surpasses, the best in the world. These factors have led numerous multinational companies to not only establish operations in India but also to count it among their key markets. While overseas companies have set up base in India, increasing number of Indian companies are also aspiring to go global.

India's Global M&As
The year 2006 was marked by increased traction in deal making by India Inc. The total value of deals increased to $28 billion from $18 billion last year, a growth of 54 per cent. In the 266 cross border deals at $15 billion, India Inc.'s growing global ambitions continued unabated as Indian companies made more acquisitions abroad through 190 deals valued at $10 billion (outbound) compared to just 76 acquisitions for $5.4 billion made by overseas companies in India (inbound).

The year 2007 is on track to be a year of 'mega deals'. The deals so far have already captured around $40 billion, twice as much as last year and 10 times more when compared to the corresponding period. While last year the focus was on the volume of deals, 2007 will be more value driven and is expected to touch the $100 billion mark.

The global ambitions of Indian companies, underpinned by unprecedented overseas acquisitions, are now playing out in the pharmaceutical industry.

The pharma sector
After the withdrawal of the odds-on favourite Ranbaxy, Indian pharmaceutical companies including Cipla Ltd and Torrent Pharmaceuticals are still among those considering the acquisition of the generic drug making unit of Germany's Merck KGaA's valued at about $7 billion. They join other bidders such as US-based Mylan Laboratories Inc, Iceland's Actavis Group HF, Switzerland based Novartis International AG, Israel's Teva Pharmaceutical Industries Ltd and a private equity consortium including Bain Capital and Apax Partners.

The increase in worldwide M&A activity in the pharma-sector is attributed to the expected market growth as drugs worth $65 billion in sales go "off patent" next year.

If the deal for Merck's generic drug business goes to an Indian entity, it will be the biggest acquisition of a pharma company by an Indian company and more than three times the value of M&A deals in the sector in 2006. The pharma sector accounted for second most M&A deals worth $2.5 billion in 2006 compared with just $364 million the previous year.

The acquisition of Merck's generic drug business, the world's fourth-biggest producer will be significant as it will catapult the Indian company into the global league with the unit worth as much as $6 billion, i.e. 2-3 times their size.

Indian companies are strongly positioned to grab the new opportunities in the generic drug market as they have the benefit of low-cost manufacturing, world-class production skills and availability of quality manpower. Domestic production costs in India are almost 50 per cent less compared to developed countries.

Indian drug-makers are expected to acquire a 33-per cent share of the global generic drug market in the next two years against the current 4 per cent market share, according to industry estimates.

However, India's Ranbaxy Laboratories Ltd and Dr Reddy's Laboratories Ltd were among those who withdrew from the race to acquire Merck's generic drug business on concerns of the valuation of the unit being too high. This concern is reflected in the fact that Merck's generics business is expected to take a hit when its US subsidiary Dey loses its patent for the profitable drug Duoneb, used to treat bronchial spasms. It accounted for 15 per cent of the generics unit's revenue in 2006.

India's prominence in the global M&A arena started with the successful acquisition of UK's Corus Group Plc by India's Tata Steel Ltd; India's largest non-ferrous metals company Hindalco Industries Ltd's acquisition of Atlanta-based Novelis Inc for $6 billion and the ongoing bidding war for German wind turbine company REpower Systems AG between India's largest wind turbine manufacturer Suzlon Energy Ltd and French nuclear-reactor maker Areva SA.


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Opportunities for India in generic drug space