M&A in Pharma

Understanding the Strategy of M&A in the Pharmaceutical IndustryBy

Abhishek Ghosh

10 July, 2015

2© 2015 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Agenda

2

• Introduction: Pharmaceutical Industry ScenarioJune 2015

3-18

• Introduction: Sun Pharmaceuticals• Segmentation of the Business and Business Model• Structure Pre and Post Transaction• What Strategic Decision led to the Ranbaxy Acquisition?

19-22• Competitors in India• Customer Analysis

23-27

• Opportunities in Pharmerging Markets• Strategy for Expanding in Pharmerging Markets

28-31

• SWOT Analysis• Long-Term Strategy• Synergies and Challenged Post the Ranbaxy Acquisition• Capabilities Post Acquisition


Introduction: Pharmaceutical Industry ScenarioJune 2015

• Market Size: US$ 1.2 trillion by 2017 (CAGR: 3-6%)

• Key Growth Drivers: Emerging Markets

Source: pp. 11, “2013-14 SPIL-Director’s Report and Management Discussion and Analysis”, Sun Pharmaceutical Industries Limited, http://www.sunpharma.com/, Accessed on 30 June, 2015* Detailed explanation in: Jackson Richard et. al, “Global Aging and Future of Emerging Markets” (2011: Centre for Strategic and International Studies and Everest Capital), pp. 2-4

Economic and Healthcare Austerity Measures

* Unfavourable Demographic Dividend

Lowering of Savings and Investments due to

Greying Population

Budgetary Pressure due to Rising Pension and

Healthcare Costs

Double-Digit Growth in Emerging MarketsSingle-Digit Growth in Developed Markets

Economic Growth

* Favourable Demographic Dividend

Increased Out-of-Pocket and Private Spending

Increased Governmental Healthcare Funding

Savings Realized from the Growing availability of Generic Drugs

http://www.sunpharma.com/


• Outlook of the Indian Pharmaceutical Sector

• Projected to grow at a CAGR of 11-14% during 2013-17.

• One of the key exporters to the U.S.A and other markets-the highest number of US FDA approved manufacturing facilities outside U.S.A.

• Indian Pharmaceutical companies received over 150 ANDA (Abbreviated New Drug Applications) approvals from the U.S FDA during 2013, accounting for ~38% of the total approvals.

Outlook of the Indian Pharmaceutical Industry

Source: pp. 11, “2013-14 SPIL-Director’s Report and Management Discussion and Analysis”, Sun Pharmaceutical Industries Limited, http://www.sunpharma.com/, Accessed on 30 June, 2015

Market Position

13 11

Market SizeUS$ 14 bn US$ 22-32 bn

Year2012 2017



Introduction: Sun Pharmaceuticals

• Sun Pharmaceuticals was started in 1983 in Vapi, India by Dilip Shanghvi with only five products to treat psychiatric ailments.

• After its historic US$ 4 bn all-stock acquisition ( stock swap ratio : 0.8 : 1) of Ranbaxy in April 2014, Sun has become, by 2015, the largest chronic prescription company in India and the fifth largest specialty generic pharma company in the world.

• Market Leader in:

• By 2011, Ranbaxy’s global revenues crossed US$2 billion, the first Indian company to do so.

Psychiatry Neurology Cardiology

Orthopedics Ophthalmology Nephrology

Gastroenterology


Major Acquisitions and Alliances – Sun Pharma and Ranbaxy

1992Ranbaxy + Eli Lilly & Co.

Joint Venture (India)

1995Sun Pharma + API Plant

from Knoll PharmaAcquisition

(Ahmednagar, Maharashtra)

1997Sun Pharma + Caraco

Pharmaceutical Laboratories, Acquisition

(U.S.A)

2006Ranbaxy+Unbranded

Generics Business of GSKAcquisition (Italy and

Spain)

2006Ranbaxy + Be Tabs

Pharmaceuticals, the 5th largest generics company in

South AfricaAcquisition

2006Ranbaxy + Terapia, the largest generic pharma company in Romania

Acquisition

2010Sun Pharma Acquires

controlling stake in Taro Pharmaceuticals

(U.S.A)

2012 Sun Pharma + Dusa and

Generics Segment of URL Pharmaceuticals

Acquisition (U.S.A)

2015Sun Pharma + Ranbaxy

Acquisition


Segmentation of the Industry’s Business Lines

Industry Segments

Generics

Specialty

Complex

BrandedConsumer Medicine

Protected Originals


Segmentation of the Business at Sun

Major Business Segments

(Sun Pharma)

U.S. Generics Indian Branded Generics

International Branded Generics

(ROW except U.S.A)

Active Pharmaceutical

Ingredients (API)

Major Market Categories (By Geography):

• U.S Formulations: 5th largest generics company in US with one of the largest ANDA pipelines (159 ANDA’s awaiting approval) with 50% contribution to revenue in June, 2015.

• Indian Generics: Leading position in high growth chronic therapies with Indian brand generics contributing 24% of total sales revenue in June, 2015.


Business Model

1. Plans to in-license products that are already marketed or are in late stage clinical development in key therapy areas such as CNS disorders, Cardiology, Diabetes and Metabolic disorders, Gastroenterology, Ophthalmology, Oncology, Pain, Allergy, Asthma, Inflammation and Gynaecology.

2. Strategic interest in in-licensing bio-similar products and new products based on recombinant/humanized monoclonal antibody technology used in the above therapy areas.

3. Out-licensing product range includes dosage forms for oral, injectable, topical and transdermal routes developed through non-infringing routes and/or patented routes.

4. Out-licensing sought for specialty generics, super generics, and bulk drugs in therapy areas such as CVS, CNS, Pain, Cancer, Gynaecology, Allergy, Asthma other respiratory diseases.

5. Focused on expanding in key markets such as Russia and CIS countries, China and South East Asia, Africa, Brazil and Mexico.

Identify Promising

New Molecules

Test them in Large

Clinical Trials

Build Strong Product Portfolio

Focus on Niche and Complex

Molecules to Garner

Premium to Peers

Promote them with an

Extensive Sales and Marketing Presence


Sequence of Metrics Analyzed

Profits

Revenues

Revenue / Unit

Customer Analysis

Competitor AnalysisNo. of

Units Sold

ExpensesFixed

VariableMetrics to be Determined within the Company over Time and Between Competitors in the same time period


Structure Pre-Transaction

RANBAXY

PUBLIC SHAREHOLDERS + CUSTODIANS

63.41%36.9%

SUN PHARMA

PUBLIC SHAREHOLDERS

PROMOTERS AND PROMOTER GROUP

36.35% 63.65%

DAIICHI


Structure Post-Transaction

SUN PROMOTER AND SUN PROMOTER GROUP

SUN PHARMA(MERGED ENTITY)

9% 36%55%

DAIICHIPUBLIC

SHAREHOLDERS(RANBAXY + SUN)


What Strategic Decision Impacted the Ranbaxy Acquisition?

Problem Definition: What was the impact on-

a. Revenue

b. Costs

c. Operational Efficiencies and Synergies

PAT of Sun Pharma (Standalone) 2010-14

Mar '10 Mar '11 Mar '12 Mar '13 Mar '14

-3000-2500-2000-1500-1000

-5000

500100015002000

PAT (Rs. in Crore)

PAT


Declining Revenues Post Dusa, URL Acquisitions in U.S.A in 2012

CAGR in Revenue [2012-14] = -(11.02)%

Sun Pharmaceuticals (Standalone) Net Sales Revenue [2010-2014]

Mar '10 Mar '11 Mar '12 Mar '13 Mar '140.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

1,845.09

3,107.57

4,015.56

2,432.14

2,828.79

Net Sales (Rs. in Crore)


Increasing Costs Since Acquisition in 2012

Mar '10 Mar '11 Mar '12 Mar '13 Mar '140.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

1,845.09

3,107.57

4,015.56

2,432.14

2,828.79

Total Expenses (Rs. in Crore)

Sun Pharmaceuticals (Standalone) Expenses [2012-14]

CAGR in Expenses [2012-14] = 6.52%


Pricing Pressures Uniform throughout the Pharma Industry

• Government-mandated price controls on 348 essential drugs in May, 2013 impacted prices of both MNC’s and local firms producing essential drugs.

• A new Act, known as Drugs (Prices Regulation and Control) Act enacted to have effective control on prices, production, distribution and supply of medicines in India.

• All customer segments are very sensitive to change in price of generics.

• Thus, growth will be fueled only by increasing volumes.


• GlaxoSmithKline (GSK) and Sanofi Aventis were affected the most. Bottom lines of domestic drug makers such as Cipla and Cadila would also take a hit.

• Least impacted were companies such as Sun Pharma and Lupin.

• Some companies like GSK have created a Developing Countries Unit that caps prices at no more than 25% of the UK price and reinvests 20% of any profits back in the country it covers.

GSK CFO Simon Dingemans says,

“Price reductions [in China] are in many ways very important in driving up the access and take-up of healthcare coverage. We see very good volume response to that, which shows that the strategy is

working.”

(Bloomberg)

Pricing Pressures Uniform throughout the Pharma Industry


Causes of Price Decline and Fall in PAT at Sun Pharma

• Sun Pharma and Ranbaxy to hive off certain products due to CCI regulation, for the merger to become effective

• Sun Pharma sold products under the Tamlet brand name and Ranbaxy divested 6 brands, leading to price erosion.

Ranbaxy Divestments

Eligard

Triolvance

Raciper L

Terlibax

Rosuvas EZ

Olanex F


• One-time merger expenditure and high cost of integration of Ranbaxy

• Debt reduction strategy to consolidate debt position

• US$ 800 mn debt obligation of Ranbaxy at the time of merger to be serviced by Sun Pharma, reducing PAT

• Regulatory expenses in the U.S.

• Opportunity cost owing to new-product approval delays and clinical trial delays in the U.S leading to subdued PAT

• US sales hit

• Pricing pressure from channel consolidation

• Customer Consolidation

• Recalls from the Halol facility, which contributes 25% of consolidated profits

• Currency Headwinds in Russia, Venezuela and other emerging markets

Causes of Price Decline and Fall in PAT at Sun Pharma

Source: Kanungo Soumanty, “Pharma firms to face US approval delays and currency headwinds this quarter too”, DNA, http://www.dnaindia.com/money/report-pharma-firms-to-face-us-approval-delays-currency-headwinds-this-quarter-too-2092157, Accessed on 4 June, 2015

http://www.dnaindia.com/money/report-pharma-firms-to-face-us-approval-delays-currency-headwinds-this-quarter-too-2092157



Competitors in India – Consistently Growing Market Share of Sun[2000-13]

Source: pp. 26, “Director’s Report”, Sun Pharmaceutical Industries Ltd., http://www.sunpharma.com/investors/annualreports, accessed on 2 July, 2015

Competitor Market Share Growth in India [2000-13]

http://www.sunpharma.com/investors/annualreports



Customer Analysis: Segmentation of Sources of Revenue

Segmentation into Customer Segments by Geography

Source: IR Presentation June 2015, Sun Pharmaceutical Industries Limited, Accessed on 30 June, 2015


Customer Segment in India: Falling Sales per Representative

• In the largest market (U.S.A), sales have experienced consistent growth of 40.66% CAGR between 2012 and 2015 (INR 137 bn in 2015 including the impact of the Ranbaxy merger, up from INR 98 bn in 2014) and 438 ANDA’s have been approved in 2015, an increase of 15.05% from 2012.

• In India, sales have increased consistently to INR 67 bn in 2015 (including the effect of the Ranbaxy merger), from INR 37 bn in 2014.

However, a realignment to the preferred distribution channel preference of key customer segments may be required since the Sales per Representative has seen a sharp decline in 2015


High Price Sensitivity, Opportunity to Differentiate Product

Price Sensitivity of Emerging Markets:

Challenges for Upward Price Revision

Enablers for Upward Price Revision

Essential Drug List Revision in China; Government Cost Containment Measures in Brazil and Russia

Increased Healthcare Investment by the Chinese, Brazilian, Russian and Indian Governments

Slowdown in Economic Growth in Brazil and Russia

Rising affluence of patients paying out-of-pocket for premium products in China

Attempts at Differentiation of Products: Company Segment

Pfizer, Sanofi Generics

Novo Nordisk, Roche Specialty

Boehringer Ingelheim, Bayer, GSK, Teva

Consumer Health

Product differentiation (except for brand equity) is not the most viable strategy in India, which follows process patents that favour imitators and generics manufacturers, opportunities to increase revenues or introduce cost competitiveness more viable


Opportunities in Pharmerging Markets: China Leads Spending; Brazil, India Follow

Source: pp. 8, “2013-14 SPIL-Director’s Report and Management Discussion and Analysis”, Sun Pharmaceutical Industries Limited, http://www.sunpharma.com/, Accessed on 30 June, 2015

Split-Up of Revenue Spending and Contribution to Sales Growth [2012-17] by Customer Segments for the Pharma Industry

* EU5 countries include Germany, France, Italy, Spain and the U.K



Rise of Generics in Pharmerging Markets (China, India, Brazil)

• As the Pharmerging markets emerge, a global spending shift towards generics is forecasted.

• Pharmaceutical Spending absolute growth in Pharmerging markets would increase from US$ 30 bn in 2012 to US$ 40 in 2017 (estimated) and spending on generics in these markets would increase from 58% in 2012 to 63% in 2017 (estimated).

Pharmerging Economies (Based on the IMS Health Global Market Prognosis)Classification Based on Income Level, Growth Rate and Pharmaceutical Spend per Person


Drivers for Growth in Generics in Emerging Markets:

Rise of Generics in Pharmerging Markets (China, India, Brazil)

Generics are most affordable

for govt. healthcare

programmes and consumers

Increasing Incidence of

Chronic Diseases

Increasing Life Expectancy and

an Ageing Global

Population

Patent-protected brand volume growth

set to shrink with patents

expiring

Weaker IP laws in some

developing countries


Highest Growth in Generics in Pharmerging Economies

Product Mix in Pharmerging Economies

• Top 8 Mature Markets include U.K, France, Germany, Italy, Spain, Japan, U.S.A and Canada• LIC : Low Income Countries• LC $ : Constant Local Currency Dollars, used to smoothen out effects of exchange rate fluctuations• Pharmerging Economies, based on minimum anticipated added value to the global pharmaceutical market, as enumerated by IMS Health Global Market Prognosis include: Brazil,

Turkey, Russia, China, India, Mexico, South Korea, Venezuela, Poland, Argentina, Vietnam, South Africa, Thailand, Indonesia, Egypt, Pakistan, Ukraine, Algeria, Colombia, Saudi Arabia and Nigeria


Strategy for Expansion in Generics in Pharmerging Economies

• Between January 2008 and February 2013, India has seen 226 M&A deals in the Pharma Sector, with 81.4% of the deals involving local companies

• Ranbaxy had a large product portfolio, established infrastructure linking its complex supply chain and excellent stakeholder relationships to boost inorganic growth when acquired.

Integrated Distributors

Large Portfolios

Strong Brand

Equity in the Local Market

Efficiencies of Scale

Attractiveness of Investing in Local Companies in the Target Market


SWOT Analysis of Sun Pharma

• Established brand Market leader in dermatology (U.S), specialty chronic segment and branded generics (India)

Strengths Weaknesses

ThreatsOpportunities• Focus on access to generic

products, market presence and technology

• Differentiation of products by focusing on complex generics

• Increasing share of branded specialty drugs

• Achieve critical mass in key markets

• Branded generics growth will slow down due to payer pressure to reduce costs via commoditization

• Improved manufacturing standards would reduce the brand proposition of branded generics and unprotected originals leading to large price cuts

• Consolidation would lead to low margins and difficult cost structure for sophisticated MNC’s to replicate

• Karkhadi facility faces restrictions in approval of its Abbreviated New Drug Applications [ANDA’s] by the USFDA due to its non-compliance with certain current Good Manufacturing Practices (cGMP)


Leveraging Opportunities and Strengths: Long-Term Strategy at Sun

• Sustainable Revenue and Cash Flow Stream:

• Targeting complex / differentiated products in key markets

• Focus on fast-growing chronic therapies and timely product launches

• Using Investments to Develop Complex Products and Turning Around Underperforming Acquisitions

• Cost Leadership

• Vertical Integration

• Optimisation of Operational Expenses

• Closer links between the back-end and supply chain


Synergies and Challenges Post the Ranbaxy Acquisition

Synergies

• All-Stock Deal used to leverage Sun’s huge Market Cap, Cash preserved for future deals, CAPEX

• Sun will be in the top spot in 13 Therapy segments, up from 7 in 2014

• Better Over-the-Counter Portfolio in India

• Better Dermatology Franchise in India (55% of Ranbaxy Sales)

• Strong presence of Ranbaxy in India and other Emerging Markets

Challenges

• Regulatory Turnaround needed to access Ranbaxy’s Product Pipeline

• US$ 500 mn in payments to the US Department of Justice for manufacturing violations may have affected brand equity of Ranbaxy

• Increased competition in the Generics Segment (high dependence on Absorica of Ranbaxy)

• Lower Sales Growth, Margin, Returns, which means Pay Back Period might exceed 6 Years

Source: “Finding a Cure”, Business Today, http://businesstoday.intoday.in/story/sun-pharma-buys-ranbaxy-implications-profits-debt-usfda/1/205241.html, accessed on 1 July, 2015

http://businesstoday.intoday.in/story/sun-pharma-buys-ranbaxy-implications-profits-debt-usfda/1/205241.html




Capabilities of the Company Post Acquisition

• The tax burden can be alleviated for 8 years following the transaction as the Income Tax Act allows for the losses of Ranbaxy to be set off the profits of Sun Pharma for the aforementioned period.

• The merged entity will have a highly complementary portfolio of specialty and generics targeting chronic and acute treatments globally.

• Presence in 55 markets and capabilities across specialty branded products and complex generics.

• In the U.S.A, no. 1 in generic dermatology and no. 3 in the branded dermatology market. Pro-forma U.S. revenues to be about US$ 2.2 bn with a strong capability in developing complex products.

• In India, Sun Pharma will become the largest pharmaceutical company with over 9% market share. No. 1 by prescriptions across 13 different classes of specialist doctors in India. Pro forma revenues in India will be about US$ 1.1 bn.

• Ranbaxy will add to competitive edge in acute care, hospitals and OTC businesses with robust brands.

• 31 amongst top 300 brands and greater distribution reach.

• Foundation for OTC business in India.

• The target is to generate synergy benefits of about US$ 250 mn by the third year- driven by revenue, procurement, supply chain and other cost synergies.


• ANDA: An Abbreviated New Drug Application is an application that allows the applicant to manufacture and market the generic drug product to provide a safe, effective, low cost alternative to more expensive licensed medications.

• API: Active Pharmaceutical Ingredient refers to the active or central ingredient in the drug product which causes the direct effect on the disease diagnosis, prevention, treatment or cure.

• Branded Generics: A branded generic is a drug that is bioequivalent to the original product, but is now marketed under another company's brand name.

• Complex Drugs: Drugs with complex active ingredients, formulations routes of delivery or drug-device combinations.

• Generics: A drug product that is comparable to a brand in dosage form, strength, quality, performance characteristic and intended use. Instead of a brand name or registered trademark, they carry either the name of the manufacturer or the nonproprietary name of the drug. Generic products are available once the patent protections afforded to the original developer have expired. Market competition often leads to substantially lower prices for both the original brand name product and the generic forms.

• In-Licensing: The business model of acquiring one or more products still in pre-clinical or clinical development (fairly advanced stages of development) and focusing on its product development and launch. The skills involved are therefore medical and clinical, rather than relating to discovery.

Glossary


• Specialty Drugs: Drugs that are expensive, have limited access, complicated treatment regimens, compliance issues, special storage requirements and manufacturer reporting requirements.

• Out-Licensing: The business model of a company that seeks a partner in the development and co-marketing of its compound from the late-stage clinical trial phase to the product launch phase. This is a strategic way to continue to generate value from pipeline assets, while sharing the risks and high costs inherent in any R&D program.

• OTC Drugs: A drug for which prescription is not needed.

• US FDA: The Unites States Food and Drug Administration is responsible for protecting and promoting public health through the regulation and supervision of food safety, prescription and over-the-counter pharmaceutical drugs (medications), vaccines, biopharmaceuticals and other similar consumer products.

Glossary


External Sources

• “2013-14 SPIL-Director’s Report and Management Discussion and Analysis”, Sun Pharmaceutical Industries Limited, http://www.sunpharma.com/investors/annualreports , Accessed on 30 June, 2015

• “IR Presentation, June 2015”, Sun Pharmaceutical Industries Limited, http://www.sunpharma.com/investors/annualreports, Accessed on 30 June, 2015

• “Pharmerging Markets- Picking a Pathway to Success”, Q2 IMS Pharmerging white paper 06-2013 (2013), Accessed on 30 June, 2015

• Jackson Richard et. al, “Global Aging and Future of Emerging Markets” (2011: Centre for Strategic and International Studies and Everest Capital), pp. 2-4

• “Govt. to regulate prices of 652 medicines, prices set to fall”, ET, http://articles.economictimes.indiatimes.com/2013-05-17/news/39336744_1_essential-drugs-price-control-indian-pharmaceutical-alliance, Accessed on 30 June, 2015

• Kanungo Soumanty, “Pharma firms to face US approval delays and currency headwinds this quarter too”, DNA, http://www.dnaindia.com/money/report-pharma-firms-to-face-us-approval-delays-currency-headwinds-this-quarter-too-2092157, Accessed on 4 June, 2015

• Sharma Kumar, “Finding a Cure”, Business Today, http://businesstoday.intoday.in/story/sun-pharma-buys-ranbaxy-implications-profits-debt-usfda/1/205241.html, Accessed on 1 July, 2015





http://articles.economictimes.indiatimes.com/2013-05-17/news/39336744_1_essential-drugs-price-control-indian-pharmaceutical-alliance

http://articles.economictimes.indiatimes.com/2013-05-17/news/39336744_1_essential-drugs-price-control-indian-pharmaceutical-alliance





Thank you

Presentation by Abhishek Ghosh

Summer Trainee

KPMG, Lodha Excelus

Mumbai

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

© 2015 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

M&A in Pharma

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