Mergers & acquisitions pharma industry

Mergers & Acquisitions Pharma Industry

19-06-2013 1 M&A in the Pharma Industry_ Group7

19-06-2013 2 M&A in the Pharma Industry_ Group7

Problems faced by the Indian Pharmaceutical Companies :- •Rising power costs, pricing curbs and other policy uncertainties. •Government wants to increase its ambit from 74 bulk drugs to over 640, thus reducing the revenue generating medicines. •Political stamp on the price, with United Progressive •Alliance(UPA) planning free medicines for the poor. •Fragmented and competitive market with difficulty in gaining market share.

The Scenario:- High expectations by Indian promoters because of rising interest of MNC’s in local pharmaceutical companies. (Mylan bought Agila by paying eight times its last year's revenue) Foreign proposals to invest in Indian drug makers are stuck at the government because of the argument that MNC’s are buying local companies only to stifle competition.(100% FDI allowed). Guidelines being formed to enable the Competition Commission to take certain drug related decisions in case of the foreign investments in Indian pharmaceutical companies. In the past, acquisitions in the Indian pharmaceutical market were driven by different reasons. E.g. In Ranbaxy's case, the star attraction was the rights it had bagged from USFDA to launch the generic version of Lipitor, the world's largest-selling medicine.

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MULTINATIONAL PHARMA COMPANIES •To gain access to the pipeline of generic drugs being developed by small and mid-sized Indian companies in order to leverage cost-effective R&D and low-cost manufacturing having similar value. •Patented foreign companies going off patent in order to increase the number of blockbuster drugs going off-patent & focus on generics adoption globally.

•The manufacturing cost is about 30% cheaper in India than in the US. •The cost of developing a generic drug in India is about half of that in the US.

INDIAN PHARMA COMPANIES •Indian Pharmaceutical Co’s lack marketing their setup in local geographies. Tie ups with MNC’s help Indian companies to develop expertise outside India. •The foreign companies help the Indian companies create a base for infrastructure as they are already well established in their respective countries. •MNC’s help commercializing the products of Indian companies through well established distributors and retail chains.


Q1. Explain the trends of M&A activities in global pharmaceutical industry since last 3 years? Q2. Why do you think inorganic strategies are sometimes irreplaceable for industries like pharmaceutical? Q3. What is the M&A trend going forward in context with the pharmaceutical companies? Q4. What are the other popular inorganic growth strategies adopted by pharmaceutical companies?


•The pharmaceutical sector is currently battling with declining pipelines, patent expirations and a clampdown on healthcare spending. As their troubles grow, the sectors are being forced to increasingly engage in mergers and acquisitions (M&A) activity. •Three blockbuster deals happened in 2009. Pfizer acquired Wyeth for $68Bn, Merck acquired Schering-Plough for $41B, and Roche acquired Gen0entech for $46B. •In last 3 years, the pharmaceuticals and biotechnology sectors witnessed increased M&A activity, including some big-ticket acquisitions of 72 deals worth $6bn. This has been possible largely because the sectors have the necessary internal resources and credit lines to finance such deals. Megamergers, which had been absent from the sectors since 2004, made a dramatic comeback in 2009. •The global pharmaceuticals and biotechnology sectors saw only a 1.7 percent increase in the total number of deals. However, the total disclosed value of deals increased by a staggering 185 percent, to US$226.2 billion. Due to the three megamergers, valued at US$155.9 billion, the average size of the deals increased drastically.

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In the period from June 08 to May 09 the pharmaceuticals sector witnessed increased M&A activity, including some big-ticket acquisitions, compared with the period from June 07 to May 08 . This has been possible largely because the sectors have the necessary internal resources and credit lines to finance such deals

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•The total value of M&A deals targeting companies in Central Asia/Asia-Pacific decreased by 43.8 percent to US$8.8 billion. This significant drop was due to decreased activity in Japan, where the value of acquisitions fell from US$7.7 billion to a mere US$87.1 million. •However the global pharmaceuticals sector’s interest in China and India continued to grow. These countries accounted for 146 and 38 deals, respectively, out of the 305 deals within the region. •India emerged as the top target country in terms of deal value, as a result of the Daiichi Sankyo’s US$4.6 billion acquisition of Indian generics firm Ranbaxy Laboratories. •With two large megamergers in the pharmaceuticals sector, pharmaceutical companies accounted for more than 91 percent of the total deal value in the current review period. •The deal value of acquisitions by pharmaceutical companies increased by 410.9 percent


•Opportunity for cost cutting earnings boost :– Drug companies “create value” by M&As and fire a lot of people. While some costs are unavoidable, others are duplicative. With the lower number of approvals, especially for large-market, general practitioner drugs, the large selling organizations have capacity. •Developed market companies:- The developed market companies deployed M&A to bolster their product portfolio and expand their product offerings to customers in their existing markets of focus. For example, Shire Pharmaceuticals(Irelands) maintained their focus on the United States and Europe, respectively. •Focus on biologics:- Biotech drugs are not subject to the same risks of generic drugs as regular small molecule drugs, so their commercial life tends to be longer. Drug companies are looking to monoclonal antibodies not just because of their advanced science, but because they can get paid for the innovation.


•Buying a sales force:- Companies try & partner away their drugs to different territories in order to capture more of the value chain – or own more of the distribution. If a company has a hot new product soon to be approved in the US then an established sales force helps the company to commercialize it’s product more easily due to enhanced marketing power •Economies of Scale :- Horizontal mergers between equals often do not result in efficiencies and savings in the pharmaceutical sector. While activities such as commercialization and distribution are often scalable, R&D efficiency often suffers during a horizontal merger of two large pharmaceutical companies. E.g. Pfizer's acquisition of Warner Lambert and the Glaxo Wellcome and SmithKline Beecham’s merger. •Emerging market companies:- Companies based in emerging markets see M&A as a way to gain access to developed markets, which offer stable operating environments, relatively higher price points for drugs, and high growth rates in the specialty and generics segments. Thus helping the companies to get a shift from a relatively small, highly fragmented domestic market to the developed one.


1. Establishment of new strategic alliances and joint ventures:- R&D process for each drug take years and requires significant investments,

and the outcome of these investments of time and financial resources remains unclear until the final approval of the drug. Hence pharmaceutical companies are constantly looking for synergies that they can get from cooperation with their competitors.

2. Several global pharmaceutical MNCs have entered into licensing arrangements with Indian companies:-

In order to be able to dip into a ready basket of generic products, these deals are likely to accelerate the launch of products in various generic markets while offering the MNCs the advantage of cost effective manufacturing

3. Most of the pharmaceutical MNCs have outsourced significant portion of manufacturing to verified third party vendors:-

They act as marketing and sales organization resulting in less capital intensive nature of operations. The outsourcing of manufacturing to multiple third party vendors leads to better inventory management and consequently lower working capital engagement.


4. Bio-Pharma Convergence:- Biopharmaceuticals are projected as potential drugs curing many diseases. Many researches have proved that chemistry based medical innovations need to be replaced by advances in biopharmaceutical research that will boost the growth of revenues and profits in the years to come. 5. Contract Manufacturing New start-up companies are increasingly getting international exposure through the contract manufacturing (of patented drugs, custom synthesis and scale-ups, specialized generics and old molecules) route. It is estimated that about 50% of global bulk drugs / API manufacturing and around 15% of formulations manufacturing are outsourced to low cost destinations. 6. Co-Marketing Alliances Another growth strategy adopted by Indian firms is entering into co-marketing alliances with foreign firms to market their products. Co-marketing alliances are taking place not only between Indian and foreign producers, but also amongst Indian producers. Such alliances are proven to be beneficial to both the parties.


•The megamergers of 2009 have put pressure on other large pharmaceutical and biotechnology companies. The likely candidates for the next wave of consolidation are Astra Zeneca, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson and Sanofi-Aventis. •However, executives of several companies have indicated they will not join the megamerger bandwagon, and will instead rely on their own research and development (R&D) or enter into smaller partnerships or M&A deals. •It is still not clear whether the sectors are heading towards more megamergers or whether they will move towards smaller strategic acquisitions. Deals in the biotechnology sector could increase further as small and mid-size biotechnology companies become increasingly willing to enter into deals at value prices. Large pharmaceutical and biotechnology companies are scouting around for deals at much lower valuations, and the current trend of M&A in generics is one to watch for in the future.


•Executives from the global pharmaceutical industry expect to see increased levels of consolidation, with 61% of respondents anticipating either a significant increase or an increase in M&A activity in 2013. • The need for new product pipelines, new product acquisition, patent expiries, cost containment, and credit availability are identified as the key drivers for increase in M&A activities in the global pharmaceutical industry. •Larger companies have cash piled in their accounts books, while their product line is limited to few market leading products. These companies find it as an opportunity to acquire and leverage on promising portfolios from smaller organizations.

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MADE BY:

1. Utkarsh Garg (121) 2. Sangam Lalsivaraju (138) 3. Sugandha Arora (140) 4. Dhruv Mahajan (141) 5. Nitish Dubey (177)

Mergers & acquisitions pharma industry

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