Mergers and Acquisitions: Indian Pharmaceutical Industry

Naveen Kumar

Contents
O Introduction O Reasons for M&A O Leading M&A deals O Case study: Abbott- Piramal deal O Future

Introduction
O India ranks 3rd worldwide by volume of

production and 14th by value O India accounts for 10% of worlds production by volume and 1.5% by value O India continues its growth trajectory facilitated by a dynamic position and a global trend towards consolidation O M&A has become important tool for inorganic growth in Indian Pharma

Contd..
O A strong and growing domestic market, a

robust pipeline of generic drugs and an ability to service developed markets abroad have suddenly made Indian pharma companies most sought-after in the M&A space O The story started in a small way in 2006 with the $736 million Matrix-Mylan deal

What are MNCs looking for?

O Presence of strong portfolio of brands which are

ranked amongst the top in their respective segments O Strong generics portfolio with presence in high growth/ high margin therapeutic categories like CV, CNS, Oncology and anti diabetes O Availability of infrastructure to cater to regulated markets. This will enable them to act as a manufacturing base to meet the demand for regulated markets O Presence in niche segments like vaccines, biotech, nutraceuticals, OTC etc which has substantial growth potential both in India as well as globally

Why M&A??

Reasons for M&A

O Patent cliff: The total value of

patents expiring between 2010 and 2015 is expected to reach US $100 Billion O Expanding market is one of the strategies to maintain the flow of revenue O India with high population and growing market, is attracting MNCs to invest in India

2010 Product Aricept Cozaar Effexor XR Taxolere Protonix Flomax Arimidex Gemzar NovoSeven Coreg Total 2009 sales ($mn) 3,991 3,561 3,182 3,034 2,052 1,970 1,921 1,363 1,320 253 22,647 Product Lipitor Advair Zyprexa Levaquin Xalatan Concerta Femara Xeloda Avelox Caduet Total

2011 2009 sales ($mn) 12,535 7,794 4,916 2,648 1,737 1,326 1,292 1,160 1020 548 34,976

Year of first available generics; Source: Ken Kaitin, Tufts University, R&D Productivity conference, May 5, 2011

2012 Product Plavix Enbrel Diovan Seroquel Singulair Lexapro Avapro Actos Viagra Avandia Total 2009 sales ($mn) 9,801 6,575 6,013 5,126 4,660 3,263 3,088 2,532 1,892 724 43,674 Product Cymbalta AcipHox Humalog Zometa Niaspan Lovaza Xopenex Zomig Advicor Fuzeon Total

2013 2009 sales ($mn) 4,660 2,728 1,959 1,469 853 705 357 166 80 26 13,003

Industry Leaders in lost revenues due to 2010-13 patent expirations

US $ Billions
29.2 12.9 11.3 9.5

8.8

7.2

4.7

4.6

3.3

Reasons for M&A(contd..)

O High cost of R&D and decreased R&D O O O O O

productivity(Poor returns) High valuation of Indian firms (Premium Value) Increase in market share Change in mindset of promoters Generic competition High profile product recalls

Reasons for M&A(contd..)

O Manufacturing prowess and cost

O O O O

competitiveness of Indian companies (highest no of USFDA approved plants outside US) Geographical expansion Emerging markets- future growth driver Overcome barriers to entry Product/Brand extension

Reasons for M&A(contd..)

O Growing Indian population

Reasons for M&A(contd..)

O Growing middle class with higher purchasing

power( Increasing market)

Reasons for M&A(contd..)

O Increase in chronic diseases

Reasons for M&A(contd..)

O Low growth rate of global pharma

Source: IMS Health Market Prognosis, March 2011

Higher growth in pharmerging markets

Indian pharma scenario in 2020

Area Size in 2010 CAGR over 10 years Estimated size in 2020 Base Aggressive Base growth growth valuation Total US $ 12bn domestic market Rural market OTC market Vaccine market US $ 2 bn 15% 20% US $ 49bn Aggressive valuation US $ 74 bn

15%

20% 20% 13%

US $ 8bn US $ 11 bn US $ 1.4 bn

US $ 12 bn US $ 13 bn US $ 1.8 bn

US $ 1.8bn 18% US $ 524 mn 10%

Source: PwC Analysis

India to enter top 10 markets by 2015

Reasons for M&A(contd..)

O Increase in market share

Reasons for M&A(contd..)

O High premium offered by MNCs
Target Paras Solvay Piramal Aventis Shantha Pfizer India Novartis India Ranbaxy Dabur Acquirer Reckitt Benckiser Abbott Abbott Hoechst GmbH Sanofi Pasteur Pfizer Novartis AG Daiichi Sankyo Fresenius Kabi AG Deal value($mn) 720.9 66.88 3,720 91.5 625.2 169.5 75.57 4,538.6 220 DV/Revenues 8.12X 6.4X 8.47X 3.96X 8.7X 3.25X 2.5X 6X 3.73X Source: Datamonitor

Reasons for M&A(contd..)

O High profile product recalls: MNCs now

focusing on pharmerging markets

Drug Vioxx Avandia Meridia Company Merck GSK Abbott Reasons Cardiovascular side effects Cardiovascular side effects Cardiovascular side effects

Reasons for M&A(contd..)

O Highest number of US FDA approved plants

outside US
FDA approved plants
120+ 55 27 India Italy China 25 10 8 5

Spain Taiwan

Israel Hungary

Source: Taking wings, Ernst & Young, 2009

Reasons for M&A(contd..)

O Cost efficiency: India rates higher than other

countries on cost efficiency

Percentage overall indexed manufacturing cost (US FDA approved plants)
Cost index 150 100 50 0 US Europe India Source: Taking wings, Ernst & Young, 2009 100 80 35

Reasons for M&A(contd..)

O Growing global demand for generics

M&A Deals
O M&A trend analysis:

2007 Deal volume Deal value($mn) 45 798.1

2008 74 5,347.7

2009 35 1,646.7

2010 55 5,322.3

Source: Datamonitor

Recent M&A Deals(Inbound)

Date May 2010 June 2008 Mar 2009 Dec 2010 July 2009 Dec 2009 Apr 2008 Target Piramal Ranbaxy Matrix Paras Shantha Orchid Dabur Acquirer Abbott Daiichi Sankyo Mylan Deal value($mn) 3,720 4,538.6 736.0

Reckitt Benckiser 720.9 Sanofi Aventis Hospira Frenesius kabi 625.18 400.0 220.0 Source: Datamonitor

M&A by Indian companies

O Not a one way street O Indian companies are not only looking to sell

but they are also active buyers wherein they are looking to augment their capabilities by expanding their footprints, entering into new geographies or diversifying their business model or moving up the value chain O Several cash rich domestic companies are looking at hitherto unexplored markets like Japan, Australia and East Asia

Drivers of acquisition by Indian companies

O Enhancing revenue through global presence O Better market access O Widening product portfolios O Strengthening R&D capabilities O Strengthening distribution network O Increasing efficiencies through leveraging

economies of scale O Gaining access to new technologies O Establishing a new area in pharma value chain

Some M&A Deals(Outbound)

S. N. 1 2 3 4 5 6 7 8 9 10 11 Company (Acquirer) Biocon Dr. Reddy's Labs Wockhardt Wockhardt Wockhardt Wockhardt Zydus Cadilla Ranbaxy Nicholas Piramal Sun Pharma Cadilla Healthcare Company (Target) Axicorp (German) Trigenesis Therapeutics (USA) Esparma (German) C P Pharmaceuticals (UK) Negma Laboratories (France) Morton Grove Pharma (USA) Alpharma (France) RPG Aventis (France) Biosyntech (Canada) Taro (Israel) Quimica E Farmaceutica Nikkh For Amount $ 30 million $ 11 million $ 11million Rs 83 crore $ 265 million $ 38 million EUR 5.5 million $ 70 million $ 4.85mn $ 500mn -

The Big Deal Abbott + Piramal

At $3.72 bn (Rs 17,500 crore), its the second largest pharma deal in India, after the Rs 19,780 cr DaiichiRanbaxy deal in 2008 What it means for Abbott? Rights to 350 brands and trademarks of generics, including Phensedyl cough syrup Market share close to 7% Strong presence in India(growth rate 13-17%) Complete product portfolio

The Big Deal Abbott + Piramal

O The Piramal group has agreed that for eight

years after the deal's closing, it will not enter the business of generic pharmaceutical products in India, or make or market them in emerging markets O Abbott became market leader with the acquisition of Piramal with appox. 7% market share

The Big Deal Abbott + Piramal

The Big Deal Abbott + Piramal

The Big Deal Abbott + Piramal

Piramal Overview
O A leader in the Indian branded generics market O Strong brand equity and presence in key areas:

antibiotics, respiratory, cardiovascular, pain and neuroscience O ~350 branded generic products O Significant local footprint largest sales force in India O One of the largest formulation plants in India

The Big Deal Abbott + Piramal

ABBOTT STRATEGY
Abbott will become no 1 in India, with ~ 20% annual growth over next several years Piramal to add >$500MM in 2011 sales in India; total Abbott pharma sales expected to exceed $2.5BN by 2020 in India

Further diversify sources of pharmaceutical growth

The Big Deal Abbott + Piramal

ABBOTT STRATEGY

Expand presence in high-growth emerging markets

India is one of the worlds fastest-growing markets; expected to more than double by 2015 Piramal has the largest sales force in India; unique model with dedicated people in high-growth rural areas

The Big Deal Abbott + Piramal

Piramal portfolio has ~350 leading branded generics in multiple therapeutic areas Solvay, Zydus and Piramal give Abbott critical mass and a comprehensive leading portfolio of branded generics

Establish a leading presence in branded generics

The Big Deal Abbott + Piramal

Deliver sustained double-digit EPS growth

Expect ~20% Piramal sales growth over the next five years Expect transaction to be neutral to EPS over the next several years, accretive thereafter

The Big Deal Abbott + Piramal

Globally, there is a new way of selling patented drugs, which we would not have been able to do on our own. So as part of future strategy, we took this decision. Also, at almost 9.5 times the sales, its in the best interest of our shareholders Ajay Piramal Chairman, Piramal Group

Future
O India will break into top 5 pharma markets by

2020 O Increasing spending on healthcare will drive the MNCs to look for Indian presence O Indian companies do not have the capital and expertise required for new drug development O At the same time, from the standpoint of the MNCs, with the drying up of R&D productivity in the U.S. and developed markets and their search for other sources of innovation ,acquisitions are a cost-effective way to bring in a portfolio of branded generics

Future
O With the availability of 100 per cent FDI through

automatic route, Indian companies may witness takeovers by foreign firms O There has been a gradual shift in thinking of Indian promoters who are now more open to exploring strategic options for their companies which has enabled increased M&A activity in this sector O The new patent regime, challenges faced by generic companies in regulated markets and the robust valuation being offered by MNCs are some of the key factors which have resulted in this changed mindset of both MNCs as well as Indian promoters

Future
O These are interesting times for the Indian

pharmaceuticals industry which offers diverse opportunities with substantial growth potential to both domestic as well as global pharma companies O This will result in increased M&A activity in this sector as companies are prompted to evaluate their business models and re-align themselves to create value for their stakeholders