Abbott – Piramal deal: the way future is expected to shape up

In my view, these are still very early days for such acquisitions of large domestic Indian pharmaceutical companies by the Global Pharma majors to gain momentum in the country. However, there is no doubt that in the near future, we shall rather witness more strategic collaborations between Indian and Global pharmaceutical companies, especially in the generic space.

Squeezing margin due to cut-throat domestic and international competition may affect future valuation of the domestic companies:

I reckon, the number of such high profile mergers and acquisitions will significantly increase, as and when the valuation of domestic Indian companies appears quite attractive to the global pharma majors. This could happen, as the domestic players face more cut-throat competition both in Indian and international markets, squeezing their profit margin.
Abbott possibly has a well-structured game plan for seemingly high valuation of the deal:
Having said that let me point out, during Ranbaxy-Daiichi Sankyo deal, analysts felt that the valuation of the deal was quite high. US $ 3.7 billion Abbott – Piramal deal has far exceeded even that valuation. Does this deal not make any business sense? I do not think so. Abbott is a financially savvy seasoned player in the M&A space. It is very unlikely that they will enter into any deal, which will not have any strategic and financial business sense.

Big ticket Indian Pharma deals:

So far India has seen four such major deals starting from Ranbaxy – Daiichi Sankyo, Dabur Pharma – Fresenius, Matrix – Myalan and Orchid – Hospira, besides some global collaborative arrangements, such as, Pfizer with Aurobindo/Claris/Strides GSK with DRL, AsraZeneca with Torrent and again Abbott with Zydus Cadila.

Key drivers for these deals:

Such acquisitions and collaborations will be driven by following eight key factors:

1. R&D pipelines of the global innovative companies are drying up
2. Many blockbuster drugs will go off-patent in the near future
3. Cost containment pressure in the western world exerting pressure on the bottom lines
of the global pharma majors
4. Increasing demand of generics in high growth emerging and developing markets
5. The new Healthcare Reform in the US will promote increased usage of generic drugs.
6. The fact that India already produces 20% of the global requirement for generic drugs
increases the attractiveness.
7. The fact of domestic Indian companies account for 35% of ANDAs highlights the future
potential of the respective companies.
8. Highest number of US-FDA approved plants, next to the US, is located in India.

A strategic move by Abbott:

As announced by Abbott from its headquarter in Chicago that Abbott in India will increase its sales four times to around Rs. 11,000 Crores by 2020 with the acquisition of 350 brands of ‘Piramal Healthcare’ business.

Facing the stark reality of a ‘patent Cliff’, cost containment pressures especially in the US and EU, low single digit growth rate of the developed markets and high growth of branded generic dominated emerging markets, Abbott has taken a new global initiative aimed at the emerging markets with the creation of its global ‘Established Products’ Business’. This initiative started with worth US $ 6.2 billion acquisition of branded generic business of Solvay Pharma, which has a sizeable presence in the EU markets.
Recently announced licensing agreement of Abbott with Zydus Cadila to market 24 products initially in 15 emerging markets of the world is another step towards this direction.

Advantage Abbott India:

The asset based acquisition of ‘Piramal Healthcare’ by Abbott will help its Indian arm to increase its domestic market penetration, significantly, both for branded generic and patented products in urban, semi-urban and rural markets spearheaded by around 7000 strong sales force. This strategy perhaps will also help Abbott in India distancing itself from the number 2, in the Indian Pharma league table, probably with a handsome margin.

Global players want a risk-cover with the generic business and minimize tough competition:

Like Abbott, it is quite likely that other major global players are also planning to reduce their business risks by expanding the business from mainly high risk and expensive R&D intensive patented products to a more predictable and rapidly expanding branded generic business.

Will such move have any significant effect on competition?

Such M&A initiatives may seemingly minimize the cut throat competition from large generic players from India. However, I do not envisage any significant impact on over all competition between the generic players for such moves, as their will be mounting competition from more number of new entrants and emerging players, entry barrier in Indian generic pharmaceutical market being quite low.

Conclusion:

In the globalized economy where the ‘world is flat’ such types of business consolidation initiatives are inevitable. The domestic Indian companies across the industry are also in the prowl for suitable global targets, which are at times of world class ‘Crown Jewels’ like Arcelor, Chorus or Jaguar/Land Rover. Pharmaceutical industry is, therefore, no exception.

By Tapan Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

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