Could M&As in Pharma create significant stakeholder value?

At the very outset, I pay my homage to the departed soul of our industry colleague respected Amar Lulla, former joint managing director of Cipla, who passed away on Friday, April 22, 2011 after a prolonged battle against cancer.

As we know, “Merger and Acquisition (M&A)” is an inorganic growth tool of any business. In this model growth in business operations arise from value creation through mergers or takeovers of other companies, rather than from increase in the company’s own existing business activities.

On April 13, 2011, quoting a study released by Burrill & Co, a noted life sciences investment firm, ‘Fierce Pharma’ reported that “drug makers’ deal making over the past 10 years has utterly and completely failed to build value in the industry. Big Pharma has actually lost almost $1 trillion in value during the past decade.”

Big Pharmas lost value in the past decade through deal making:

Burrill argued: “The drug industry’s 17 most active buyers had a combined market value of $1.57 trillion at the end of 2000. By the end of 2010, that value had shrunk to $1.04 trillion–notwithstanding the $425 billion in acquisitions these companies made during the decade with a total loss of $955 billion.”

The report commented that global pharma majors could not make up non-delivery of innovative products through these acquisitions.

M&As triggered by in-market blockbuster products, were successful in the past:

It was observed that those M&As, which were triggered by in-market blockbuster products were successful in the past. Like for example:

Year M&A Product/Products
2000 Pfizer and Warner Lambert Lipitor
2006 Eli Lilly-ICOS Cialis
2008 Eli Lilly- ImClone Erbitux

However, when a company was acquired for products in development or R&D pipelines, it was observed that acquirer could not derive full benefits of their respective inorganic growth plans, as many of those projects did not fructify or could not be continued in the long run for various different reasons. I am not trying to go into those details in this article.

It is usually believed that healthcare companies with diversified interests along with pharmaceuticals and biotech business, like, diagnostic, devices and generic pharmaceuticals encountered much lesser growth pangs in the past. I reckon, it is for this reason, companies like, Abbott, J&J, Roche and Novartis registered overall better business performance than their pure pharmaceutical business counterparts like, Merck, Pfizer etc.

Only future will tell us whether high takeover prices, such as US$ 68 bn paid by Pfizer for Wyeth or US$ 46 bn of Roche for Genentech or US$ 41 bn of Merck for Schering-Plough, mainly to acquire the drug pipelines of the respective companies, can ultimately be justified or not. At this stage, it is indeed extremely difficult to quantify the transaction value of phase III drugs that Pfizer, Roche and Merck acquired with these mega deals.

However, about a couple of years ago ‘Forbes’ in its article titled, “Will Pfizer’s Merger Hurt Innovation?” published in January 26, 2009 commented as follows:

“Between 1998 and now, Pfizer has launched only one medicine with annual sales surpassing $1 billion, despite ploughing more than $60 billion into research and development. That drug, the pain med Lyrica, was already in development at Warner-Lambert when Pfizer bought it.” 

Other significant global M&A initiatives in 2010 were as follows:

Global Companies Value (US $ billion)
Sepracor by Dainippon Sumitomo 2.6
77% of Alcon (the eye care unit of Nestle) by Novartis 50
Millipore by Merck KGA 6
OSI Pharma by Astellas 4
King Pharma by Pfizer 3.6
BioVex by Amgen 1
Ratiopharm by Teva 5

In addition, work is in progress for some more M&A initiatives, like the hostile bid of US $ 20 billion of Sanofi Aventis for Genzyme in 2011. J&J’s offer of US $2.3 billion for vaccines of Crucell; Valeant’s hostile bid for Cephalon of US $ 5.7 billion, and J&J’s talk with Synthes for an acquisition with US $20 billion.

Emerging markets: the Eldorado:

At the same time, IMS Health reports that emerging markets will register a growth rate of 14% to 17% by 2014, significantly driven by generic pharmaceuticals, when the developed markets will be growing by 3% to 6% during this period. It is forecasted that the global pharmaceutical industry will record a turnover of US$1.1 trillion by this time.

Probably prompted by this overall market scenario, the global pharmaceutical majors are still trying to keep their heads above water through deal making and various collaborative initiatives. India, being one of the fastest growing global pharmaceutical markets, has also started experiencing this consolidation process.

Real consolidation process in India commenced in 2006: The consolidation process in India started gaining momentum from the year 2006 with the acquisition of Matrix Lab by Mylan, although 2009 witnessed the biggest merger in the Pharmaceutical Industry of India, thus far, in value terms, when the third largest drug maker of Japan, Daiichi Sankyo acquired 63.9% stake of Ranbaxy Laboratories of India for US $4.6 billion.
This was widely believed to be a win-win deal for both the companies with Daiichi Sankyo leveraging the cost arbitrage of Ranbaxy effectively, while Ranbaxy benefiting from the innovative products range of Daiichi Sankyo. This deal also established Daiichi Sankyo as one of the leading pharmaceutical generic manufacturers of the world, making the merged company a force to reckon with, in the space of both innovative and generic pharmaceuticals business.
Another mega acquisition soon followed:
In May 2010, the Pharma major in the US Abbott catapulted itself to number one position in the Indian Pharmaceutical Market (IPM) by acquiring the branded generics business of Piramal Healthcare with whopping US$3.72 billion. Abbott acquired Piramal Healthcare at around 9 times of its sales multiple against around 4 times of the same paid by Daiichi Sankyo.

According to Michael Warmuth, senior vice-president, established products of Abbott the sales turnover of Abbott in India, after this acquisition, will grow from its current around US$ 480 million to US$2.5 billion by the next decade. 

Was the valuation right for the acquired companies?
Abbott had valued formulations business of Piramal Healthcare at about eight times of sales, which is almost twice of what Japan’s Daiichi Sankyo paid for its US$4.6 billion purchase of a controlling stake in India’s Ranbaxy Laboratories in June 2008.

On the valuation, Warmuth of Abbott has reportedly commented “If you want the best companies you will pay a premium; however, we feel it was the right price.”

This is not surprising at all, as we all remember Daiichi Sankyo commented that the valuation was right for Ranbaxy, even when they wrote off US$3.5 billion on its acquisition.
In my opinion, considering the fact that not too many attractive acquisition targets are available within the domestic pharmaceutical industry, the valuation of any well performed Indian Pharmaceutical Company will continue to remain high, at least in the short to medium term… and why not, when the domestic pharmaceutical industry is growing so well, consistently?

M&As in India from 2006 to 2010:

Year

Indian Companies

Multinational Companies

Value ($Mn)

Type
2006
Matrix Labs Mylan

736

Acquisition
Dabur Pharma Fresenius Kabi

219

Acquisition
Ranbaxy Labs Daiichi Sankyo

4,600

Acquisition
Shantha Biotech Sanofi-aventis

783

Acquisition
2009
Orchid Chemicals Hospira

400

Business Buyout
2010
Piramal Healthcare Abbott

3,720

Business Buyout
Paras Pharma Reckitt Benkiser

726

Acquisition

Collaborative deals in India from 2009 to 2011:

Year

Multinational Companies

Indian Companies
2009
GSK Dr. Reddy’s Lab
Pfizer Aurobindo Pharma
2010
AstraZeneca Torrent
Abbott Cadila Healthcare
Pfizer Strides Arcolab
AstraZeneca Aurobindo Pharma
Pfizer Biocon
2011
Bayer Cadila Healthcare
MSD Sun Pharma

The Key driver for acquisition of large Indian companies:
Such strategies highlight the intent of the global players to quickly grab sizeable share of the highly fragmented IPM – the second fastest growing and one of the most important emerging markets of the world.
If there is one most important key driver for such consolidation process in India, I reckon it will undoubtedly be the strategic intent of the global companies to dig their heel deep into the fast growing Indian branded generic market, contributing over 99% of the IPM. The same process is being witnessed in other fast growing emerging pharmaceutical markets, as well, the growth of which is basically driven by the branded generic business.
Important characteristics to target the branded generic companies:
To a global acquirer the following seem to be important requirements while shortlisting its target companies:
• Current sales and profit volume of the domestic branded generic business • Level of market penetration and the rate of growth of this business • Strength, spread and depth of the product portfolio • Quality of the sales and marketing teams • Valuation of the business
Faster speed of consolidation process could slow down the speed of evolution of the ‘generics pharmaceutical industry’ in India: Though quite unlikely, if the moderate valuation of large Indian companies starts attracting more and more global pharmaceutical majors, the speed of evolution of the ‘local generic pharmaceutical industry’ in the country could slow down, despite entry of newer smaller players in the market.

The global companies will then acquire a cutting edge on both sides of the pharmaceutical business, discovering and developing innovative patented medicines while maintaining a dominant presence in the fast growing emerging branded generics market across the world.
An alarm bell in the Indian Market for a different reason:
It has been reported that being alarmed by these developments, some industry insiders feel, “Lack of available funding is the main reason for the recent spurt in the sale of stakes in domestic companies”.
They have reportedly urged the Government to adequately fund the research and development (R&D) initiatives of the local Pharmaceutical Companies to ensure a safeguard against further acquisition of large Indian generic players by the global pharmaceutical majors. It is a fact that the domestic Indian companies do not have adequate capital to fund cost-intensive R&D projects in India even after having a significant cost arbitrage.
Will such consolidation process now gain momentum in India?
In my view, it will take some more time for acquisitions of large domestic Indian pharmaceutical companies by the Global Pharma majors to gain momentum in the country. In the near future, we shall rather witness more strategic collaborations between Indian and Global pharmaceutical companies, especially in the generic space, as indicated above.
The number of high profile M&As of Indian pharma companies will significantly increase, as I mentioned earlier, when the valuation of the domestic companies appears quite attractive to the global pharma majors. This could happen, as the local players face more cut-throat competition both in Indian and international markets, squeezing their profit margin.
It won’t be a cake walk either…not just yet:
Be that as it may, establishing dominance in the highly fragmented and fiercely competitive IPM will not be a ‘cakewalk’ for any company, not even for the global pharmaceutical majors. Many Indian branded generic players are good marketers too. Companies like, Cipla, Sun Pharma, Alkem, Mankind, Dr.Reddy’s Laboratories (DRL) have proven it time and again, over a period of so many years.
The acquisition of Ranbaxy by Daiichi Sankyo did not change anything in the competition front. Currently the market share of Abbott, post M&A, including Solvay and Piramal Healthcare, comes to just around 6.2% followed by Cipla at 5.5% (Source: AIOCD). This situation in no way signifies domination by Abbott in the IPM, far from creating any oligopolistic pharmaceutical market in India.
Thus the pharmaceutical market in the country will continue to remain fragmented with cut-throat competition from the existing and the newer tough minded, innovative and determined local branded generic players having cost arbitrage, cerebral power and untiring spirit of competitiveness with a burning desire to win.
Simultaneously, some of the domestic pharmaceutical companies are in the process of creating a sizeable Contract Research and Manufacturing Services (CRAMS) sector to service the global pharmaceutical market.
Conclusion:
In my view, it does not make long term business sense to pay such unusually high prices for the branded generics business of any Indian company. Besides the report of Burrill & Co., we also have with us examples of some of the Indian pharmaceutical acquisitions in the overseas market are not working satisfactorily as the regulatory requirements for the low cost generics drugs were changed in those countries.
Most glaring example is the acquisition of the German generic company Betapharm by DRL for US$ 570 million in 2006. It was reported that like Piramals, a significant part of the valuation of Betapharm was for its trained sales team. However, being caught in a regulatory quagmire, the ultimate outcome of this deal turned sour for DRL.
Could similar situation arise in India, as well? Who knows? What happens then to such expensive acquisitions, if for example, prescriptions by generic names are made mandatory by the Government within the country, despite intensive lobbying efforts?

Be that as it may, in India also, a study like, ‘Burrill Report” could be quite useful to ascertain whether or not the deal making of global and local drug majors in the country over a ten year period commencing from 2006 onwards, has succeeded to create desired stakeholder value.

By: Tapan J 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.

With significant competitive edge should Global Biotech Companies consider entry into high potential ‘Biosimilar drugs’ business?

‘Biosimilar drugs’ – rapid future growth potential:
In most of the developed countries of the world, besides regulatory issues, ‘Biosimilar drugs’are considered a threat to the fast growing global biotech industry. However, many believe that innovative biotech companies can have a head start with all wherewithals at their disposal, compared to generic pharmaceutical companies, to convert this seemingly significant threat into a bright emerging opportunity and derive the best possible mileage out of such changing environment.

Sandoz (Novartis) – first to launch a ‘Biosimilar drug’ in the USA:

In mid 2006, US FDA approved its first ‘Biosimilar drug’; Omnitrope of Sandoz (Novartis) following a court directive in the U.S. Omnitrope is a copycat version of Pfizer’s human growth hormone, Genotropin. Interestingly, Sandoz (Novartis) had taken the U.S FDA to court as the regulatory approval of Omnitrope was kept pending by them, in absence of a defined regulatory pathway for ‘Biosimilar drugs’ in USA.

The CEO of Sandoz had then commented, “The FDA’s approval is a breakthrough in our goal of making high-quality and cost-effective follow-on biotechnology medicines like Omnitrope available for healthcare providers and patients worldwide.” Despite this event, no one at that time expected the U.S FDA to start commencing approval of other ‘Biosimilar drugs’ within the country.

‘Biosimilar drugs’ – emerging global interest:

Thereafter, many developments are fast taking place in the space of ‘Biosimilar drugs’, the world over. To fetch maximum benefits out of this emerging opportunity, India is also taking steps to tighten its regulatory reform process for ‘Biosimilar drugs’ to allay general fear and apprehensions regarding safety of such drugs, in absence of adequate clinical data for the specific protein substance.

Merck’s entry in ‘Biosimilar drugs’ business is through an acquisition:

In the west Merck announced its entry into the ‘Biosimilar drugs’ business on February 12, 2009, while announcing its acquisition of Insmed’s portfolio of ‘Biosimilar drugs’ for U.S$130 million in cash. Rich pipeline of follow-on biologics of Insmed is expected to help Merck to hasten its entry into global ‘Biosimilar drugs’ markets.

Current status of ‘Biosimilar drugs’ in the USA:

The new administration of President Barak Obama has expressed its strong intent to pave the way for regulatory guidelines for ‘Biosimilar drugs’ in the USA. To facilitate this process, the new draft legislation titled, “Promoting Innovation and Access to Life Saving Medicine Act” has already been introduced by the legislators of the country. This legislation, when will come into force would help define guidelines for approval of ‘Biosimilar drugs’ in the USA with just a five year exclusivity period to the innovative products, against a demand of 14 years by the global biotechnology industry.

Lucrative Global market potential for ‘Biosimilar drugs’:

It is estimated that only in the top two largest pharmaceutical markets of the world, USA and EU, sales of ‘Biosimilar drugs’ will record a turnover of U.S$ 16 billion in next two years and around U.S$ 60 billion by year 2010, when about 60 biotech products will go off-patent.

Opportunity for the Indian biotech companies:

Such a lucrative business opportunity in the west will obviously attract many Indian players, like, Biocon, Dr. Reddy’s Labs, Ranbaxy, Wockhardt etc, who have already acquired expertise in the development of ‘Biosimilar drugs’ in India like, erythropoietin, insulin, monoclonal antibodies, interferon-alfa. Domestic Indian biotech players are not only marketing these products in India but also exporting them to other non/less-regulated markets of the world.

Indian Companies are fast preparing to take a sizable share of the global pie of ‘Biosimilar drugs’ market:

Ranbaxy in collaboration with Zenotech Laboratories is engaged in global development of Granulocyte Colony-Stimulating Factor (GCSF) formulations. Wockhards is expected to enter into the Global ‘Biosimilar drugs’ market by 2010. Dr. Reddy’s Laboratories and Biocon are also preparing themselves for global development and marketing of insulin products, GCSF and streptokinase formulations.

Government of India funding for development of ‘Biosimilar drugs’ in India:

It has been reported that the Department of Biotechnology (DBT) of the Government of India has a proposal for funding of U.S$ 68 million through public private partnership (PPP) initiatives, where soft loans at the rate of interest of just 2% will be made available to the Indian biotech companies for development of ‘Biosimilar drugs’. Currently DBT spends around U.S$200 million annually towards biotechnology related initiatives.

Advantage India:

Experience in conforming to stringent U.S FDA manufacturing standards, having largest number of U.S FDA approved plant outside USA; India has acquired a great advantage in manufacturing similar high technology products in India. Significant improvement in conformance to Good Clinical Practices (GCP) standards in India offers additional advantages.

Two available choices for the innovator companies:

With increasing global cost-containment pressures within the healthcare space, emergence of a lucrative global ‘Biosimilar drugs’ market with appropriate defined regulatory pathway in place is inevitable now.

Major global research based companies will now have two clear choices in the fast evolving situation. The first choice is the conventional one of competing with the ‘Biosimilar drugs’ in all important markets of the world. However, the second choice of jumping into the fray of ‘Biosimilar drugs’ business keeping focus on R&D undiluted, appears to be more prudent to me and perhaps will also make a better business sense. Only future will tell us, which of these two business senses will prevail, in the long run for the global biotech companies.

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.

Healthcare services in India … growing disparity between urban and rural population – can ‘Telemedicine’ play a significant role?

Healthcare Industry in India is currently valued at US$ 35 billion. This industry is expected to record a turnover of US$ 75 billion in 2012 and US$ 150 billion in 2017, reports Technopak Advisors in their report titled “India Healthcare Trends 2008”.Growing Middle Class Population – the key growth driver:This growth is not expected to come from rural India where over 70% of Indian population lives and a vast majority of them do not have ‘access to modern medicines‘. The key driver of growth of this sector will be growing 150 million strong middle class population with increasing health awareness. Out of this population, 50 million have a disposable income of US$ 4,380 – US$21, 890,, reports McKinsey. Technopak Advisors report recommends an immediate investment of US$ 82 billion to meet this growing demand.

Medical Tourism - another potential growth driver:

Another growth driver is expected to be ‘Medical Tourism’. With a slogan: ‘First World Treatment at Third World Prices’, Medical Tourism is expected to become a US$ 2 billion industry by 2012 from US$ 350 million in 2006, reports a study done by McKinsey and CII. In 2008-09, over 200,000 foreigners, mainly from Middle East and South Asian countries came for medical treatment in India. Hospitals in India are now trying to attract patients from Afro-Asian countries who spend around US$ 20 billion outside their respective countries, towards medical treatment. Thus, the current number of patients visiting India for medical tourism is expected to grow by around 25 percent during next few years.

Medical expertise and facilities – a sharp contrast between the urban and rural India:

India Brand Equity Foundation (IBEF) reports that over a period of last few years besides cost advantage, high success rate, especially in the following areas has been attracting the medical tourists towards India:

• Over 500,000 major surgeries and over a million other surgical procedures including cardio-thoracic, neurological and cancer surgeries have been performed by the Indian specialists, with success rates at par with international standards.

• The success rate of cardiac bypass in India is 98.7 per cent against 97.5 per cent in the U.S.

• India’s success in 110 bone marrow transplants is 80 per cent.

• The success rate in 6,000 renal transplants is 95 per cent.

• India has the 2nd highest number of qualified doctors in the world.

It is worth noting, the centre of excellence of all these outstanding statistical records are located mainly in the urban areas. In sharp contrast to these most of the rural populations are denied of basic healthcare facilities services. Despite being second highest growing economy in the world after China and having world class healthcare facilities available in the country, a vast majority of rural population is denied of basic healthcare services. Even in those places where primary healthcare establishments are available, poor maintenance, understaffing, non-availability of medicines and antic medical equipment, deny the basic and standard healthcare services to the local population.

India is still the home for world’s ‘largest number of poor people in a single country’, even after 61 years of Independence. A study indicates that in India around 260 million people live below the poverty line (BPL). Out of this number about 193 million people live in rural areas and about 67 million live in urban areas. Over 75% of these poor people live in rural India.

The point to note here, although over 700 million people live in rural India, only 193 million of them belong to BPL families. Therefore, even those who can afford proper medical treatment in rural areas, do not have access to modern healthcare facilities, due lack of healthcare infrastructure and services.

Quoting Oxford University of the United Kingdom (UK), The Economic Times (ET) dated February 2, 2009 reported that due to lack of basic healthcare facilities, around one million women and children die every year in India. This is, once again, mainly because 700 million people in rural India have no access to specialists. 80% of medical specialists live in urban areas. ‘India Knowledge, Wharton’ reported recently that India would require an investment of US$ 20 billion over next 5 years to address this problem.

National Health Policy 1983 promised healthcare services to all by 2000 – has it delivered?

The National Health Policy 1983 announced commitment of the Government of India to provide ‘health care services to all by year 2000′. Unfortunately, even today only 35% of Indian population have access to affordable modern medicines, despite an appreciable growth of this sector during last four decades.

Per capita expenditure towards healthcare in India is one of lowest among Asian countries outside South Asia. The expenditure of the Government for healthcare has progressively grown over the years though, healthcare expenditure as a percentage of total government spending has decreased considerably. Only silver lining is that the private sector spending towards healthcare is steadily increasing at a much higher pace.

Can ‘Telemedicine’ improve access to healthcare in rural India?

Would creation of a cost-effective ‘Telemedicine’ infrastructure in rural areas be able to address this problem? In my view, this area is worth exploring seriously and should be tried out by the Government with Public Private Partnership (PPP) model, initially with pilot projects.

‘Telemedicine’ has been defined as the use of electronic information and communication technologies to provide health care support to patients from distant locations. Thus ‘Telemedicine’ could be used to provide healthcare services where it does not exist at all and at the same will help to improve healthcare services considerably, where something already exists.

With the advancement in telecommunication and satellite communication technology in the recent years, the scope of creating and gradually expanding the ‘Telemedicine’ facilities in India indeed throw open a new avenue to improve ‘access to quality healthcare services’, in rural India.

Besides lack of basic primary healthcare services in rural areas where over 70% of Indian population live, 90% of secondary and tertiary healthcare facilities are also located in large cities and towns.

Thus, in addition to primary healthcare services, even secondary and tertiary healthcare needs of a large number of rural populations can be successfully met locally through consultations with the experts located in distant cities and towns without anyone having to travel to those far off cities and towns.

Telemedicine‘, therefore, could also offer solutions to the problem of expert medical assistance during serious or critical illness of people living in rural India. The role of ‘Telemedicine’ on healthcare services will be very meaningful under such circumstances.

‘Telemedicine’ services have already started in a smaller scale though, in Kerala, West Bengal and North-eastern states of India. It is slowly coming up in some other southern states, as well. What is required now is a concerted and integrated approach, spear-headed by the Government of India, taking all State Governments on board, with a robust policy initiative.

However, there are some key concerns with this initiative, as well. The most important of which is related to costs of such treatment for the rural households, besides other regulatory issues.

Appropriate regulatory and policy frameworks should be thoughtfully worked out to extend such innovative services to rural India, under PPP. If the concept of ‘Telemedicine’ can be made to work effectively in rural areas, leveraging world class expertise in information technology available within the country, India will emerge as a role model in the field of ‘Telemedicine’ for the developing nations of the world.

Moreover, over a period of time the ‘Telemedicine’ platform can also be effectively utilized for many other healthcare initiatives, like for example, disease prevention programs, medical/para medical staff training etc.

When ‘e-chaupal’ initiative of ITC for rural farmers of India could be so successful, why not ‘Telemedicine’ for rural patients of India?

The promise of “Healthcare services to all by year 2000” as enunciated in the National Health Policy, 1983 of the Government of India, could still be achievable, albeit late, by the next decade of this new millennium with ‘Telemedicine’.

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.