Indian pharma poised for US acquisitions

The assets of Teva Pharmaceutical Industries have become acquisition targets following devastating results announced last week by the world's biggest maker of generic medicines.

Teva's profits in the second quarter dropped to $1 billion from $1.23 billion a year earlier. Its stock slumped the most in almost two decades and the yield on its bonds jumped after the drug maker warned that it might breach some debt covenants this year if sales did not rise.

Soon, names of drug makers Fresenius, Mylan and Novartis started doing the rounds as buyers of some of Teva's assets, expected to be sold to repay debt.

Teva's acquisition of Allergan's generic business last year for $40.5 billion has become troublesome as generic drugmakers' profit margins are being squeezed in the US, the world's biggest market. The Food and Drug Administration (FDA) is speeding up drug approvals, flooding the market with products from smaller companies that compete on price. It also came at a time when pharmacy chains and retailers had consolidated their orders to a point where four groups accounted for 80 per cent of the purchases, Teva said during its earnings call.

"In retaliation, pharmaceutical manufacturing has to also consolidate in the US," said Rajeev Gupta, founder and director, Arpwood Capital. "Indian companies are big participants and if the US market is to be consolidated then Indian companies also have to participate in it," he added.

The largest Indian pharmaceuticals exporter to the US, Sun Pharmaceutical, had cash and cash equivalent of Rs 8,663 crore at the end of the last financial year. Its debt equity ratio was 0.22. Another major exporter Lupin had cash and cash equivalent of Rs 2,779 crore at the end of the last financial year with a debt equity ratio of 0.6.

"Given the industry challenges in the US, valuations are down from two years ago," said Vinita Gupta, CEO of Lupin. Two years ago, Lupin had acquired US-based Gavis Pharmaceuticals for $880 million. Lupin has been one of the most energetic buyers of complex generic and speciality drug assets in the US as it tries to overcome pricing pressure.

"It is a good time for Indian pharma to make big acquisitions in the US as the price-to-earnings multiple for the generics business has come down to 7.5, a 10-year low," said Sanjiv Kaul, partner at private equity firm ChrysCapital. Kaul is advising his portfolio firm Intas Pharmaceuticals to make use of the opportunity in the US.