Pharma MNCs take JV route for India

With the rising significance of India as one of the largest generic drug markets and escalating valuations which makes the pharmaceutical space here a tough acquisition target, global pharma majors remain active for entering partnerships, joint ventures and alliances with their Indian counterparts.

During this year, two global pharma majors entered JVs with top Indian players to sell generic drugs in India as well as other emerging markets. In January, Bayer AG entered into a 50:50 joint venture, Bayer Zydus Pharma, to distribute pharmaceuticals in India with Cadila Healthcare Ltd. Similarly, US-based Merck joined hands with Sun Pharma, eyeing emerging markets.

In October last year, Pfizer, the world's largest drug maker, entered into a marketing alliance with biotech major Biocon Ltd to, initially, market globally four of the latter’s insulin biosimilar products. The $350-million deal allows each other to market insulin in separate markets.

According to a recent study by Standard Chartered, global companies face the dilemma of growth versus innovation. While the innovation-led model has traditionally served them well, most would be impacted in the next few years by a steep patent cliff (almost $75 billion of patented products are expected to go off-patent in the next five years) and low research and development productivity (lower number of approvals and blockbusters to replace potential patent loss), it said.

IMS says this would impact regulated market growth (almost 80 per cent of current sales for most global companies), forecast to grow at a compounded annual rate of only three to six per cent. In comparison, emerging markets (EMs) are likely to grow at a 12-15 per cent rate. EMs contributed almost half of global growth in the past few years (despite a 20 per cent market share) and this contribution is projected to increase to 70 per cent in the next five years.

‘THE INDIA DRAW’
Ranjit Kapadia, vice-president, institutional research, HDFC Securities, said, “The Indian market, which grows at 17-18 per cent annually, attracts all the major MNCs to strengthen their presence here. Also, India has a 1/5th share of global population which helps in expanding the pharma markets quite well. Through the alliances, apart from India, all the other emerging markets like Australia, Africa, Middle East and Latin America can be tapped.” The valuation remains high and they prefer the alliance route than the acquisition one for the time being, he added.

Another key feature of EMs is that consumers primarily pay for most medications from private means, unlike in regulated markets where a large portion is borne by state/insurance players. Coupled with relatively lower incomes, consumers are thus more price-sensitive than in other markets, the study says. Also, the manufacturing cost in India is 35-40 per cent cheaper than that of US or European markets.

According to experts, the valuations of Indian pharma companies are still on the high side in the backdrop of the Abbott-Piramal and Daiichi-Ranbaxy deals. This forces multinational corporations to think on buyouts.

According to data from VCCedge, in 2010, apart from $3.7-billion Abbott-Piramal deal, the only single deal in pure pharma space was that of US-based Avantor's buyout of RFCL from ICICI Venture for $112 million. However, in 2009, about five inbound deals took place, where Sanofi-Aventis bought Shantha for $625 million, Hospira Inc acquired Orchid for $400 million, the $133-million Mylan-Matrix deal, Pfizer Animal Health's buyout of Ventex AFCL from ICICI Venture for $75 million and Ventoquinol's acquisition of Wockhardt's animal health business for $31 million. In 2008, only a single inbound deal took place, where Ranbaxy was bought over by Daiichi Sankyo for $4 billion.

However, according to Rajeev Dalal, partner, transaction advisory, at Ernst and Young, the Daiichi-Ranbaxy or Abbott-Piramal kind of deals cannot be ruled out. He said: “Someone who is having zero presence in India still explores a possibility for buyout, even if the valuations are high. Deals similar to Abbott-Piramal will give a high hand over one of the largest formulations market like India. But the alliance is a win-win deal for both parties, where Indian firms can enjoy the R&D expertise of their multinational counterpart.”

Last year, Anglo-Swedish drug maker AstraZeneca signed its first branded generics supply deal, with Torrent Pharmaceuticals. In 2009, a similar deal was signed by British drug maker GlaxoSmithKline with Dr Reddy's Laboratories.