Sales decline in US pushes drug makers to evaluate better options in Europe

Slowdown in sales due to drug price erosion in the US is pushing home-grown pharmaceutical companies to evaluate opportunities in Europe.
 
Europe is the third-largest market for Indian drug makers after the US and Africa. Data from IQVIA says that at $35 billion, the European generics market is the world’s second-largest by value after the US. Thus, it is an attractive market for most Indian firms.
 
Among them is Ahmedabad-based Torrent Pharmaceuticals. The firm is in the race to buy Sanofi’s European generics business. Indian peers Intas, Zydus Cadila and Aurobindo Pharma are also in the fray, but Torrent is among the shortlisted ones and is likely to make a binding offer by March 28.

 

Sanofi’s European generic business is valued at around €2 billion (Rs 160 billion). If done, Torrent’s buy would be the largest outbound acquisition by any Indian drug maker.
 
An e-mail sent to Torrent remained unanswered. Sources close to the development said the company was looking to diversify due to a lean product pipeline and a slowdown in the US business.
 
Over a decade ago, Torrent acquired Pfizer group firm, Heumann Pharma, and the company’s German business generated Rs 8.1 billion in revenue in FY17. “Sanofi’s European generics business is stable. This buy would make Torrent one of the major players in the European market. Aurobindo and Intas have greater exposure to the European market,” said a source aware of the development.

 
The source said while the deal size was big, it made sense as the pricing scenario in Europe was relatively more stable than that in the US. Also, over 60 per cent of all medicines consumed in Europe are generics. “In Europe, one has to have a certain scale to be able to negotiate with distributors,” said the source. Europe is largely a tender market and margins, as such, are low.
 
Torrent’s bid is estimated to value Sanofi’s European generic business at 13 times its Ebitda (earnings before interest, taxes, depreciation, and amortisation). The chief of another leading drug firm, earlier in the fray for the deal, however, said Torrent’s final bid value could be lesser.  In the first half of 2017, Sanofi’s generics sales in Europe were €388 million.

 
Amey Chalke, analyst with HDFC Securities, said companies were chasing the European market (through acquisitions) with long-term plans of shifting their manufacturing base to India. “Once they shift, costs will come down and that will improve margins. Volume growth for the base business would be 0-2 per cent,” he said. Moving manufacturing to India can improve margins to around 18 per cent on a top line growth of 7-8 per cent. 
 
In 2017, Aurobindo and Dr Reddy’s Laboratories expanded their presence in Europe. Aurobindo acquired Portuguese drug maker Generis for €135 million. This was the firm’s second acquisition in Europe after its purchase of Actavis business in seven countries.

 
Last February, Dr Reddy’s introduced its portfolio of generic medicines in France in oncology and anti-infective therapies. It also launched select products in the hospital category in Italy and Spain and said would launch HIV drugs soon.
 
Patent expiries and widespread usage will fuel low-to-mid single-digit net sales growth in Europe’s generic drug market into 2020, according to a Moody’s Investors Service report. “Volume growth will be stronger in countries such as France, that actively promote increased usage of generics, and in countries that have lower penetration rates like Italy,” said Knut Slatten, vice-president — senior analyst at Moody’s.

 
Utkarsh Palnitkar, national head (life science practice), KPMG, said: “Margins for generic drugs in the US have come under severe pressure. With more consolidations in the offing on the buyer side, the situation will not get alleviated in the medium term. To compound this problem, new partnerships have been seen recently, including those with e-commerce firms. The interest in European markets is, therefore, understandable.”

Attractive Markets

• Generics account for over 60% of all medicines consumed in Europe but account for less than 30% of pharmaceutical expenditure
• The European generic drugs market is expected to grow in low-to-mid 
• single-digits over next few years
• Torrent Pharma is in the race to acquire Sanofi’s European generic business
• Earlier, Aurobindo acquired Portuguese drug maker Generis, while Dr Reddy’s introduced drugs in France, Italy & Spain
• India exported $2.5 bn worth of drugs to European countries in FY17