'Most Indian cos want Ranbaxy-like deals'

Q&A: DOMINIC HOLLAMBY

An experienced M&A practitioner working with Rothschild since 1998, DOMINIC HOLLAMBY (pictured)has a long track record of completed healthcare company financing transactions. These include the Dr Reddy’s Laboratories’ acquisition of German drug company Betapharm in 2006, so far the largest outbound acquisition by any Indian drug maker. Hollamby, who is the global head of healthcare and MD, London for Rothschild, one of the largest privately-owned banks in the world, explains the changing dynamics of the global drug industry, acquisitions and the role Indian drug companies can play in future. Excerpts from an interview with P B JAYAKUMAR:

With the global economy showing signs of revival, do you think M&A activities will also pick up in the near future?
This is the second downturn we have witnessed in the last 10 years and many Western governments are literally trying to print more cash to stabilise their economies. But this may lead to inflation and this is applicable to healthcare products, such as branded generics too. This is also applicable to mergers and acquisitions (M&As). People are frightened and are sitting on cash, but it is not wise to hoard money. It has to be invested. But the markets are yet to recover and we will have to wait to see more large deals.

 

Innovation-driven multinational drug companies are now looking at the generics business in a big way. Do you think Indian generic companies are attractive targets for them, as it happened in the case of Ranbaxy Laboratories?
The world cannot live without medicines. Generics are cheaper and have a huge opportunity globally. India, China and other markets, such as Turkey, have a growing middle-class and have a great future for generics. So, all companies are looking at these markets for growth. Acquisitions will happen depending on the demands of the buyer. There can be misfit and mismatch issues as most Indian companies are operating in all areas of generic drug business globally.

We have been hearing about many multinational companies trying to buy out Indian firms, but deals are not happening. What are the issues?
Most of the Indian companies are looking at deals like what the Singhs of Ranbaxy (Malvinder and Shivinder Singh) got. It was an unusual deal and the Ranbaxy promoters got a great valuation. It cannot be applicable for all. Multinational companies such as Pfizer, GSK and sanofi-aventis, which have a presence in India are looking at consolidating their presence in India. Of course, there are firms which do find any reason to sell off and put the money in banks or other businesses. Emotional attachment to assets is another issue in India, unlike in the US or Europe where businessmen are willing to sell off and retire than entrusting the business to children. In such generation-next family-run businesses, success depends on how good your children are.

Do you think the focus on complex generics business is a sustainable business model for Indian companies as competition is severe and margins are becoming lean?
Generics has future and India is a powerhouse in this category with cost-effective manufacturing capabilities. Branded generics is one area where margins are very high. It is difficult to establish a generics brand and many Indian companies are able to do that. Partnering with local players is an option to tap new geographies, with less risk. Indian players can enter into alliances with big pharma. Many Indian companies are already manufacturing for multinational companies. In many cases, this includes the entire generics cycle, which include product registrations and regulatory approvals and the partner’s job is just to market the product using its brand identity.

After the ban on Ranbaxy by the US drug regulator, do you think the Food and Drug Administration is getting stringent on quality issues, especially with Indian companies?
The rules are the same for all players and there is no separate rule for any particular company or country and the FDA is impartial. If your restaurant’s kitchen causes food-poisoning to customers, they will not come again. It is up to the companies to maintain the quality standards and they should not ignore the warnings given by the regulators.

Indian companies bought many companies in the past few years in different parts of the world. Many of those large acquisitions, including that of Betapharm, is now a liability. What went wrong?
I think in most such cases, sellers got the better deal. They know the home market, its dynamics and business — better than the foreigner. I will not say that the acquisition strategy was wrong as it depended on the requirements. At that time, the bankers were willing to give money and markets were bullish. The value from these acquisitions may be delayed due to the negative markets. But, in the long run, it may prove useful. The situation is the same everywhere.