Mumbai: Indian pharmaceutical companies stand to gain from the sale of Merck KgaA’s generics business, irrespective of who ends up with the prize, valued at $6 billion (Rs26,400 crore).
That’s because most of the finalists are likely to end up wanting to leverage India’s growing capabilities as the world’s most cost-effective drug manufacturing base. Industry analysts say that the high valuation—Merck’s generics business is valued at three times its $2 billion annual sales, and over 14 times its profit in 2006—will force the eventual buyer to sharply cut costs. That could mean work for contract manufacturers in India. Merck received 22 offers from leading off-patent drug makers including Novartis AG’s generics arm Sandoz, Mylan Laboratories, Israel’s Teva Pharmaceutical Industries Ltd, Iceland’s Actavis Group, India’s Ranbaxy Laboratories Ltd and a few major private equity companies such as Carlyle Group, KKR, Warburg Pincus, and Texas Pacific Group.
The company’s merchant bankers short-listed Teva, Mylan and Actavis and two private equity companies for the second round (India’s Ranbaxy withdrew from the race). However, recent media reports say that Torrent Pharmaceuticals Ltd and Aurobindo Pharma have partnered with the private equity firms to participate in the bidding.
Merck’s generics business has a portfolio of 400 products across all therapeutic areas. India, which has around 79 drug-manufacturing facilities approved by the US Food and Drug Administration , produces almost all these drugs; the country is one of most significant players in the global generics market with a 30% share. A London-based research organization, Global Insight, has estimated that Indian drug companies will have 33% share of the global generics market by 2007.
“Whoever is the winner in this big acquisition will necessarily opt for a low-cost manufacturing base,” predicts Sanjiv D. Kaul, MD, Chrys Capital, a private equity firm, and a former regional director of Ranbaxy Laboratories Ltd.
“There will be benefit coming to Indian companies from Merck deal, but it cannot be quantitatively defined. There are pressures on margins that are forcing drug companies to scout for partners in low-cost destinations,” said N. Santhanam, chief financial officer of Nicholas Piramal India Ltd, a drug company with several global partnerships.
Off-shoring of manufacturing is a strategy that is followed by most of the global pharma companies. Even leading global pharmaceutical companies such as Pfizer, GlaxoSmithKline and Merck, which have manufacturing facilities all over the world, are looking at contract manufacturers to lower production costs.
Production costs in India are almost 50% less compared to developed countries. Firms such as Nicholas Piramal, Cipla Ltd, Torrent, and Divi’s Laboratories Ltd are into the contract manufacturing business. Not everyone is convinced that the winner will outsource business to India. “A lot of acquisitions have happened without back end synergies being brought to India,” said a Mumbai-based sector analyst.