New Delhi: With the largest drug maker, Ranbaxy Laboratories Ltd., deciding that the bidding was getting too rich for its comfort, all three Indian pharmaceutical companies that were publicly in the fray are now out of the race to acquire the non-patented drugs business of German Merck KGaA, billed as one of the last big opportunities to own a global generics business.
Ranbaxy said it was pulling out because of “valuation issues,” and the decision was promptly rewarded by the stock market where the drug giant’s beaten down shares rose 6.15%, or Rs19.50, to Rs336.35 on the Bombay Stock Exchange.
Hyderabad-based Dr Reddy’s Laboratories withdrew just before bids were due, also citing the rich price that Merck was expecting. A consortium of private equity players, including Cipla Ltd., failed to make it past the first cut, leaving the field to bidders such as Israel’s Teva Pharmaceutical Industries Ltd., Iceland’s Actavis and U.S.-based Mylan Laboratories Inc.
Gurgaon-based Ranbaxy’s spokesperson, Raghu Kochhar, declined “to confirm or deny” the development citing a non-disclosure agreement.
An industry source, requesting anonymity, said: “The valuation in the bidding could go well beyond $6.5 billion(Rs 28,600 crore) and, even though Ranbaxy was evaluating the high quality asset, it was not tenable at that price.”
“It (the development) is a clear positive,” said Rahul Sharma, sector analyst with Mumbai-based equity firm, Karvy Stock Broking, who thinks the acquisition was quite hyped and was making people uncomfortable about the return period, had Ranbaxy clinched the asset.
“The acquisition would have caused significant equity dilution and would have put pressure on earnings as it was double the size of Ranbaxy,” said Sarabjit Kour Nangra, vice-president of research at Angel Broking. “The stock had corrected on these concerns. Now it will come back to normal.”
A Mumbai-based merchant banking executive, who also did not want to be named, said, “Since the valuation seems to have exceeded Ranbaxy’s threshold estimation of $5.5 billion, it was a sensible decision to withdraw from the bidding, as the valuation is apparently more than three times Merck Generics’ turnover and more than 15 times its profit.”
Ranbaxy had sought advice from Citigroup, Goldman Sachs and Religare on its bid for the business which earned $2.3 billion in 2006, had a presence in 90 countries, and is the world’s fourth-largest generics player.
Ranbaxy has been aggressively acquiring companies overseas, especially in Europe, to become a global generics player. Last year, the company bought three European firms; the biggest among them was the US$324 million acquisition of Terapia of Romania.
But the company has been under a cloud in recent weeks after US federal officials conducted a search at its New Jersey offices for as yet undisclosed issues. It has also faced other legal and regulatory setbacks in Europe and has seen a sharp drop in its share price this year, touching a 52-week low of Rs305.50 on 7 March.
“While Indian drug makers have become mature to a reasonable extent, they no longer want to scale up for its own sake. Regulatory landscape in western markets is changing where a five-year payback period might stretch to a 8-10 year period. Investors, on the other hand, are looking for short to medium term value accretion,” said Karvy’s Sharma.
Dr Reddy’s chief executive G.V. Prasad had said that his company was pulling out because it was “a very large transaction. After an overall study of the opportunity, we felt this is not the right time for Dr Reddy’s to venture into such a big-sized deal.”
Dr Reddy’s has had issues with integrating Betapharm Arzneimittel GmbH in Germany, acquired for $570 million, the biggest Indian pharmaceuticals acquisition to date.
—C.H. Unnikrishnan in Mumbai and Reuters contributed to this story.