If any of the three Indian drug makers interested in bidding for the generics or non-patented drugs business of Merck KGaA were to succeed, the win would catapult them among the top companies in such businesses, say sector analysts but are wary about the cost such an acquisition may entail.
India’s top three drug companies—Ranbaxy Laboratories, Dr Reddy’s Laboratories and Cipla are preparing bids for the Merck asset, valued at up to $6 billion (Rs26,460 crore) by analysts.
The winner will walk away with an asset that had $2.3 billion in revenues in 2006 and access to 90 pharma markets. The flip side: for an Indian company, it will come at a substantial restructuring of their balance sheets either in form of a dilution of equity or increased debt.
“The unit from Merck is the last big asset on the block and it is not going to come cheap,” said Saion Mukherjee, pharma analyst, Brics Securities. “While all the mid-tier generic companies looking to take that leap into the big league will be interested, the big ones will be attracted by Merck’s US pipeline which has new drug delivery products in the respiratory segment.”
Merck’s unit is designed to lure. With operations in 90 countries, it has 35 companies in its fold with large operations in the US, Canada, France, Brazil, Belgium, Germany, the Netherlands, Spain, Australia and the UK.
“An acquisition will give the winner immediate leadership in Australia, potential leadership in Canada, France and UK along with a terrific presence in US and rest of Europe,” said an industry insider, who didn’t wish to be identified.
Little wonder then, that as many as 22 players are believed to be queuing up for the acquisition, which will pitch Indian suitors against the world’s two largest generics drug companies, Israel’s Teva Pharmaceuticals, Novartis’ Swiss unit Sandoz and Iceland-based Actavis.
A win will take both Ranbaxy and Dr Reddy’s—Indian pharma players with revenues topping $1 billion—at the number three spot in the pecking order of global generics. While Ranbaxy has openly shown interest and is holding hectic parleys with private equity players, Dr Reddy’s has so far declined to confirm its intent officially. Cipla, in a unique model, will manage the operations while buyout fund partners will lead the bid.
The win could, however, dilute earnings at Ranbaxy and Dr Reddy’s. “The profitability will change depending on the mix of debt and equity that they employ. The company will either have to sell equity or raise debt and have the resultant drag of interest cost,” said Mukherjee. Ranbaxy shares have shed 7.7% in the past month, closing at Rs382.5; Dr Reddy’s dropped over 10% in the same period to Rs729.5.
The caution is not without reason. Kotak Securities’ analyst Awadhesh Garg estimates the debt equity ratio for Ranbaxy at 0.9 and at 1.5 for Dr Reddy’s. This is high compared to the industry average of 0.5. “Merck’s business is 2.5 times the size of Ranbaxy while the market capitalization is 1.5 times,” said Garg.
A quick look at Indian drug companies acquisition history shows how such companies have eventually dropped out of mega deals making way for the big fish in the global generics market.
For every Betapharm Arzneimittel GmbH that Dr Reddy’s acquired—at $570 million, it was the biggest drug company acquisition—there is a Pliva, Alpharma Inc, Ivax Corporation and Viatris that Indian pharmaceutical companies have missed buying out in the last two years.
Ranbaxy and Mumbai-based Wockhardt Ltd were pipped in the race for US’ Alpharma that Actavis eventually bought for $810 million. Ranbaxy was also interested in Ivax and Viatris that were acquired by Teva and Meda, respectively. The Indian players had declined to comment on their interest then but were confirmed by industry sources.
But the backing of private equity firms could clinch a deal for them this time. Chryscapital’s managing director Sanjiv Kaul believes Indian companies that have picked up “ticker items so far” will have to go look at alliances with buyout firms with deep pockets to be serious contenders for Merck.
“The balance sheet of Indian companies will regulate their risk appetite. In such big ticket deals, they might get swamped by bigger players that have the ability to pay up,” he said.
Another black spot in the history of pharma acquisitions has been their record at turning around targets. Ranbaxy acquired French RPG Aventis in 2003 at $80 million but it is yet to break even. Experience of Matrix Laboratories with Docpharma in Belgium and Dr Reddy’s with Betapharm has been no better either.