(A correction: This article on Ranbaxy Laboratories Ltd was based on conversations with three industry analysts about their views on the drug company’s mergers and acquisitions strategy. One of the analysts cited in the story had based his comments on a meeting he had with Anurag Kalre, general manager investor relations of Ranbaxy. While the story cited Ranbaxy’s views on the subject and also cited the company’s chief executive from a separate Reuters news report, both the story and the resulting headline incorrectly attributed the analysts’ opinions as comments made by Ranbaxy senior managers at an analysts’ meet and conference. The article also incorrectly said the Ranbaxy team at that meeting was headed by an executive who is no longer with the company.)
India’s largest drug maker Ranbaxy Laboratories Ltd, which made nine acquisitions last year, will slow its pace of buyouts at least for the next two years and will be selective in the targets it eyes, says the company’s senior managers
Led by its vice-president of mergers and acquisitions Amit Desai, the Ranbaxy team said at an analysts’ meet that one of the major concerns for the company and other large export-oriented Indian drug, is the likely spread of the ongoing price wars in the US off-patent drugs market to Europe. Tightening profit margins, analysts say, will push the pay-back period further by a few years on its previous acquisitions, and new buyouts will take longer to add to the acquirer’s profits after factoring in for the cost of merger.
Clarifying, a Ranbaxy spokesman said, the company’s policy is to stay away from the ongoing “mad rush” for acquisitions unless the deal makes very important strategic sense in terms of synergies, product fit and ultimately benefiting shareholders.
The company’s chief executive Malvinder Singh said on Friday that Ranbaxy was evaluating several acquisition opportunities, but declined details.
Ranbaxy’s 2006 acquisitions, that cost it over Rs2,000 crore and included Terapia in Romania, Allen S.p.A in Italy, Ethimed NV in Belgium, the Mundogen generic business of GlaxoSmithKline Plc. in Spain, and BE-Tabs Pharmaceuticals Ltd in South Africa, have increased the Gurgaon-headed firm’s debt and the burden of interest cost.
“A margin pressure in the European generics market will raise the pay-back period for Ranbaxy’s acquired business across the region,” said Manoj Garg, a leading analyst who tracks drug industry at Emkay Research, a Mumbai equity research firm.
Another analyst with a domestic brokerage, who attended the analysts’ conference but did not wish to be named, said the rising interest cost will stop the company from being aggressive on debt-funded acquisitions.
For instance, Ranbaxy’s ambitious plan to mount a bid on Merck KGaA’s generics unit, which eventually was snapped up for $6.63 billion (Rs27,183 crore) by Mylan Laboratories Inc., failed to gather momentum over structuring the finances of the mega deal. The company’s debt equity ratio is already 1.4%, ahead at least 60 basis points of the pharmaceutical industry’s average gearing of 0.80%.
Currently, four-fifths of Ranbaxy’s over Rs4,100 crore sales come from exports, mainly to the US and Europe. In April, the drug maker, which aims to be one of the world’s top five generic drug firms with $5 billion in annual sales by 2012, raised its forecast for sales growth in 2007 to 20% from 15% projected earlier.
But, if it does go ahead with acquisitions especially in the US or Europe, Ranbaxy will have to be ready to wait longer for its investment to pay back. “The average pay-back period for an acquisition valued at 11 to 12 times of operational profit of the target, as in the case of Terapia, in the drug sector is 8-10 years,” said a third analyst who, too, requested anonymity.
However, going by the current trend of intensifying generic competition and increased government regulation, the company may have to be patient, said this analyst.
Ranbaxy expects Terapia will touch sales revenue of $510 million with a 25% operational profit by 2008.
Ranbaxy is not the only drug maker under pressure in Europe. Rival Dr Reddy’s Laboratories Ltd’s $570 million buyout of German Betapharm Arzneimittel GmbH, the biggest ever buyout by an Indian drug-maker, has also been through some tough times after the German government undertook two rounds of price cuts for generic drugs.
Shares of Ranbaxy closed at Rs373.80 on Friday, about mid-way between its one-year low of Rs305.50 and 52-week high of Rs445.
James Macharia of Reuters contributed to this story.