Mumbai: With demand in the $120 billion (Rs5.15 trillion) global generic, or off-patent, drugs market expanding at more than double the rate of growth in the patented pharma market, there will be several more cross-border buyouts among global and Indian drug makers on the lines of Wednesday’s acquisition of Ranbaxy Laboratories Ltd by Japan’s Daiichi Sankyo Co. Ltd, experts say.
Demand for generic drugs, which account for one-fifth of global drugs sales, is expanding at 15%, compared with 6% in the overall drugs market. The faster growing generic demand is on account of efforts by governments globally— from Japan to Germany to the US—to prune health care costs even as their populations age.
The Daiichi Sankyo-Ranbaxy transaction, one of the biggest among generic deals so far, is also significant because it values the Indian firm at $8.5 billion, say analysts.
As a direct consequence of Wednesday’s deal, the valuation of Indian generic companies such as Cipla Ltd, Dr Reddy’s Laboratories Ltd and several others will get a boost considering their capability to produce quality generics at a fraction of costs in developed markets for global consumption, says an industry analyst at a Mumbai-based foreign equity research company, who doesn’t want to be identified.
Done deal: Ranbaxy chief Malvinder Singh with Daiichi Sankyo’s Takashi Shoda. (Harikrishna Katragadda / Mint)
For example, Ranbaxy, with presence in 150 countries and with a strong portfolio of cheap generics, will not only help Daiichi Sankyo to be a strong player in its home turf, but in all these markets.
“This transaction will completely transform the outlook of Indian generic industry as it triggers a real global consolidation trend in the generic sector,” says Sujay Shetty, associate director at the international consultancy and audit firm PricewaterhouseCoopers. The deal “will definitely change market dynamics and one can expect more deals in the Indian generic industry soon,” he adds.
The present fragmented structure in the global generic market is also key to this valuation: Around a dozen firms in the business now exceed $1 billion in annual sales and several are set to join them in the next few years.
Some analysts pointed out that the Daiichi Sankyo-Ranbaxy deal values the Indian drug maker at 5.3 times sales compared with a 2.82 valuation-to-sales multiple in a transaction in August 2006 when the US’ Mylan Laboratories bought a controlling stake in Hyderabad-based Matrix Laboratories.
“It was absolutely no surprise that Ranbaxy promoters exited the company at a stage when the company has been making strides in the global generic market with organic as well as inorganic expansions, because the valuation is as high as 50% (over) the current market valuation. This will be benchmark for any deal in the Indian generic drug industry,” says Kirit Gogri, another sector analyst with Mumbai-based Quant Capital.
The impact of Wednesday’s deal was quickly evident on the stock prices of other listed Indian pharmaceutical firms. The prices of at least five pharma scrips were up higher than the average rise of 2% on the Bombay Stock Exchange’s benchmark index. Shares of Cipla rose by 3.41% to Rs218.25, Aurobindo Pharma Ltd by 13.56% to Rs301.75, and the Orchid Chemicals and Pharmaceuticals Ltd stock 7.21% to Rs260.80. Shares of Dr Reddy’s Labs and Piramal Healthcare Ltd were also up.
According to Ajay Piramal, chairman of Piramal Healthcare, the Ranbaxy deal clearly shows international companies are keen on Indian generic capabilities.