Mylan’s India unit key to Merck buy

Mylan’s India unit key to Merck buy
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First Published: Mon, May 14 2007. 07 36 AM IST

Updated: Mon, May 14 2007. 07 36 AM IST
Mylan Laboratories Inc’s successful $6.63 billion (Rs27,183 crore) bid for Merck KGaA’s generics unit, while bringing a significant amount of business to its Matrix Laboratories Ltd unit in Hyderabad, also signals the start of what could be a siesmic shift in India’s low-cost drug manufacturing industry.
That’s because Mylan, which moves to No. 3 in the global generics business from its current No. 9 position, will become the first global giant to have a large manufacturing operation in India of its own. Earlier this year, the US company bought a controlling 71.5% stake in Matrix, giving it access to that company’s relatively low-cost manufacturing operations here.
Matrix, which has over 165 APIs, or active pharmaceutical ingredients, already in the market or under development, has six of its manufacturing facilities already approved by the US Food and Drugs Administration, a key regulator whose approval often sets the bar in the industry. Matrix’s manufacturing facility at Nashik has a capacity to manufacture two billion tablets and 300 million capsules annually on a two-shift basis and it has units in Belgium and China as well. Indeed, Mylan and industry analysts said it will see savings of up to $250 million by 2010 in sourcing pharmaceutical ingredients from its Indian unit following the Merck acquisition.
Analysts saw Mylan’s strong India linkages as the first sign of global shifts in pharmaceutical manufacturing strategies. “Any generics powerhouse, if it has to sustain size and growth, has to (now) have a formidable Indian presence,” said Sanjiv Kaul, managing director of New Delhi-based buyout fund, Chryscapital. “The Mylan-Matrix-Merck combine comes close on the heels of the Matrix buyout and will enable optimal and better integration.”
Leading Indian drug firms, while relatively small by global standards, have meanwhile built billion-dollar businesses riding on relatively cheap research and manufacturing capabilities in a global generics market worth about $50 billion and are expected to reach $100 billion by the end of the decade by some estimates.
On Sunday, some of the firms, which in varying degrees also tried to grab some parts of the Merck business by eyeing bids or partnering with other interested bidders, sounded a cautious note.
“In the immediate term, it may not have any impact as the existing Merck generics business has just been handed over to Mylan,” said Amar Lulla, managing director of Cipla Ltd. “But, if Indian firms don’t aggressively increase their market share abroad by adding to their product pipeline, then overseas companies will lead the world generics market also in the longer term.”
Cipla, partnering private equity firms, Ranbaxy Laboratories Ltd and Dr Reddy’s Laboratories Ltd had expressed interest in the Merck asset but pulled out in the early stages of the four-month race for what has been the No. 3 generics business by revenues in 2006, with sales of $2.4 billion and an operating profit of about $500 million.
The Indian companies quickly found out they couldn’t afford the unit and indeed the price Mylan paid was near the top of the €4-5 billion (Rs22,400-28,000 crore) that analysts had expected. Globally, interest in generics is rising as many patents are expiring and several governments are actively seeking ways to curb drug costs.
“We will still be competing with the same number of players in a particular market because Merck’s generics unit didn’t have a (big) presence in the US and Mylan doesn’t have much of a presence outside the US,” insisted Ranbaxy chief executive Malvinder Mohan Singh. Ranbaxy is India’s biggest drug firm.
While the deal will make Mylan a much stronger player globally, with annual sales of $4.2 billion and operating profits of about $1 billion, it could put pressure on larger firms such as Israel’s Teva Pharmaceuticals Ltd, which also bid for the Merck unit, to find partners or expand in India to take advantage of low-cost manufacturing. Other than Novartis AG’s Sandoz unit, none of the major generics players in the world, including Barr Pharmaceuticals Inc. and Iceland’s Actavis Group hf, which also bid for Merck business, have significant operations here.
“Mylan is already a leader in the US, the world’s largest market, and through Matrix Laboratories controls one of the broadest API platforms in the world,” Mylan vice-chairman and chief executive Robert J. Coury said in a statement. “Merck Generics provides us with leading positions in many of the world’s other key regions. Together, we will form a powerful, diverse, robust and vertically integrated generics platform.”
“Matrix would basically derive benefits from vertical integration of Mylan’s generics business. Some of the pipeline products of Merck would also be shifted to Matrix’s Indian facilities,” said a senior Matrix executive, declining to be identified because regulatory formalities of the Merck buyout are still pending.
Meanwhile, the Merck unit buys all its ingredients from third parties, said the Matrix executive, noting that Mylan would now turn to a Matrix-dominated supply line. But, he added, “Matrix would not derive the benefits at least in the first year. It will take at least 5-6 months for Mylan to complete the deal with Merck and another 5-6 months for Matrix to obtain regulatory approvals for (manufacturing) Merck generics.” Matrix’s India facilities could require expansion to meet demand from its parent.
Matrix shares that are now owned by Mylan are held by institutional investors and continue to be listed on Indian bourses. Matrix shares rose 1.97% on Friday to Rs198.85 a share, recovering smartly in recent weeks from the 52-week low of Rs149 a share set on 7 March.
Mylan, founded in 1961, specializes in copies of branded medicines that are relatively difficult to make, such as Johnson & Johnson’s Duragesic pain patch and Ditropan XL bladder medicine, as well as copies of Pfizer Inc’s Norvasc blood-pressure tablets.
Merck, which isn’t affiliated with Merck & Co. of the US, has 5,000 employees in its generics division and is selling the business to pay off debt from the $13.7 billion accquisition of biotechnology firm Serono SA. The generics unit makes a cheap version of AstraZeneca Plc’s Prilosec ulcer pill and specializes in patent-protected reformulations of older medicines. Last week, it won US approval of Perforomist, a treatment for emphysema and chronic bronchitis. Merck, founded as a pharmacy in 1668, is the oldest pharmaceutical business in the world and is based in Darmstadt, Germany.
Mylan said Merrill Lynch & Co.—which also advised the firm—Citigroup Inc. and Goldman Sachs are providing debt financing. Mylan said it will issue $1.5-2 billion in equity or equity-linked securities and suspend its dividend to fund the transaction.
INDIA FOOTPRINT OF GLOBAL GENERICS MAJORS (Graphic)
(c.sukumar@livemint.com)
(Geir Moulson of AP and Angela Cullen and Gautam Chakravorthy of Bloomberg contributed to this story.)
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First Published: Mon, May 14 2007. 07 36 AM IST
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