Pharma firms to tap M&A opportunities to gain scale, tide over challenges

In a report dated 4 January, brokerage firm CLSA said consolidation will gather steam in 2018 for the pharma sector globally. Photo: Bloomberg

Mumbai: Leading Indian pharmaceutical companies, struggling to cope with a slowdown in growth and reduced profitability over the last couple of years, are expected to try and tap inorganic opportunities globally in order to increase scale of business and rise above challenges.

The focus of large Indian drug makers continues to be on acquiring assets in developed markets like the US, Europe and Japan, and they are expected to evaluate opportunities arising out of portfolio rationalization exercise of multinational companies such Teva Pharmaceutical Industries Ltd, Novartis AG, Sanofi S.A. and Mallinckrodt Pharmaceuticals.

“Most of the large Indian companies are looking at acquisitions as they need to bulk up their product portfolio to improve growth. While focus is more on acquiring specialty products, the companies are also evaluating generic drugs opportunities because expanding product base is critical to offset impact of pricing pressure,” Sujay Shetty, pharma practice leader for India and Asia Pacific at PricewaterhouseCoopers, said.

Teva announced restructuring plans which include plant shutdowns and exiting loss making products. Novartis’ generic arm Sandoz also plans to exit low-end products, Mallinckrodt is looking to divest its US generics business and Sanofi has put its generic business in Europe on block.

In a report dated 4 January, brokerage firm CLSA said consolidation will gather steam in 2018 for the pharma sector globally with early signs of consolidation being visible in the recent announcements of mergers and acquisitions (M&As), plant shutdowns and product rationalization in the US.

“Valuations for M&A could become more reasonable. For example: Teva acquired Actavis’ generic business of 6x sales in mid-CY17, whereas media reports suggest that Mallinckrodt’s US generic business is valued at 2.5x sales. We expect Indian companies to participate in M&A activities due to their strong balance sheets,” CLSA said.

A report in The Times of India on 11 January said quoting people familiar with the matter that Intas Pharmaceuticals remains the sole contender for acquiring Mallinckrodt’s US generic business. An The Economic Times report on the same day said quoting people familiar with the matter Indian firms such as Aurobindo Pharma Ltd, Cadila Healthcare Ltd, Intas Pharma and Torrent Pharmaceuticals Ltd have expressed preliminary interest in buying Sanofi’s European generic business.

Companies have outlined their inorganic growth strategy in recent investor calls and presentations. Aurobindo Pharma is eyeing acquisitions in east Europe and will also look at newer technologies and platforms. Lupin’s focus is on acquiring specialty assets in the US, Japan and Europe.

Cadila Healthcare is looking at specialty products in the US in areas of pain, dermatology, cancer and gastro-intestinal diseases, while Cipla will evaluate opportunities in neurology and respiratory drugs in the US.

While there could be some cross-border deals by Indian companies this year, a major consolidation within domestic pharma market is unlikely due to reluctance of promoters to sell, higher valuations, and limited availability of good quality assets.

Smaller acquisitions of brands or some manufacturing facility will continue, but big M&A deals among domestic companies will be few and sporadic.

“Given the current market conditions, there is definitely a case for consolidation in domestic market but there isn’t a trend. We can call it a trend if we see many large deals happening in period of say 12 to 18 months. That is unlikely to happen in the near future,” PWC’s Shetty said.

“Most big companies continue to explore inorganic opportunities in domestic market but they are looking for a strategic fit that will fill the gaps in their existing portfolio. So if something is available and matches their portfolio and is at reasonable valuations, companies will acquire. Big size deals will be few,” Kedar Upadhye, global chief financial officer at Cipla, said.

Moreover, in India, promoters are very hesitant to sell at valuations which are ‘reasonable’ to the buyers, he added.

Sanjay Singh, partner and chief operating officer deal advisory, KPMG India said some consolidation is expected due to the prevailing growth challenges but deal activity would be largely in mid-size firms, ranking 25th to 75th in domestic market, and not much among the large companies.