Times fo India
21 May 2010
Mumbai, India

Buyout By US Giant Will Catapult Co To Top Position In Indian Pharma Market
The hunter has turned hunted. In the second largest deal ever in the Indian pharmaceuticals market, US–based Abbott Laboratories has acquired the pharma solution business of the acquisitive Piramal Healthcare for $3.72 billion (Rs 17,500 crore). The compensation includes an upfront payment of $2.12 billion, with an additional $400 million annually for the next four years. The Indian drug maker, which itself has made 15 acquisitions since 1988, insists that it will stay on in the industry and invest in the remaining business.

The deal is just behind Japanese drugmaker Daiichi Sankyo’s $4.2 billion takeover of another homegrown drug major, Ranbaxy, in 2008. Besides, more importantly, it will also catapult Abbott from just about nowhere to the top position in the Indian pharmaceutical market with a market share of close to 7%. Abbott will add 350 branded generic drugs from the Piramal portfolio, including Phensedyl, one of the top two pharma brands in the country. TA K EOV E R TA L E Indian gold rush sees Abbott paying big bucks

Mumbai: The reasons for Piramal’s pharma solution business to Abbott Labs appear to the very high valuations it got and issues of competition arising out of the new patent regime, which would make it difficult for home–grown companies to sell their products in developed and emerging markets with MNCs breathing down their neck. When contacted by TOI, Ajay Piramal, chairman of the Piramal group said that the sale was in the best interest of shareholders and would create immense value, almost 9.5 times the sales. The India story is an attractive growth story, but globally and in emerging markets, there is a new way of selling drugs (patented products), which we would not have been able to do on our own.

He said that his company was selling the domestic formulation business on "slum sale basis’’ and added that he would not engage in the business of generic pharmaceuticals for the next eight years. "The annual payment of $400 million is, however, not contingent, but on performance basis,’’ he added. After a capital gains tax of around 22%, he would utilize the rest of the proceeds for expansion and retiring debt. Piramal’s Healthcare Solutions accounted for about 55% of its revenue at the end of 2009. Piramal, however, reiterated that he was not exiting the business.

For Abbott, it’s a clear bid to capitalise on the gold rush to emerging pharmaceutical markets. For multinationals, emerging markets, with its cheaper generic medicines, are turning out to be the new battleground, given that most are witnessing stalled sales in western markets. Industry forecaster IMS Health has predicted that leading emerging markets will push annual pharmaceuticals sales growth to 14%–17% through 2014, against just 3%–6% a year in the developed markets.

In a statement, Miles D White, chairman and chief executive officer, Abbott, said: "This strategic action will advance Abbott to the leading market position in India. The deal will complement our market–leading proprietary pharmaceutical offerings and pipeline in developed markets.’’ Abbott estimates the growth of its Indian pharmaceutical business with Piramal to approach 20% annually, with expected sales of more than $2.5 billion by 2020.

With nearly $8 billion in annual sales this year, the Indian market is expected to more than double by 2015. India is the second fastest–growing emerging market and was a clear pull for Abbott, officials in the US–based multinational told the TOI. It’s another thing that with the acquisition, Abbott has become the largest pharma player in the Indian market. In terms of turnover (domestic and global sales), it would be among the top 10, with a turnover of around Rs 3,000 crore.

The Piramal Healthcare scrip was down 2.87% from its previous close at Rs 569.65 at the Bombay Stock Exchange on Friday. It had climbed to an intra–day high of Rs 599.90. On the other hand, Abbott India Ltd jumped 7.3% to Rs 1,138.10. While Abbott said it was advised by Morgan Stanley, while Piramal said it did not have a financial advisor on the deal.

A top banker in the know had this interesting tale about the humble beginnings of Abbott in India. Apparently, Aboott had subscribed to its paid–up capital of Rs 1 lakh in its Indian subsidiary by selling its drugs that it imported from the US. It had not brought in any direct investments at that time. The current acquisition is clearly a big leap.

The deal, however, came as a surprise to many, since the names of the acquirers doing the rounds included the more fancied Glaxo and Pfizer. A chairman of a bank spoke to TOI on condition of anonymity. Hesaid, "Glaxo is learnt to have bid $1.5 billion, while Pfizer had bid over $1.7 billion. It looks overvalued.’’

Tarun Shah, CEO of Mehta Partners, an M&A boutique advisory firm, agrees. According to Mehta, it could take Abbott about 20–25 years to recover the Rs 17,500 crore buy, unless the growth of pharmaceutical products in India becomes really superlative, in a similar manner to how mobiles and colas have reached every part of the hinterland.

From the usual two–four times sales bracket, the deal has been clocked at over eight times the sales. On an FY10 sales basis, it comes to 8.33 times sales of the company. The Ranbaxy deal was at approx 4 times sales trailing, so this one seems more expensive. However; it is a pure branded generics deal,an analyst at Mape Advisory Group Limited said.

However, the deal is also being hailed as a precursor to better times for domestic drug compaies looking to bail out.

Piramal Healthcare, which makes generic and branded drugs in nine plants in India, Britain and Canada, is said to have the largest sales force in the country with more than 5,000 medical and sales representatives. The company reported a 52% increase in net profit in the last fiscal year, to $103 million. The Piramal group’s turnover across several business had exceeded $1 billion in 2009–10. Its business grew 23% in the fiscal year 2010 ended on March 31.