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Article:Innovation in Healthcare: Key to Superior Patient Experience and Safety

March, 2018

Nitin D Parekh, Chief Financial Officer, Cadila Healthcare Limited, Ahmedabad writes about opportunities and drivers of M&A in pharmaceuticals.

Merger & Acquisition has remained an integral part of growth strategy of most of the Indian and Foreign Pharma companies. The M&As are frequently resorted for growth, diversification, horizontal or vertical integration, market power, market access or for empire building. In the year 1970, Nicholas Stancey wrote:  “Three things can put a corporation in the sophisticated class; buying a computer, buying a Harvard Business School graduate or buying a company. The last expedient is the most risky”. This was a statement made in 1970 and now computer buying is not risky but buying a company is both an opportunity and a risk.

Global M&A Opportunities

The Pharmaceutical industry has witnessed some of the mega deals in the last few years. In Pharma and Biotech sectors there were 2789 number of M&A deals valued at US $ 325.8 billion in 2016 as compared to 3004 number of deals valued at US $ 578 billion in 2015. Three major countries of destination where the deals happened in 2016 are: the US, UK and Sweden. The largest deal in 2016 valued at US $ 29.4 billion was acquisition of St Jude Medical Inc by Abbott Laboratories. In 2017 in the first 3 quarters there were 207 M&A deals valued at US $ 161.8 billion. In 2017, the largest deal valued at US $ 11.2 billion was Gilead’s acquisition of Kate Pharma Inc. Thus, both volume and value of M&A deals have witnessed sharp decline. It is also seen that the mega deals are now happening in Biotech sector and not pure Pharma sector.

The major reasons for sharp decline in M&A deals include the following:

  1. Reduced valuations compared to earlier periods: Due to changing scenario of pharma industry in the USA, the market multiples of deals have come down. For example, as per  Capital IQ, the median EV/EBIDTA multiples for generic pharma in the US, were 20.5 in 2015, 16.5 in 2016 and 12.2 in first 10 months of 2017.

  2. Stock market volatility mainly in biotech sector due to significant competitions and lack regulatory clarity impacting the initial enthusiasm.

  3. The changes in US tax laws impacting tax inversion route.

  4. Dwindling generic pipelines due to number of products going off-patent coming down every year.

  5. Generic businesses are no longer hot cakes due to significant price erosions experienced in the US markets due to channel consolidation, faster product approvals and entry of newcomers.

  6. Most aggressive pharma players who resorted to large M&A deals based on high financial leverage are now reeling under heavy debt burden and are in no position to strike more deals.

Opportunities and drivers of Global M&A deals

The major drivers which would throw open the M&A opportunities in future are going to be the following:

  1. Drying up of patented products pipeline: This would prompt the innovator companies also looking at buying some generic companies.

  2. Funds needed for investments in key or strategic therapeutic areas (divestment of non-core assets): Many profit making large pharma companies are also looking at exiting from non-core assets or de-growing product segments so that they can get funds for investing in key or strategic therapeutic areas.

  3. Funds needed to reduce the debt burden: Some large global pharma companies are expected to come out with divestment of certain products/geographies/entities to reduce the debt burden.

  4. Entry into speciality pharma by many generic companies: Many large generic companies are also finding the challenges in terms of further growth in the US market. The generic industry has its own set of challenges and hence as a diversification of portfolio, the companies are looking at buying specialty pharma companies. Even for portfolio balancing, the companies are contemplating acquiring relevant targets.

  5. Funding from venture capitalists and PE funds: According to MoneyTree report from PwC, the venture capitalists invested US $ 19 billion in 1207 deals in Q3 of 2017. It is also important to note that such funding largely goes to start- up ventures in new technology arena, new dosage forms or new delivery mechanism and speciality products. Given the time horizon of investment by venture capitalists/PE funds, normally in 3-5 years the divestment is expected which creates room for M&A deals. Cadila Healthcare Limited’s acquisition in January-2017 of Sentynl Therapeutic Inc, a specialty pain management company in the US is fitting in this case.

  6. Early stage targets:  A number of opportunities for the niche products in early stage development are making the round. This is because promising late-stage candidates have already been acquired, forcing companies to look earlier in the pipeline. Most of such deals happening today are contingency deals, with seller getting lower upfront payments in return for larger payments upon completion of defined milestones. These kind of deals help the buyer to mitigate his risk and the seller to get some liquidity to continue to invest in expensive clinical trials. It is also true that while it is easy to value a brick and mortar businesses with visible revenues, profits and tangible assets, valuing a virtual company with products still in clinical stages and only people as their main assets, it is a complex and risky proposition.

It is important to note that apart from M&A, many companies are resorting to other routes to address the issue of shrinking drug pipeline. The same include in-licensing arrangements as well as formation of partnerships and joint ventures.

India M&A Opportunities

Indian Pharmaceutical industry is quite fragmented and thus theoretically it offers a great scope of consolidation and thus possibility of M&A deals. However, the history does not really support this argument because of the nature of ownership and management of most of the Indian pharma companies. The Pharma industry in India is largely owned and managed by private promoters and in India the promoters strive to continue with their entrepreneurial drive to bring growth for their companies. Most of the large pharma companies are financially strong and thus there is no need felt for divestment, which also affects the level of M&A opportunities in the country. Having said so, the philosophy is certainly changing and there are a few deals which are happening.

We have witnessed three types of M&A deals in India as under:

  1. Indian target  acquired by another Indian entity: For example,  acquisition of domestic formulation business of Strides Shasun by Eris Lifesciences, acquisition of domestic formulation business of Unichem Laboratories by Torrent Pharmaceuticals Ltd or acquisition of certain brands of AstraZeneca and MSD by Zydus Healthcare Ltd.

  2.  Indian target acquired by a foreign party: For example, acquisition of Claris Injectables  Ltd by Baxter International Inc., for US $ 625 million, and

  3.  Indian companies acquiring targets abroad: for example, Ahmedabad based Intas Pharma’s acquisition of certain brands of Teva in UK and Ireland for US $ 764 million or Lupin’s acquisition of Gavis Pharmaceutical LLC, USA for US $ 880 million.

Opportunities and drivers of Indian M&A deals

The major drivers which would throw open the M&A opportunities in India are going to be the following:

  1. Lack of family succession:  Some of the Indian pharma companies do not have family members to take over the management or in some cases the successors do not have interest in pharma business.

  2. Challenges faced in next phase of growth:  There are many pharma companies which have reached the sales level of Rs.150-200 crores. The next phase of growth requires financial and management resources; which some promoters are finding difficult to mobilise and hence are considering divestment if they can get expected valuation.

  3. Better valuation:  Some of the M&A deals done in India have offered rich valuations. This has also prompted some of the promoters to look at divestment as one alternative. This valuation attractiveness, coupled with increasing coverage of medicines under price ceiling, have also encouraged some promoters to look at exit options.

  4. Exit of certain MNCs from certain products/countries:  Some of the MNCs operating in India are exiting from certain products/therapeutic areas globally and hence make their product portfolio of those products available for sale. This offers good opportunity to other players in terms complementing or strengthening their product portfolio. Some other companies who do not command a strong presence in India may also like to exit the country in totality.

  5. New Insolvency Law:  The Insolvency law in India has created a mechanism for faster resolution of debt of defaulting borrowers. The specified time-limit of 180 days (with possible extension of 90 days) would certainly create new opportunities for M&A, more so after considering the stipulation of prohibiting the existing promoters to bid for their companies.

At the end we must remember that while M&As are important as a growth driver they have their own attendant risks. Donald Trump, President of the USA has mentioned that, “Sometimes your best investments are the ones you don’t make”. Let both vision and wisdom guide us in our M&A journey at every step!

Opinions expressed in the article are the author’s own.