M&A in the pharmaceuticals industry slows in 2017
The
mergers and acquisitions (M&A) scene in the Indian pharmaceutical industry
has been quite vibrant for the last several years, but there are signs that the
tempo is slowing, both with respect to the number of inbound and outbound
deals, and their sizes. This is a reflection of the fundamental changes taking
place in the industry – both here in India and in the developed market – the
diversion of attention amongst Indian companies to set their house in order in
the wake of adverse observations by global regulatory agencies (notably the US
FDA) and soaring valuations that deter all but the most aggressive.
Diminished inbound interest
According
to an analyses carried out by Ernst & Young, a consultancy, inbound
interest in the Indian pharmaceutical industry from the traditional western
markets, clearly diminished in 2017, with just 47 deals registered in the year,
compared to 52 in 2016. The value of the deals disclosed fell even more sharply
– from $4.4-bn in 2016 to just $1.5-bn in 2017, in the absence of big-ticket
deals.
In
2017, there was just one in-bound deal valued at more than $500-mn and just
five that crossed the $100-mn size. This bias towards lower value deals is both
a reflection of the shallowness of the Indian market and its fragmented nature,
and a pointer that the most valuable brands and companies have quite likely
already been gobbled up!
A
further perusal to the inbound deal making reveals that in 2017 out of the total
$1.5-bn coming in from 47 deals, $1.1-bn (spread over 22 deals) were accounted
by the formulations space, while the biotechnology space accounted for $0.27-bn
(10 deals). Presumably, active pharmaceutical ingredients (APIs) accounted for
the balance 15 deals (with a cumulative value of $0.13-bn).
Consolidation in the domestic space continues
The
consolidation in the domestic arena continued in 2017, with more deals reported
than in the earlier two years. Pricing pressures brought about by a government
keen to rein in healthcare costs, and increasing regulatory scrutiny on the
industry were two factors contributing to the activity in the domestic M&A
space. There is merit in consolidation as it affords economies of scale, curbs
costs (especially in sales and marketing) and affords a possibility of
broadening portfolios to address a greater number of therapeutic areas. The
industry here, unlike in most other countries, still remains highly fragmented,
and this poses several challenges especially relating to product quality,
regulatory compliance and ethical practices. It has been hard to usher in
modernisation in this segment of the industry by dictum, and a lot of
handholding is required to ensure patients are not put to risk at a time when
they are most vulnerable. Consolidation is very much the need of the hour, and
while the increased number of deals is a welcome sign, its pace needs to pick
up several-fold for it to make a meaningful impact on the industry’s structure
and practices.
When
domestic companies acquired one another in 2017 it has been mostly to buy into
growth through speciality products and brands. Amongst the largest deals in the
formulation space was the announcement by Torrent Pharmaceuticals Ltd. to buy
the Mumbai-based Unichem Laboratories Ltd.’s branded pharmaceutical business in
India and Nepal for a consideration of $557.5-mn. In another deal, Torrent
acquired the women healthcare portfolio of Novartis AG for an undisclosed
amount.
Other
significant deals in the local space included Eris Lifesciences Ltd.’s $76.9-mn
acquisition of the India-branded generics business of Strides Shasun Ltd.; and
the former’s acquisition of the entire share capital of UTH Healthcare Ltd., a
Pune-based company, for $2-mn.
One
characteristic of deal-making in the domestic space in recent times has been a
tendency amongst companies to refocus on their overseas operations and exit
less profitable Indian ones. The flip side of this – wherein companies exit
international operations to focus on domestic opportunities – is rarely (if
ever seen), presumably because of the poor profitability in the domestic space.
Outbound pace slows
Over
the last decade or so several Indian companies have looked to enhance their
presence in overseas markets – either through organic growth or through
M&A. The first model was to set up a marketing front in the western
economies of interest (notably the US market – the world’s largest), but over
time companies have also invested in or acquired manufacturing or service
footprints to better serve customers.
With
an eye on new geographies the biggies in the Indian pharmaceuticals market have
sought opportunities largely in the growing markets for generics – going beyond
the all-important US market, to tap into opportunities in several European
countries, each with varying penetration of generics, and even in Japan, which
is now embracing lower cost alternatives in order to curb rising healthcare
costs.
In
2017, the number of outbound deals diminished as compared to the previous year,
but a number of players have indicated that they are very much interested in an
enhanced overseas presence and are waiting patiently for the right opportunity
to come along and at the right price.
The
most significant outbound deal in 2017 was the acquisition of the intrathecal
therapy business of Mallinckrodt PLC, a Dublin (Ireland)-based pharmaceutical
company, by Piramal Critical Care Ltd. of the UK, a unit of Mumbai-based
Piramal Enterprises Ltd., for $203-mn. This was followed by the acquisition of
Generis Farmaceutica SA, a generics player based in Portugal, by Agile Pharma
BV (The Netherlands), a unit of Hyderabad-based Aurobindo Pharmaceuticals Ltd.,
for $142-mn.
Opportunities in biotechnology
The
biotechnology segment has been vibrant in the year gone by, with two
sub-sectors dominating M&A activity: biosimilars and vaccines. Biosimilars
are widely touted as the next big opportunity for at least some of the Indian
pharmaceutical companies and several in the top-10 are eyeing significant
growth to come from this space. Unlike small molecule generics, biosimilars are
more demanding in terms of manufacturing competence, capital costs of
manufacturing plants, regulatory pathway to market and costs. While regulatory
hurdles have been cleared for launch of many biosimilars in several European
markets, the all-important US market still remains more or less out of bounds,
though that is likely to change in the years ahead.
Indian
companies are sharpening their skills in this space by focussing first on the
domestic and semi-regulated markets, but like in small molecule generics the
pot of gold is in the developed markets of the world and M&As are seen as
one way to gate-crash this party. In the most significant deal in this space
Lupin’s US-based subsidiary, Lupin Pharmaceuticals Inc., acquired Newark-based
biopharmaceutical company, Symbionix Therapeutics LLC, for $150-mn.
The
vaccines space – in which a handful of Indian companies now have global
manufacturing scale and marketing reach – also saw a significant deal in the
acquisition by Pune-based Serum Institute of Czech injectable polio maker,
Nanotherapeutics Bohumil Sro, from Nanotherapeutics Inc., for $78.3-mn.
Inward focus to stay
Going forward, the
inward focus on the leading generics players on regulatory compliance to meet
the demanding needs of international regulators could keep them preoccupied at
least in the short term from ambitious overseas forays, unless there is a
compelling value proposition. Almost every single player of size and repute has
had regulatory failings that they are hard-pressed to address to regain lost
market opportunities. At the same time, the domestic opportunity will afford
opportunities for further consolidation through M&A and for alliances with
multinational companies to expand markets for new therapeutics.
|
M&A deals in the Indian pharmaceuticals industry
|
||||||
|
Value in US$ million
|
||||||
|
2015
|
2016
|
2017
|
||||
|
Deals
|
Value
|
Deals
|
Value
|
Deals
|
Value
|
|
|
Domestic
|
22
|
209
|
21
|
342
|
24
|
818
|
|
Inbound
|
11
|
1,155
|
9
|
1,930
|
8
|
51
|
|
Outbound
|
21
|
1,752
|
22
|
2,116
|
15
|
602
|
|
Total
|
54
|
3,116
|
52
|
4,388
|
47
|
1,471
|
Source:
Ernst & Young
- Ravi Raghavan
Chemical Weekly Issue date: 10th April 2018
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