Mergers & Acquisition in pharmaceutical industry

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MERGERS & ACQUISITION IN

INDIAN PHARMACEUTICALINDUSTRY

Submitted By:

Harsanjeet Singh BhangooRoll No: 56/08



Introduction

One of the largest & biggest among the developing countries($22 billion)

Ranks 13th in terms of export value of bulk actives and dosage forms & 3rd

in term of volume

Caters to 70% of country·s demand

Adhere to highest quality standards and are approved by regulatory

authorities in USA and UK.

Gradually shifted from traditional ´Reverse Engineeringµ to original

research or regulated generic market

High capital requirement, high technical requirement, high process skills,high value addition prospects, high export volumes, high market

sophistication



Industry Structure

Highly fragmented with 3,000 small/medium sized generic pharmaceuticalmanufacturers, 20,000 units out of which 300 units are in the organizedsector; while others exist in the small scale/unorganized sector.

The leading 250 pharmaceutical companies control 70% of the market

with market leader holding nearly 7% of the market share. 5 Central Public Sector Units that manufacture drugs. These companies are:

Indian Drugs & Pharmaceuticals

Hindustan Antibiotics Ltd.

Bengal Chemical and Pharmaceuticals Ltd.

Bengal Immunity Ltd.Smith Stanistreet Pharmaceuticals Ltd.

India is largely self-sufficient in case of formulations, though some lifesaving, new generation- technology-barrier formulations continue to beimported



Continue

highest number of plants approved by the US Food and Drug

Administration outside the US. It also has the large number of Drug Master

Files (DMFs) filed which gives it access to the high growth generic bulk drugs

market.

Setting up a plant is 40% cheaper in India compared to developedcountries and the cost of bulk drug production is 60-70 percent less.

The strength of the industry is in developing cost effective technologies in

the shortest possible time for drug intermediates and bulk activities without

compromising on quality. In accordance with WTO stipulations, India grants

product patent recognition to all New Chemical Entities.



India is globally recognized as a low cost, high

quality bulk drugs and formulations manufacturer

and supplier.

Contract Research, a nascent industry in India has

witnessed commendable growth in the last few

years

The bulk drug segment is a low-margin and

volume-driven business. The thrust is on

manufacturing. In manufacturing operation,

efficiency through better process skills to reduce

both manufacturing time and cost is critical. Low cost

manufacturing is a distinct advantage gained by

Indian companies over a period of time with a

steep learning curve.

Industry Segmentation



Formulation segment

rising population, increasing per capita income, increasing access to

medicine, especially in the rural areas and an increasing population of over

sixty years of age. Presently, the growth of a domestic pharmaceutical

company is critically dependant on its therapeutic presence. In terms of end-

use, the pharmaceutical industry is subdivided into several therapeuticsegments

Indian formulation exports grew

at a CAGR of 23.2% touching around

USD 4 billion in 2007-08. The growth

has been spurred mainly due to the

focus on regulated markets by

most Indian companies,

thereby increasing revenues.



Contract Research and Manufacturing

with more than 80 US FDA-approved manufacturing facilities, is one of themost preferred locations for outsourcing manufacturing services in India bythe multinationals and global pharmaceutical companies.

The Indian CRAMS market stood at USD1.21 billion in 2007, and isestimated to reach USD3.16 billion by 2010.

Over 15 prominent contract research organizations (CROs) are nowoperating in India attracted by her ability to offer efficient R&D on a low-cost basis.

Thirty five per cent of business is in the field of new drug discovery and therest 65 per cent of business is in the clinical trials arena. India offers a huge

cost advantage in the clinical trials domain compared to Western countries.The cost of hiring a chemist in India is one-fifth of the cost of hiring achemist in the West.



Domestic Growth Drivers

Growing population and Improving incomes

Changing Lifestyles

Research and Development

Healthcare expenditure Insurance Sector giving a lift



Domestic Exports

Pharmaceutical exports touched a level of Rs. 30759 crores during 2007-08. Exportsconstitute a substantial part of the total production of pharmaceuticals in India



Pharmaceutical Regulatory Laws & Bodies

in India

National Pharmaceutical Pricing Authority (NPPA)

Central Drugs Standard and Control Organization (CDSCO)

Department of Chemicals & Petrochemicals (DCP)

Drug Policy Control Order (DPCO),1995



SWOT Analysis

Strengths1. Large untapped population(healthcare expenditure as low as $93)

2. Growing middle class open gates for lifestyle drugs

3. Lowest cost manufacturers

4. Highly skilled labor(115000 chemist graduates and 12000 PhD's every

year)

5. Possesses excellent chemistry and process reengineering skills. This adds to

the competitive advantage of the Indian companies. The strength in

chemistry skill helps Indian companies to develop processes, which arecost effective.



Weaknesses1. Marred by the price regulation

2. Marred by lack of product patent, which prevents global pharmaceuticalcompanies to introduce new drugs in the country and discourages

innovation and drug discovery. But this has provided an upper hand to the

Indian pharma companies.

3. one of the least penetrated in the world. However, growth has been slow

to come by. As a result, Indian majors are relying on exports for growth.

To put things in to perspective, India accounts for almost 16% of the world

population while the total size of industry is just 1% of the global pharma

industry.

4. Due to very low barriers to entry ,it is highly fragmented. The industry

witnesses price competition, which reduces the growth of the industry in

value term. To put things in perspective, in the year 2003, the industryactually grew by 10.4% but due to price competition, the growth in value

terms was 8.2% (prices actually declined by 2.2%)



Opportunities

1. migration into a product patent based regime is likely to transformindustry fortunes in the long term. The new patent product regime will

bring with it new innovative drugs(thereby increasing profitability), will

force domestic pharma companies to focus more on R&D. This migration

could result in consolidation as well

2. Large number of drugs going off-patent in Europe and in the US between

2005 to 2009

3. Opening up of health insurance sector and the expected growth in per

capita income are key growth drivers from a long-term perspective.

4. Being the lowest cost producer combined with FDA approved plants;

Indian companies can become a global outsourcing hub forpharmaceutical products.



Threats

1. concerns over the patent regime regarding its current structure. It might

be possible that the new government may change certain provisions of

the patent act formulated by the preceding government.

2. Threats from other low cost countries like China and Israel exist. However,

on the quality front, India is better placed relative to China. So,differentiation in the contract manufacturing side may wane.







Interpretation of bottom three



Mergers & Acquisitions

Companies across the world are reaching out to their counterparts to take

mutual advantage of the other·s core competencies in R&D, Manufacturing,

Marketing and the niche opportunities offered by the changing global

pharmaceutical environment.

global trend towards consolidation Main drivers for M & A activities are

1. The lack of research and development (R&D) productivity

2. expiring patents

3.

generic competition4. high profile product recalls

5. Easy availability of capital



Three levels of integration that are currently being sought in the generics

industry

1. Back-end manufacturing capability (API/formulation)(US AND EUROPEAN

FIRMS)

2. Product integration (ANDA pipeline)

3. Front-end (marketing and distribution) in the developed world(INDIANCOMPANIES)

The product side integration is common to both sides, with weaker

US/European generics companies looking at anyone that could offer a

basket of products. This is because the US/European pipeline is weak while

Indian companies are aspiring to grow rapidly, want to achieve criticalmass quickly, and are looking for geographic expansion.



Incentives for Mergers and

Acquisitions by Indian companies

Build critical mass in terms of marketing, manufacturing and research

Infrastructure

Establish front end presence

Diversification into new areas: Tap other geographies / therapeutic

segments / customers to enhance product life cycle and build synergies fornew products

Enhance product, technology and intellectual property portfolio

Catapulting market share

What the Indian companies are short of is the front-end distribution and

marketing infrastructure in the developed world. The current stress is on

bridging this gap



Acquisitions are the quickest way to front end access. Apart from market

access ² i.e. marketing and distribution infrastructure, the acquiring

company also gets an established customer base as well as some amount of

product integration (the acquired entities generally have a basket ofproducts) without the accompanying regulatory hurdles.

Can overcome entry barriers for companies from the developing countries

and acquisitions make it easy for these organizations to find a foothold in

the developed markets.





Challenges

stretched valuations of acquisition targets and the ability to turn them

around within a reasonable period of time. Acquisitions of RPG Aventis (by

Ranbaxy) and Alpharma (by Cadila) in France are clear examples

In several other cases acquisitions by Indian generic companies are small

and have been primarily to expand geographical reach while at the sametime, shifting production from the acquired units to their cost effective Indian

plants. A few have been to develop a bouquet of products.

Takes more than 4 years to see break even in most of the cases

Acquiring companies have to pay greater attention to post merger

integration as this is a key for success of an acquisition and Indiancompanies have to wake up to this fact.



IMPLICATIONS OF THE MERGER OF

RANBAXY AND DAIICHI

Why did Ranbaxy go in for a merger with Daichii?

Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of RanbaxyLaboratories Ltd.

Ranbaxy continued to operate as Daiichi Sankyo·s subsidiary but was

managed independently. The main benefit for Daiichi Sankyo from the merger was Ranbaxy·s low-

cost manufacturing infrastructure and supply chain strengths.

Ranbaxy gained access to Daiichi Sankyo·s research and developmentexpertise to advance its branded drugs business. Daiichi Sankyo·s strengthin proprietary medicine complemented Ranbaxy·s leadership in the genericssegment and both companies acquired a broader product base, therapeuticfocus areas and well distributed risks.

Ranbaxy gained a smoother access to and a strong foothold in theJapanese drug market



Continued«

The immediate benefit for Ranbaxy was that the deal freed up its debt and

imparted more flexibility to its growth plans. Most importantly, Ranbaxy·s

addition is said to elevate Daiichi Sankyo·s position from 22 to 15 by

market capitalization in the global pharmaceutical market.



Synergies

Combined presence in the developed and emerging markets

Ranbaxy·s strengths in the 21 emerging generic drug markets can allow

Daiichi Sankyo to tap the potential of the generics business, Ranbaxy·s

branded drug development initiatives for the developed markets will be

significantly boosted through the relationship. Daiichi Sankyo will be able to reduce its reliance on only branded drugs

and margin risks in mature markets and benefit from Ranbaxy·s strengths in

generics to introduce generic versions of patent expired drugs, particularly

in the Japanese market.

the companies have a set of pain points that can pose a hindrance to themerger being successful or the desired synergies being realized



Post acquisition challenges

Managing the different working and business cultures of the two

organizations

Undertaking minimal and essential integration

Retaining the management independence of Ranbaxy without hampering

synergies.



Benefits

enabled the company to gain the best of both worlds without investing heavilyinto the generic business.

Daiichi Sankyo·s portfolio has broadened to include steroids and othertechnologies such as sieving methods, and a host of therapeutic segments suchas anti-asthmatics, anti-retroviral, and impotency and anti-malarial drugs.

Daiichi Sankyo now has access to Ranbaxy's entire range of 153 therapeuticdrugs across 17 diverse therapeutic indications.

Ranbaxy has become part of a Japanese corporate framework, which isextremely reputed in the corporate world. As a generics player, Ranbaxy isvery well placed in both India and abroad.

Ranbaxy can leverage the vast research and development resources of DaiichiSankyo to become a strong force to contend with in the global pharmaceuticalsector. A smooth entry into the Japanese market and access to widespreadtechnologies including, plant, horticulture, veterinary treatment and cosmeticproducts are some things Ranbaxy can look forward as main benefits from thedeal.



Research Findings

Industry was earlier growing at a rate of 14% annually but like all otherindustries it is also hit by recession. Because of this presently, the growth ofthis industry is expected to be at 7%-8% and is expected to rise to 13% ofGDP by 2015.

Indian pharma industry registered a growing trend post 1970 because ofthe existence of merely process patents and the absence of productpatents.

Being a member of WTO, India had to amend its patent law in compliancewith the TRIPS agreement; thus Product patent became an integral part ofIndian patent law in 2005.(gave rise to many controversies)

This amendment is bound to encourage more investments in R&D by theIndian pharmaceutical Companies. Thus we can very well expect that Indianpharma industry will better its position globally which is presently 13th interms of value.



Bibliography

1. Drugs and Pharmaceuticals: International Pharmaceutical Industry-A Snapshot,

Jan 2004, ICRA

2. www.expresspharmaonline.com

3. www.pharmainfo.com

4. www.etintelligence.com

5. www.pharmainfo.net

6. www.kpmg.de

7. http://www.pharmaceutical-drug manufacturers.com/pharma-industry-

statistics/



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Mergers & Acquisition in pharmaceutical industry