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Cover Story

“Peaking Valuations may slow down M&A”
Anjan Sen, Director, Strategy & Operations, Deloitte India
Issue Date - 18/08/2011
B&E: With the growing health care market in India, Reckitt Benckiser recently bought Paras Pharmaceuticals for about $726 million. What is the scope of such deals in pharma sector in India?
Anjan Sen (AS): The market is currently worth roughly $12.6 billion and is growing at 14+% CAGR. If it keeps on its current growth path, it will achieve $22 billion by 2015. India is set to overtake Brazil and become the 10th biggest pharma market by value worldwide in 2012. The gap between volume and value figures (India is 3rd by volume and 11th by value) should be reduced through governmental intervention (regulations, pricing controls, et al). Post the recent deals, it is felt that valuations are very high in India and M&A activity may slow down unless true synergies can be obtained through acquisition.

The key trends and macro factors driving M&A activity in the pharma industry include the patent cliff ($160 billion sales drop expected in 2012 alone), increased cost pressures and corresponding demand for generics, and access, i.e. favourable government regulations in India. Through partnership or acquisition, pharma companies can strengthen core capabilities in R&D, manufacturing, marketing, and distribution. These trends point towards continued deals in the India pharma sector; however, it must also be noted that valuations are peaking and there is likely going to be a slowdown in the pace of M&A activity, unless more prospect target companies emerge.

B&E: The Indian pharmaceutical industry forms around 8% of world pharmaceutical production. The trend of Indian companies being increasingly targeted by multinationals (MNCs) for both collaborative agreements and acquisitions has been picking up over a couple of years. Does the sector environment favour consolidations in coming years?
AS: It is likely there will be more focus on product asset acquisition rather than corporates. As opposed to M&A, alliances or strategic partnerships are expected to increase in order to leverage core competency strengths in R&D, manufacturing, marketing and distribution.

A reverse trend will emerge, where Indian pharma companies will continue to acquire abroad. Currently, around $2 billion has been spent by Indian entities abroad and this trend is expected to continue with management willingness to globalize and leverage partners’ strengths in foreign markets.

It must also be noted that regulations are key and must continue efforts to make the market investment friendly, through increased focus on investment (FDI) allowances, transparency and patent/IP protection. Enhanced spending on infrastructure development and improved access through mass insurance schemes are also factors supporting collaborative agreements in the sector going forward.

B&E: Sector wise breakup of M&A deals in India for Q1 2011 shows that healthcare accounted for 25% of the total deal value. What were the possible factors favouring this sector?
AS: One of the major factors behind this is the population (currently 1.2 billion). By 2030, India is expected to overtake China as the world’s most populous nation. As the middle class rises, opportunities in healthcare will also improve. Increased liberalization has allowed additional opportunities to emerge such as the private insurance market.

B&E: What are the various challenges with East-West alliances, and do India to India mergers make better sense?
AS: There are some normal cultural and regulatory challenges associated with all cross-continental M&A deals. Drivers for M&A remain the same, whether East-West or domestic – access to innovation and R&D capabilities, reducing cost structures and improving manufacturing capabilities, entering new markets and product/service categories. MNCs have turned to Indian pharma companies for a combination of these factors – MNC-India pharma partnerships work well due to synergies obtained by both parties from leveraging different strengths across the drug development life cycle from R&D and manufacturing (typically strong in India) through sales and distribution (typically strong in US/EU).

B&E: Will pharma companies continue to pursue acquisitions of innovative biotech products and companies in future? If yes, what would be your suggestions for such deals?
AS: India’s high skill resource pool and comparatively low costs make it an attractive base for pharma players looking to add biotech/vaccines to their portfolio. The biotech sector is expected to touch $10 billion by 2015, with revenues of $4 billion in 2010-11, and a 33% growth yoy. Although a relatively smaller sector currently, India’s biotech role will mature in the global market as the standard of living, knowledge base and the cost of doing business increase. One way of maintaining the cultural integrity of the acquired biotech firm is by allowing them to function as a separate company, while at the same time streamlining shared services to reduce operational costs.

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