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To acquire or not to acquire

Jan 27, 2009

Pfizer's big gamble
'Acquisitions' seem to be on the agenda of the global pharma industry; especially big ticket ones. The world's largest drugmaker Pfizer is said to be in talks with Wyeth to acquire the latter at a deal size pegged to be worth more than US$ 60 bn. While there is no confirmation of the same as yet, the reasons why Pfizer would go in for it are manifold. It is now a well established fact that global pharma majors are finding it increasingly difficult to replenish their pipelines with new path breaking drugs while the R&D costs are mounting. As a result, many of them had already started looking to acquire either a portfolio of products or acquire smaller companies which had a few promising drugs in their pipelines but did not have the requisite funding. Biotech companies especially got classified in the latter category. But with the credit crisis now afflicting the global economy, many biotech companies seem to be shutting shop and are no longer a viable option.

Secondly, Pfizer's major drug, which is the largest drug in the world with global revenues of US$ 12 bn is set to lose its patent in 2011. And the company does not have another blockbuster to fill Lipitor's shoes. If the deal with Wyeth goes through, once the patent of Lipitor expires in 2011, Pfizer will suffer a 10% fall in earnings as compared to 23% (if it does not go through). Thirdly, Wyeth has some strong drugs in its pipeline such as Enbrel and the vaccine Prevnar, which are blockbusters. If the deal goes through, it will most likely trigger a wave of consolidation in the industry as rival companies also look to grow in size to compete. The real problem for Pfizer of course could be the funding of the deal. US$ 60 bn is by no means a small amount especially in an environment where credit has dried up and the recession has deepened. It would be interesting to see how Pfizer makes this feasible without loading its balance sheet with too much debt.

Forex woes continue
Forex losses have continued to afflict major Indian companies during the December ended quarter. With the volatile moves of the rupee baffling everybody, forex losses this quarter have only mounted. As reported in a leading business daily, around 30 companies so far have reported a combined forex loss of Rs 37 bn for this quarter. These losses are generally due to cancellation of forward contracts at unrenumerative rates and the revaluation of their foreign currency loans. While more than two thirds of the same are due to hedging practices, the remaining are due to revaluation of dollar liabilities. Not surprisingly, IT and pharma majors have borne the maximum brunt of forex losses given that these sectors are highly export oriented.

Those who have been relying on Foreign Currency Convertible Bonds (FCCBs) especially are paying a heavy price. A couple of years back when the stockmarkets were buoyant, FCCBs were being announced by the dozen, some with exorbitant premiums promised at the time of redemption. The reversal in the fortunes of the stockmarkets has put all these companies in a tight spot. Given the meltdown, conversion of these bonds into equity shares looks highly unlikely. Moreover, the spectre of redemption is hanging like a Damocles sword over these companies as funding the same has become an issue. And the sharp fall in the value of the rupee has only exacerbated forex losses on these loans thereby impacting profitability. Thus, those companies without adequate cash flows are in for some troubled times.

A dull lustre indeed
Looks like paint companies will have to brace themselves for a tough quarter. India's leading paint company Asian Paints reported an unenthusing set of numbers on Friday, wherein sales grew by a tepid 12% YoY and operating margins nearly halved. This is not surprisingly given that the growth of the paint industry is correlated to the GDP growth. With the growth of the latter having slowed down, the growth of the paint sector has been restricted as well. Mr. Ashwin Dani, the MD of Asian Paints said, "We could see demand conditions slowing down. We view these as short term challenges and we are hopeful that the situation will improve in the next financial year". We hope so too, but with 2009 also predicted to be a tough year for the global economy, it remains to be seen how Indian companies are able to cope with the same.

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