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Merck join hands with Sun Pharma - Views on News from Equitymaster

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Merck join hands with Sun Pharma

Apr 19, 2011

Indian pharmaceutical major Sun Pharma recently announced a joint venture with Merck & Co of the US. This JV will focus at ways to develop, manufacture and commercialize innovative branded generics in the emerging markets. Branded generics are off-patent drugs that are sold to consumers under a brand name as against unbranded generics that are sold by their main chemical name.

As per the terms of the JV, Sun Pharma and Merck would have equal representation on the JV board. The board members will decide the strategy for the venture in couple of months. Development of drugs under this JV will use SPARCís technology platform and development expertise. SPARC is the research arm of Sun Pharma. The manufacturing and distribution of drugs will be handled by Sun Pharma. So a question may arise on the part to be played by Merck.

Merck is global pharmaceutical leader having a strong track record of novel drugs discoveries. It has a strong presence across the developed and emerging markets. In this strategic partnership with Sun pharma, Merck will help in the clinical development, product registration and marketing across geographies.

To summarize, the task carried out by the respective companies is given below:

  1. SPARC - R&D and product development services

  2. Sun Pharma - Manufacturing and distribution

  3. Merck - Clinical development, product registration and marketing

The financial details of the JV are not yet finalized but SPARC will receive milestone and royalty payments for providing the technology. The expenses will be borne by the JV where Sun and Merck will be equal partners. The management highlighted that the focus will be only on emerging markets and the existing business for both the companies remains unaffected.

The justification for this deal is to produce long term benefits for both the companies from emerging markets. Recently, we have seen many similar pharma deals between the global pharma players and the Indian generic companies. Pfizer and GSK entered into tie-ups for drug supply with Indian companies for the emerging markets. Daiichi Sankyo acquired Ranbaxy and Abbot acquired the domestic formulations business of Piramal Healthcare. With the new innovative product pipeline for global pharma players drying up, they have no choice but to look for growth in the generics space.

At the current price of Rs 442, the stock is trading at a price to earnings multiple of 18 times our estimated FY13 earnings. We believe that it will take at least 5 years for this venture to give successful outcomes. As of now we do not expect any gains from the JV in the medium term.

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