Apr 22, 2008|
Food crisis, Indian pharma & more...
After the subprime fiasco, which continues to create havoc in the global financial markets, it is the ongoing food crisis that has cast a pall of doom not only in India but also in nations around the world. Sharp spike in food prices is hurting some of the poorer economies and is causing inflation to head steadily northwards. The major factors contributing to the rising prices are the increasing demand for food in the fast growing countries of China and India and the diversion of crops by developed nations for the production of biofuel given the firm crude prices. Besides this, rising demand for meat has also pushed up the prices of feedstock. As per the Economist, while wheat and rice prices rose by 77% and 16% respectively in 2007, since the start of January this year, rice prices have galloped 141% and the price of one variety of wheat surged by 25%.
To put things into perspective, the UN Secretary General has stated, "A rapidly escalating global food crisis has reached emergency proportions and threatens to wipe out seven years of progress in the fight against poverty." In fact, the World Bank had appealed to governments to provide US$ 500 m in emergency aid to the UN World Food Programme (WFP) by May 1. And to further compound woes, the UN Secretary General has cited that the recent sharp rise in food prices has already raised the cost to maintain WFP's current operations from US$ 500 m to US$ 755 m. It will be a while before farmers across the world increase production to bridge the demand supply mismatch and till such time rising prices and food shortage will continue to haunt not only poorer countries but the richer nations as well.
The prospect of Orchid Chemicals being taken over and the Burmans selling their 65% stake in Dabur Pharma means that consolidation is slowly gathering pace in India. The year 2006 saw large-scale acquisitions been made by Indian pharma companies to widen geographical reach in the global generics market. This was driven by the need to acquire scale in wake of the rising competition and most of these acquisitions were in Europe, which was not yet subject to the brutal price erosion being witnessed in the US. The rationale behind acquisitions being that they reduce the need to make large investments (especially on the sales and marketing front) in any region right from scratch. Therefore, many players are looking to acquire companies that already have strong presence in particular regions with large product portfolios.
The consolidation wave now seems to be gathering steam in India. India is a highly fragmented and competitive market and the largest player enjoys a market share of only 6%. Besides this, the cost of drugs in India is one of the lowest in the world and the market is highly price sensitive. The DPCO, the drug price regulator in India, by imposing price control on 75 drugs, has also been responsible for lowering the prices of drugs in the market. The rationale for making acquisitions in India is no different than that for acquiring companies abroad - increase scale, have access to a wider portfolio and ward off competition.
While it was expected that the introduction of the product patent law (and consequently the slowdown in product launches) would trigger a spate of acquisitions in the country, the same has not really happened. This could largely be attributed to rich valuations of companies in India, a phenomenon that has been observed in cross border acquisitions as well. To put things into perspective, Fresenius Kabi, a German based healthcare company bought 73.3% stake in Dabur Pharma for a consideration of Rs 8.7 bn. Given that Dabur Pharma reported revenues of Rs 3.3 bn in FY07, the price to sales for Fresenius works out to be 2.6 times, which is on the higher side.
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