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Pharma: Press ‘A’ for survival!
Sep 9, 2005

The advent of the product patent regime has heralded an era of creativity and innovation. Domestic pharma majors are adopting different business models to survive and are eyeing the overseas markets to propel their growth engine. In this article, we take a look at why acquisitions (the ‘A’ word) can provide a fillip to growth and what some of the domestic pharma companies have done on this front.

Why the need for acquisitions?
An increasing number of domestic pharma companies are turning their focus to the generics markets of Europe and the US. While companies like Ranbaxy, Wockhardt and Dr. Reddy’s are directly competing in the generic markets, others like Biocon and Cipla have instead entered into tie-ups with generic companies to provide bulk drugs to them. However, it must be noted that the generic market, especially the US, has been bogged down by intense competition and price erosion. Since size is vital to the success of generic drug companies, as players strive for the economies of scale necessary to keep costs down and remain competitive, growth through the inorganic route assumes significant importance to survive in this increasingly tough market. Acquisitions provide access to a larger basket of products, technologies and marketing and distribution networks to increase one’s reach in these markets and at the same time obviate the need to significantly invest in R&D and selling expenses.

Global scenario
In the global generics arena, the top two behemoths Teva (revenues to the tune of US$ 4.8 bn in CY04) and Sandoz (generic arm of Novartis with revenues to the tune of US$ 3 bn in CY04) have been battling it out for the purpose of being the largest generics company. Teva was the numero uno generics player in the world until Sandoz dislodged it from its premier position when it acquired German based generics company Hexal (US$ 1.7 bn revenues in CY04) and US-based generics company Eon Labs (US$ 431 m in revenues in CY04). However, the recent acquisition of US based generics major Ivax (US$ 1.8 bn in revenues in CY04) by Teva has tipped the scale in the latter’s favour catapulting it back in the driver’s seat.

Teva is currently the world’s largest generics company and is among the top 20 pharmaceutical companies in the world having a strong presence in the North American and European markets. Its business model is similar to that of Ranbaxy and Dr. Reddy’s. However, Teva’s growth has been considerably faster than these two Indian companies and the company has strengthened its hold in the generics market due to its focus on branded generics (which enjoy higher margins), string of acquisitions as well as investing in R&D and moving up the value chain. The Ivax acquisition will help Teva establish a strong foothold in Latin America and central and eastern Europe.

After these big ticket-sized acquisitions by Teva (now a US$ 6 bn company) and Sandoz (now a US$ 5 bn company), the gap between these leading players and the rest of the generic companies has considerably widened. The mid size generic companies globally will thus have to either follow the inorganic route to acquire scale or probably run the risk of being potential acquisition targets themselves.

India, on the acquisition radar
Indian pharma companies have also been scouting for acquisitions in the global generics space to establish a strong foothold in these markets. In CY04, in a bid to spread its wings across the European region, Ranbaxy made its biggest acquisition when it acquired the French generics company RPG Aventis for a consideration of US$ 84 m. This acquisition provides the company access to the French markets. The company had also recently acquired the product portfolio of Spanish company Efarmes in a bid to establish a presence in the Spanish market besides augmenting its present product portfolio. Ranbaxy’s management has clearly stated that it is looking to pursue further such options and that funding these acquisitions is not expected to pose a problem. Currently Ranbaxy is ranked eighth in the US generics market (US$ 1.1 bn revenues in CY04) and a large-scale acquisition is likely to provide a fillip to its size and position in the US market.

Another leading domestic player, Wockhardt too established a strong presence in the European region when it acquired CP Pharmaceuticals, UK for a consideration of Ł 10.9 m (US$ 20 m) and Esparma GmbH, Germany for a consideration of US$ 11 m. Wockhardt, in fact, has raised US$ 100 m through the FCCB route for the purpose of acquisitions. Both these companies are aggressively eyeing acquisition targets in the US (largest pharma market in the world) and Germany (largest market in Europe).

In FY05, as a part of its strategy to cater to the specialty segment, Dr. Reddy’s acquired Trigenesis, a US based dermatology products company for a consideration of US$ 11 m in order to establish a footprint in the fast growing dermatology market.

While these acquisitions do not match the size of the deals done by Teva or Sandoz, it does give an indication that Indian companies are actively looking to pursue growth through the inorganic route.

Looking ahead…
Keeping in mind the intense competition and large-scale price erosion witnessed in the generics space, cost containment is one of the key drivers to survive. Accordingly, consolidation across the generic drug makers is likely to keep costs down, while at the same time enabling access to more products and a wider reach in the markets. Also, domestic pharma companies like Ranbaxy, Dr. Reddy’s and Wockhardt may not enjoy the low cost advantage that India offers as many generic companies abroad are forging tie-ups with Indian companies or are looking at establishing manufacturing base in the country. Therefore, while there are caveats involved such as integration issues among other things, the fact is that the right deal is likely to provide the much-needed boost to domestic pharma majors to make further strides in the generics markets.

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