Report From: India

While the world pulls itself out from one of the worst crises in decades, Indian pharmaceutical companies are trying to capitalize on falling company prices by increasing their takeovers.
Dec 02, 2008
By A. Nair
Volume 32, Issue 12

The mood inside the Indian pharmaceutical market is one of unbridled optimism, rampant self-confidence, and can-do determination. With an economy that is growing nearly 12% annually, India overall is on an upward trajectory. High profitability and cash flow have left most drug companies in India in a comfortable economic position compared with other consumer-oriented companies such as fast-moving consumer goods firms such as Nestle and Unilever. And a sizeable minority of pharmaceutical firms believe the current financial crisis will give them an opportunity to increase their volume of mergers and acquisitions. Take Mumbai-based Sun Pharma, which reported a 135% jump to $102.7 million in second-quarter net profit. The firm said it was eyeing more acquisition possibilities, with the global financial crisis making valuation of generic drug companies more attractive.

"We continue to look at opportunities," said Sun Pharma Chairman Dilip Shanghvi at a recent earnings call, without identifying any targets. The statement is surprising given that Sun Pharma has been trying to acquire Israel's Taro for $454 million for nearly a year; the agreement is still tied up in litigation. Sun Pharma sells the generic heartburn drug "Protonix" (pantoprazole) and cytoprotective agent "Ethyol" (amifostine) "at-risk" (i.e., the company challenges a patent and markets a drug, despite a pending court order) in the United States. The company's US generic drug sales soared by 195% to $122 million while international sales climbed 141% in the second quarter of FY 2009. The firm continues to sit on reserves of more than $30 million, which it raised through foreign currency convertible bonds. The company plans to use this nest egg to fund its acquisitions.

Another cash-rich firm, Chennai-based bulk drug manufacturer Orchid Chemicals and Pharmaceuticals, is set to increase its stake in the drug discovery and development company Diakron (a privately-owned company based in Roseland, NJ) to 51% this quarter. In August, the company acquired around 43% control in Diakron after a $1.7-million investment. According to an Orchid spokesperson, the Indian company will now acquire a controlling interest with a total investment of $2 million.

Custom research and manufacturing services (CRAMS) provider Jubilant Organosys (Noida, Uttar Pradesh) bought US-based HollisterStier Laboratories for $122.5 million last year in what at the time represented one of the largest overseas acquisitions by an Indian company in the CRAMS sector. That was swiftly followed by another record when it snapped up Canada's Draxis Health for $255 million.

By avoiding cheap debt, domestic drug companies have put themselves in a strong position to capitalize on the current lack of funding. This shift in power could allow them to make acquisitions for less than what was previously possible.

"Indian pharmaceutical companies are sitting on a war chest of at least $3 billion for overseas buys," says Citigroup Pharma Analyst Dipak Nishantkumar. "This is after they acquired companies worth almost $1 billion ... in early 2006 and late 2007," he added.

Ranbaxy Laboratories (New Delhi) is a case in point. The company's chief executive, Malvinder Singh, says Ranbaxy has completed 18 overseas acquisitions in the past two years alone.

"It's bargain hunting time," concurs Alakh Dalal, a research analyst at Religare Securities, an equity and securities firm in New-Delhi. "The cash-rich nature of most domestic firms puts them at a decided advantage when it comes to seeking growth through acquisitions, and also helps provide continued funding for research and development (R&D)."

As Indian arms of multinational drug manufacturers brace themselves to tackle the tough economic environment facing their parent companies abroad, pink-slips are not yet the order of the day here, even though Pfizer (New York) has stated it would reduce its staff by about 10% globally. GlaxoSmithKline (GSK, London) announced a reduction of 850 R&D staff in the US and UK. And last week, Novartis (Basel) announced its decision to lay off 300 of its field force.

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