In this blog post, Meenal Nasa, pursuing M.A. in business law from NUJS, Kolkata, analyses the top ten acquisitions in the pharmaceutical sector in India and the reasons for this sudden increase. 

 

In the recent past, we have witnessed a whole host of mergers and acquisitions (both domestic and cross-border) by the Indian Pharma companies. The Indian Pharma companies not only cater to the domestic market but also exports its products to various pharma markets overseas.

The Indian Pharma industry is known for its expertise in the generic sector, low-cost manufacturing and research facilities.

 

Why is there an increase in Mergers and Acquisition by Indian Pharma Companies?

There are numerous reasons, which may be attributed to the increased Merger and Acquisition activity by the Indian Pharma companies. Some of the reasons are noted below:

  1. Expanding the product range for building a good product portfolio – The Pharma companies find it lucrative to build a product portfolio inorganically, e., through mergers and acquisitions rather than building it organically through research and development activities, which involve an enormous amount of finance.
  2. Gaining access to approved facilities outside India – In the past, Indian companies had come under the scrutiny of US regulatory authorities and have faced import bans and penalties for irregularities in their manufacturing facilities, therefore the Indian Pharma are always on a lookout for approved facilities overseas to evade such hurdles.
  3. Access to distribution channels and gaining market presence – Another focus area for Indian pharma firms are intermediaries and distributors with established, large distribution and marketing networks. Companies can market their products in international geographies if they can acquire such a distribution network.
  4. Pressure by governmental agencies, insurance companies various countries to reduce cost of medicines, due to difficulty in meeting mounting healthcare costs, therefore Indian companies are looking to acquire pharma companies overseas with their local manufacturing and research facilities

 

Major Merger and Acquisition Deals in India

Some of the major merger and acquisition deals by Indian companies are noted below.

 

Merger between Ranbaxy and SunPharma

The merger of Ranbaxy and SunPharma led to the emergence of one of the biggest pharma companies in India. The deal valued at US$4 billion is also one of the biggest Merger and Acquisition transactions in India. The transaction was completed on 25 March 2015almost one year post its announcement in April 2014. As is the case with most high-value transactions, the transaction had to overcome various hurdles as it came under the scanner of various legal and regulatory authorities in India and overseas and required approvals from these authorities to proceed with the transaction.

The primary motive for this acquisition by SunPharma was penetration into new markets and increasing the product portfolio of the company as both Ranbaxy and SunPharma complimented each other in areas of expertise – SunPharma was globally recognized as a major specialist pharma company while Ranbaxy was known for its global presence in the generic segment. A combined Sun Pharma and Ranbaxy was slated to have a diverse, highly complementary portfolio of speciality and the generic products marketed globally.

The merger came at a very critical time for Ranbaxy who was facing financial losses and import ban from the United States Food and Drug Administration and various civil and criminal charges for irregularities in facilities in India. Therefore, one of the key terms of the transaction was the indemnification obligation of Daiichi (a Japanese company who owned a controlling stake in Ranbaxy) to indemnify SunPharma and Ranbaxy, for among other things the cost and expenses arising from a proceeding relating to a subpoena received the United States Attorney for the District of New Jersey requesting that Ranbaxy produce certain documents relating to issues previously raised by the USFDA.

Instead of opting for direct acquisition of shares or business transfer, Sun Pharma opted for a merger for various tax, legal and regulatory reasons. For a direct acquisition, an acquirer needs to have cash surplus for buying the shares of the target company from its shareholders. However, by opting for an arrangement of the merger, Sun Pharma was able to retain its cash surplus, while the shareholders of Ranbaxy received shares of Sun Pharma in exchange. The shareholders of Ranbaxy will receive 0.8 shares of Sun Pharma for each Ranbaxy share.

The transaction came under the scrutiny of anti-competition authorities both in India and in the US as there were concerns that the merged entity could prevent competition in the pharma product sector. The CCI Competition Commission of India gave its approval for the transaction on December 5, 2014, on the precondition that seven brands (constituting less than 1% of total revenues of the merged entity in India) be divested. The Federal Trade Commission in the US gave its approval on the precondition that Sun Pharma and Ranbaxy divest Ranbaxy’s interests in generic minocycline tablets and capsules to an external party.

There were also allegations of violations of India’s insider trading regulations by an entity connected to Sun Pharma Sun Pharma cleared this big hurdle by August 2014, by obtaining approval from BSE and NSE (stock exchanges in India).

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Acquisition OF Primal Healthcare by Abbott

US-based Abbott Laboratories acquired the domestic formulations business of Primal Heath care at a consideration of $3.72 billion (Rs 17,500 crore) under a Business Transfer Agreement (“BTA”) dated May 21, 2010. The acquisition was part of Abbot’s strategy of penetrating into new emerging markets in the pharma sector and moving beyond its patented product business.

The transaction for sale of the Formulation Business has been structured as a slump sale / Business Transfer for an all cash consideration of USD 3.72 billion (approx. INR 175 billion ). Under the BTA, all the intellectual property (IP) of the formulation business including patents and 350 trademarks has been assigned to Abbott. Since IP is one of the most valuable assets in the pharma sector, it is believed that the high value of the transaction could be attributed to consideration for the assignment of intellectual property by Primal to Abbott.

A part of the consideration (approximately 2% of the total consideration) amount is also attributable to the non-compete obligation of Primal and its affiliates to not engage in business competing with the Formulation Business either in India or in emerging markets for eight years from the date of closing of the Business Transfer. However, this restriction does not extend to investment in shares of listed companies carrying on competing for business, provided that such investment does not exceed 5% of the paid-up capital, and such an investment is not accompanied by acquisition of control or influence in the listed entity

Six years post the acquisition, the transaction is seen as seen as a clever business transaction for both Primal and Abbott as Primal has efficiently utilised the monetary consideration it received for sale in adding value to its remaining business by significantly increasing its revenue, while it gave Abbott the much-required access to the emerging markets.

 

Daiichi’s Acquisition of Ranbaxy

In June 2008, Daiichi Sankyo, Japan’s third-largest pharmaceutical company acquired a controlling stake in Ranbaxy Laboratories, India’s biggest generic drugs maker, in a cash deal of approximately $4.6bn. It was one of the biggest acquisition by Indian public company.

The primary motive behind Daiichi’s acquisition of Ranbaxy was gaining access to the low-cost research and production and manufacturing facilities in India and diversifying its product portfolio in the generics sector, considering that Daiichi was an innovator company and had a patent based product portfolio, both businesses complimented each other.

However, complications soon arose after the acquisition, when Ranbaxy’s facilities in India came under came under the scanner of the US Food and Drug Administration (USFDA). USFDA alleged quality issues at Ranbaxy’s US-dedicated manufacturing plants in Mohali, Dewas and Paonta Sahib resulted in the USFDA, imposing an import ban on drugs produced at these sites and withheld the company’s first-to-file 6 months’ exclusivity on three unnamed drugs. Then there was the agreement to plead guilty to 7 felonies and pay $500 million in penalties which led to a major decline in sales in the US, Ranbaxy’s most important market.

It is widely believed that Daiichi should have conducted a proper due diligence by sending its executives to inspect the plants, research and manufacturing facilities of Ranbaxy in India before entering into the deal.

Daiichi also accused the Singh brothers (Malvinder and Shivinder Mohan Singh), the former owners of Ranbaxy Laboratories Ltd for misrepresenting the problems facing Ranbaxy when it acquired the company and in this connection a Singapore arbitration tribunal ordered the Singh brothers to pay a penalty of $385 million to Daiichi.

When Daiichi realized that deal is not profitable it did not make any further investments in the venture and in April 2014, it sold Ranbaxy to Sun Pharma for $3.2 billion. As a part of the deal, Daiichi got approximately 9% stake in the new Sun Pharma (merged with Ranbaxy). It later sold its shares for $3.6 billion and withdrew the Indian market. If we view the transaction purely from a financial perspective, it recovered almost all its investment, but not the opportunity cost of capital and hence this acquisition is touted failed business deal as it fell flat in achieving its objectives.

 

Lupin’s acquisition of US-based Gavin

On 23 July 2015, the Indian Pharma company Lupin Limited entered into definitive agreements and completed its outbound acquisition of the New Jersey-based privately held company generic drugs company GAVIS Pharmaceuticals LLC and Novel Laboratories Inc. (Gavis) for $880 million, subject to certain closing conditions. This is one of the largest acquisitions by an Indian pharma company in the US.

The transaction was finalised through a competitive bidding process. Lupin funded the acquisition through cash reserves of $100 million and a bridge loan.

The main motive for Lupin’s acquisition is expansion in the US Pharma market. The acquisition is also of paramount importance for Lupin has GAVIS  strong history of compliance with the USFDA since many Indian companies have faced import bans and penalties by USFDA for non-compliance of their facilities.

The acquisition enhances Lupin’s scale in the US generic market and also broadens Lupin’s pipeline in dermatology, controlled substance products and other high-value and niche generics. With this acquisition, Lupin acquires a highly skilled US based Manufacturing & Research organisation which would complement Lupin’s Coral Springs, Florida-based R&D centre for Inhalation. GAVIS’s New Jersey-based manufacturing facility also becomes Lupin’s first manufacturing site in the US.

According to a news report, the combined company is said to have a portfolio of over 120 in-market products, more than 185 cumulative filings pending approval and a broad pipeline of products under development for the US.

The acquisition creates the 5th largest pipeline of ANDA filings with US FDA, catering to a $63.8-billion market.

Lupin’acqusition of Russian Biocom

 

On July 02, 2015, Indian Pharma Major Lupin Limited announced its acquisition of 100% equity stake in ZAO “Biocom” in Russia subject to certain closing conditions. The acquisition marks Lupin’s entry into the Russian pharmaceutical market, which is among the top pharma markets in the world. According to a news report, “The Russian drug market had annual sales of 765 billion roubles ($14 billion) and was one of the world’s top 10 pharmaceutical markets in 2014.”

The entry into Russian market is seen as a strategic move. According to industry analysts, Oat, the consultancy firm EY India – “80% of the drugs sold in Russia were imported, the government of Russia on local manufacturing of these products to cut healthcare cost. Indian companies which rely on exporting drugs to Russia prefer to acquire companies with manufacturing facilities as well as strong distribution network”. The deal did not come as a surprise to industry analysts.

Established in 1991, Biocom is a fast growing generic pharmaceutical company with a major focus on therapies such as cardiovascular, central nervous system and antimicrobials for systemic use and also does contract manufacturing and secondary packaging. The Company recorded sales of RUB 861.2 million in the financial year 2014 and had 118 employees. Biocom operated a modern European GMP compliant plant and was also one of the first Russian pharmaceutical manufacturing companies to receive an approved manufacturer status from the World Health Organization (WHO) in 2013.

The acquisition also provides Lupin with a robust platform for Lupin’s to enhance its global research, technology, manufacturing and commercial and their global high-quality product pipeline.

 

Sun Pharma acquisition of Taro

In 2007, Indian pharma major Sun Pharmaceutical Industries Ltd entered into a merger agreement with, Alkaloida Chemical Co. Exclusive Group, to take control of the Israeli company Taro for $454 million, or $7.75 a share. As part of that agreement, Taro received an equity infusion of about $60 million from Sun Pharma, which led to an improvement in the ailing Israeli company’s fortunes and sent its stock above the offer price.

Taro later terminated the merger agreement in May 2008, saying that Sun’s original offer was too low. This led to a long dream legal battle between the two companies.

In 2010, Sun Pharmaceutical Industries Ltd. acquired a controlling stake in Taro Pharmaceutical Industries Ltd., ending a three-year battle for control of the Israeli drug maker, Israeli Supreme Court ruling, which rejected an attempt by the Israeli company to block Sun’s offer to increase its stake. At that time, Sun Pharma had a 36% equity stake in Taro with 24% voting rights.

In addition to generic drugs to treat cardiovascular and neuropsychiatric diseases and inflammation, Taro has an established franchise in skin treatment products in the U.S.It also has strategic sales and marketing operations in Israel and Canada.

Sun Pharma’s units have increased their equity stake in Taro to 48.7% and their voting rights to 65.8%, the Indian company said. Its chairman, Dilip Shanghvi, has been appointed the chairman of Taro’s board.

On acquiring the controlling stake, Sun Pharma intended to on Taro’s market presence in U.S., Israel and Canada and on its expertise in dermatology and paediatric products. The U.S. accounts for almost a quarter of Sun Pharma’s total annual sales.

 

Dr Reddy’s Laboratories acquisition of UCB

In 2016, Telangana based Dr Reddy’s Laboratories acquired a select portfolio of Belgium-based pharma company UCB in India for R800 Cr  ($128.38 million) on a slump sale basis. The acquisition was part of Dr Reddy’s Lab strategy of strengthening its domestic portfolio; the parties entered into definitive agreements for the transaction, which covers the territories India, Nepal, Sri Lanka and Maldives. The deal also entails the transfer of 350 employees engaged in the operations of India business.

Revenues of the acquired business were Rs. 150 crore in 2014. This acquisition has enhanced DRL’s presence in the fast growing chronic segments. The transaction increases Dr Reddy’s presence in the rapidly growing chronic segments and dermatology, respiratory and paediatrics segments.

Revenues of the acquired business were Rs. 150 crore in 2014. This acquisition has enhanced DRL’s presence in the fast growing chronic segments. The transaction increases Dr Reddy’s presence in the rapidly growing chronic segments and dermatology, respiratory and paediatrics segments.

 

Dr Reddy’s Laboratories acquisition of Betapharm

In 2006, Dr Reddy’s Laboratories acquired the fourth-largest German generic drug maker BetapharmArzneimittel GmbH for euro 480 million (approximately Rs 2,550 crore). Dr Reddy’s Laboratories signed a definitive agreement with the private equity house that controls Betapharm to acquire 100 per cent equity of the German drug major.

This acquisition was considered to be one of the biggest overseas acquisitions by an Indian pharmaceutical company. The transaction was funded using a combination of the company’s internal cash reserves and committed credit facilities.

The acquisition was part of Dr Reddy’s lab strategy to expand its presence in in all key pharmaceutical markets.

The acquisition was the most expensive foreign acquisition by an Indian company in 2006, and Dr Reddy’s Lab visualized that a strategic investment would generate substantial opportunities for long-term value creation for both the companies, lay a strong foundation to leverage Dr Reddy’s global product development and marketing infrastructure and to build a significant generics business in Europe in the long term. However, ten years later the acquisition is seen as one of the biggest failures resulting into major fall of Betapharm’s valuation.

The reason for the failure was that within months of the acquisition, the German government changed its procurement policy, shifting to a tender-based system for a substantial number of drugs. This reduced drug reference prices therefore what was aimed at securing access to the second-largest generics market after the US turned into a liability.

 

Domestic acquisition of Elder Pharma by Torrent Pharma

In 2014, Torrent Pharma acquired the branded domestic formulations business of Elder Pharma in India and Nepal on a slump sale basis for all cash consideration of Rs. 2,004 crore (around USD 324 million). This was one of the biggest domestic merger and acquisitions in India.  The business was sold as a going concern on a slump sale-bases, and the transaction also involved the transfer of employees engaged in sales, marketing and operations of the identified India business of Elder. The deal was be funded mainly via borrowings and partly by internal accruals

The deal worked well both businesses who were earlier rivals, for Elder it was a step to restructure its operations as Torrent bought out Elder’s products in the categories of women’s healthcare, pain management, wound care and nutraceuticals products while Elder continued to manufacture, facilitate contract manufacturing operations, which include an active pharmaceutical plant, a liquid drug production plant and an R&D lab.anti-infective, in-licensing and exports business as also its overseas subsidiaries. Elder utilised the consideration amount of the deal to clear a debt worth Rs 1,300 crore, accumulated after multiple acquisitions.

The deal helped Torrent in expanding its market share by adding a portfolio of 30 brands addressing the women’s healthcare, wound care and nutraceutical segments and its foothold in women’s healthcare and pain management segment. The deal also helped Torrent to substantially increase its turnover, resulting in a sizeable gain for its investors.

 

Cipla’s acquisition of two US-based pharma companies

In 2016, Cipla, one of the biggest pharma companies in India acquired two US-based generic companies InvaGen and Exelan, worth $550 million in an all cash transaction. The development marks an important step for Cipla in expanding its foothold in one of the biggest pharma markets in the word.

The acquisition was carried out by the Cipla wholly-owned special purpose vehicle Cipla (EU). The deal was approved by US regulatory agencies.

With the closure of the deal, Cipla intends to launch as many as 10 products in 2017. Cipla expects to file 3 to 4 products cumulatively each quarter through this acquisition.

According to the representatives of Cipla, the acquisition of InvaGen Pharmaceuticals also provides Cipla with about 40 approved ANDAs, 32 marketed products, and 30 pipeline products which are expected to be approved over the next 4 years. They represent a balanced, diversified and growing portfolio targeting highly attractive, large and niche markets.

The Invagen deal enables Cipla to get access to manufacturing sites in the US and also reach to a large network of wholesalers and retailers in the US. Through Exelan, Cipla will be able to access government and institutional market in the US.
With this acquisition, Cipla aims to reap around 25% of its total revenues from the US over the next five (5) years.

 

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1 COMMENT

  1. In the study of Indian pharmaceutical industry, S Beenafound that coincided with the global trends, the industry experienced a bigger consolidation through mergers and alliances. Considering the research of Dr. Anirban Ghatak (2012) the mergers and acquisition have no evident impact on the profitability of the firms, in the long run, may be because of the resultant X-inefficiency and arrival of new firms into the market. Contradicting to the above, Vidhisha Vyas et al. (2012) found M&A as faster and systematic way to enhance firm’s asset base and productive capacity.

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