M&A In the Indian Pharmaceuticals Industry Slows in 2017 - Ravi Raghavan

The mergers and acquisitions (M&A) scene in the Indian pharmaceutical industry has been quite vibrant for the last several years, but there are signs that the tempo is slowing, both with respect to the number of inbound and outbound deals, and their sizes. This is a reflection of the fundamental changes taking place in the industry – both here in India and in the developed market – the diversion of attention amongst Indian companies to set their house in order in the wake of adverse observations by global regulatory agencies (notably the US FDA) and soaring valuations that deter all but the most aggressive.

Diminished inbound interest

According to an analyses carried out by Ernst & Young, a consultancy, inbound interest in the Indian pharmaceutical industry from the traditional western markets, clearly diminished in 2017, with just 47 deals registered in the year, compared to 52 in 2016. The value of the deals disclosed fell even more sharply – from $4.4-bn in 2016 to just $1.5-bn in 2017, in the absence of big-ticket deals.

In 2017, there was just one in-bound deal valued at more than $500-mn and just five that crossed the $100-mn size. This bias towards lower value deals is both a reflection of the shallowness of the Indian market and its fragmented nature, and a pointer that the most valuable brands and companies have quite likely already been gobbled up!

A further perusal to the inbound deal making reveals that in 2017 out of the total $1.5-bn coming in from 47 deals, $1.1-bn (spread over 22 deals) were accounted by the formulations space, while the biotechnology space accounted for $0.27-bn (10 deals). Presumably, active pharmaceutical ingredients (APIs) accounted for the balance 15 deals (with a cumulative value of $0.13-bn).

Consolidation in the domestic space continues

The consolidation in the domestic arena continued in 2017, with more deals reported than in the earlier two years. Pricing pressures brought about by a government keen to rein in healthcare costs, and increasing regulatory scrutiny on the industry were two factors contributing to the activity in the domestic M&A space. There is merit in consolidation as it affords economies of scale, curbs costs (especially in sales and marketing) and affords a possibility of broadening portfolios to address a greater number of therapeutic areas. The industry here, unlike in most other countries, still remains highly fragmented, and this poses several challenges especially relating to product quality, regulatory compliance and ethical practices. It has been hard to usher in modernisation in this segment of the industry by dictum, and a lot of handholding is required to ensure patients are not put to risk at a time when they are most vulnerable. Consolidation is very much the need of the hour, and while the increased number of deals is a welcome sign, its pace needs to pick up several-fold for it to make a meaningful impact on the industry’s structure and practices.

When domestic companies acquired one another in 2017 it has been mostly to buy into growth through speciality products and brands. Amongst the largest deals in the formulation space was the announcement by Torrent Pharmaceuticals Ltd. to buy the Mumbai-based Unichem Laboratories Ltd.’s branded pharmaceutical business in India and Nepal for a consideration of $557.5-mn. In another deal, Torrent acquired the women healthcare portfolio of Novartis AG for an undisclosed amount.

Other significant deals in the local space included Eris Lifesciences Ltd.’s $76.9-mn acquisition of the India-branded generics business of Strides Shasun Ltd.; and the former’s acquisition of the entire share capital of UTH Healthcare Ltd., a Pune-based company, for $2-mn.

One characteristic of deal-making in the domestic space in recent times has been a tendency amongst companies to refocus on their overseas operations and exit less profitable Indian ones. The flip side of this – wherein companies exit international operations to focus on domestic opportunities – is rarely (if ever seen), presumably because of the poor profitability in the domestic space.

Outbound pace slows

Over the last decade or so several Indian companies have looked to enhance their presence in overseas markets – either through organic growth or through M&A. The first model was to set up a marketing front in the western economies of interest (notably the US market – the world’s largest), but over time companies have also invested in or acquired manufacturing or service footprints to better serve customers.

With an eye on new geographies the biggies in the Indian pharmaceuticals market have sought opportunities largely in the growing markets for generics – going beyond the all-important US market, to tap into opportunities in several European countries, each with varying penetration of generics, and even in Japan, which is now embracing lower cost alternatives in order to curb rising healthcare costs.

In 2017, the number of outbound deals diminished as compared to the previous year, but a number of players have indicated that they are very much interested in an enhanced overseas presence and are waiting patiently for the right opportunity to come along and at the right price.

The most significant outbound deal in 2017 was the acquisition of the intrathecal therapy business of Mallinckrodt PLC, a Dublin (Ireland)-based pharmaceutical company, by Piramal Critical Care Ltd. of the UK, a unit of Mumbai-based Piramal Enterprises Ltd., for $203-mn. This was followed by the acquisition of Generis Farmaceutica SA, a generics player based in Portugal, by Agile Pharma BV (The Netherlands), a unit of Hyderabad-based Aurobindo Pharmaceuticals Ltd., for $142-mn.

Opportunities in biotechnology

The biotechnology segment has been vibrant in the year gone by, with two sub-sectors dominating M&A activity: biosimilars and vaccines. Biosimilars are widely touted as the next big opportunity for at least some of the Indian pharmaceutical companies and several in the top-10 are eyeing significant growth to come from this space. Unlike small molecule generics, biosimilars are more demanding in terms of manufacturing competence, capital costs of manufacturing plants, regulatory pathway to market and costs. While regulatory hurdles have been cleared for launch of many biosimilars in several European markets, the all-important US market still remains more or less out of bounds, though that is likely to change in the years ahead.

Indian companies are sharpening their skills in this space by focussing first on the domestic and semi-regulated markets, but like in small molecule generics the pot of gold is in the developed markets of the world and M&As are seen as one way to gate-crash this party. In the most significant deal in this space Lupin’s US-based subsidiary, Lupin Pharmaceuticals Inc., acquired Newark-based biopharmaceutical company, Symbionix Therapeutics LLC, for $150-mn.

The vaccines space – in which a handful of Indian companies now have global manufacturing scale and marketing reach – also saw a significant deal in the acquisition by Pune-based Serum Institute of Czech injectable polio maker, Nanotherapeutics Bohumil Sro, from Nanotherapeutics Inc., for $78.3-mn.

Inward focus to stay

Going forward, the inward focus on the leading generics players on regulatory compliance to meet the demanding needs of international regulators could keep them preoccupied at least in the short term from ambitious overseas forays, unless there is a compelling value proposition. Almost every single player of size and repute has had regulatory failings that they are hard-pressed to address to regain lost market opportunities. At the same time, the domestic opportunity will afford opportunities for further consolidation through M&A and for alliances with multinational companies to expand markets for new therapeutics.