JM INTERNATIONAL JOURNAL OF FINANCE DECEMBER, 2010

MERGERS AND ACQUISITIONS IN INDIAN PHARMACEUTICAL INDUSTRY (A STUDY ON A FEW SELECT COMPANIES)
Dr.M. JAYASREE, Assistant professor, GITAM Hyderabad Business School, GITAM University, Hyderabad Campus Email: sreemj@rediffmail.com Ms Raavi Radhika Assistant professor, GITAM Hyderabad Business School of Management, GITAM University, Hyderabad Campus Email: radhika.ramanchi@gmail.com

Abstract: Merger can be defined as a process, which involves a transaction that combines two firms into one firm. An acquisition on the other hand is the purchase of one firm by the other. Growth is essential ingredient of success. Growth can be of two kinds, organic and inorganic. Fast pace growth is possible through inorganic route, which includes merger & acquisitions (M&A). The corporate giants in U.K. and U.S.A could reach the present status only through mergers and acquisitions. In-fact M&A are important features of western capitalism. There are several causes for M&A in the global pharmaceutical industry. Among them are the absence of proper research and development facilities, gradual expiry of patents and competition within specific pharmaceutical generics. The high profile product recalls have also played a major role in the continuing M&A in the industry.1In Indian pharmaceutical industry there are a number of companies that have entered into M&A agreements in the context of global scenario. These companies would be selling off the non-core business divisions like over-the-counter. The sheer number of companies acquiring parts of other companies has shown that Indian pharmaceutical industry is ready to be a dominant force in this scenario. Indialed M&A touched $40 billion in January-June 2010.2 Indian transactions accounted for a Sixth of the total Asian deals of $242.1 billion from 5078 deals, a rise of 21%.2 The present paper studies the reasons for M&A in the select companies and also how M&A have helped the select companies in reaching their critical mass.

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Introduction

Mergers and Acquisitions in India: During the recent past there were several M&A in Indian pharmaceutical industry. Several reasons contributed for such consolidation. A pharmaceutical company to be successful should reach or acquire a critical mass and scale in those therapeutic areas where it intends to focus. It should have a broad production line that indulges a range of products and services that can really deliver health care solutions. The critical mass for an integrated international generic company would be around $300 million in annual sales and for a research-based international pharmaceutical company is over $ 1 billion in annual sales.The companies are framing strategies to reach this status. The major strategy includes M&A. Global changes have also contributed for M&A deals. Globally, drug companies are being forced to reduce the cost of medicines. The pressure to reduce the cost further mounted by health insurance companies, health management organizations and governments in the countries like U.K. Canada, North America and all over Europe, which were finding it difficult to meet the health care costs. In all these countries there is a major move to insist on generic prescription. This led to huge opening of generic market. The ability of leading drug MNCs to operate in this market is obviously compromised, as they do not have the advantage of using their brand images to corner large chunks of emerging market. They are thus focused to compete on more or less equal terms with a larger number of lesser-known, companies and also sell drugs at relatively cheaper rates. In the U.S from 1995 to 1997 generic drugs showed a double-digit rate of price decrease. Therefore the large MNCs are in the process of working out new strategies, which include cartelization in the form of mergers and tie-ups to maintain their suzerainty over the global pharmaceutical market. Indian companies have cost advantage over the global companies. This contributed for M&A with foreign companies. Research and development is another reason for M&A deals. India has a rich potential in clinical research. India is a place to work in segments such as cardiology, cancer and neurology. It records two million cancer cases with five lakh new cases detected every year. There are thirty-five million cardiac patients and between thirty to thirty-five million diabetic patients. About seventy percent of the global product line is targeted at these deseases.6Research and development costs are low in India. In west the research cost on development of new molecule and bringing it to clinical trials-I is $50-100 million. In India, it costs ten percent of the cost incurred in the west;7 the cost advantage is another factor for M&A.

The major acquisitions in pharma industry in India are depicted in the following tables. JMACADEMYITM Page 40

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Table No:1

Major Pharma Companies Acquired in India by Overseas Companies Acquired Co Ranbaxy Labs Matrix Labs Wockhardt s nutritional foods division Wockhardts veterinary division Dabur Pharma Deal Size $4.6 bn $763mn $130mn -

Acquirer Daiichi Sankyo Mylan Abbott Labs Vetiquinol Fresenius Kabi (Singapore) Pte

Source: NANDINI Global Information Source for Chemical, Pharmaceutical and Allied Industries. Date:16-9-2010.

The table shows that quite, significant deals have taken place in India. As pointed earlier the companies were selling off their non-core areas of business. The partnership between Ranbaxy and Daiichi Sankyo has created a powerful hybrid business model, with complementary strengths ranging from excellence in new drug research & development to extensive reach across global markets. There is tremendous growth potential for both organisations which will be driven and realised in the form of synergies across the front and back ends of the pharmaceuticals business. 3 Almost all M&A deals were associated to with this motive. There were also major acquisitions by Indian Pharma companies. This is shown in the following table. Table No:2 Major Pharma Companies Acquired Outside by Indian Companies
Acquirer Acquired Co Deal Size Dr.ReddyLabs Betapharma(Germany) $570mn Ranbaxy Terpia(Romania) $324mn Matrix Labs Docpharma(Belgium) $263mn Dr.ReddyLabs RochesAPI biz (Mexioco) $59mn Jubliant Organosys Target research Associates (U.S) $33.5mn Sun Pharma Able Laboratories Inc(US) $23.15 Aurobindo Italian unit TAD Source: NANDINI Global Information Source for Chemical, Pharmaceutical and Allied Industries.Date:16-9-2010.

Both the table indicate that there were major acquisitions and take over in the industry. The study aims to explore the reasons for such M&A in the industry. The study on M&A in Indian pharmaceutical industry is done by taking a sample of top eight companies which include 1. 2. 3. 4. 5. 6. M/s Ranbaxy Laboratories Ltd. M/s Reddys Laboratories Ltd. M/s Sun Pharmaceuticals Ltd. M/s Nicholas Piramal Ltd M/s Aurobindo Pharma Ltd. M/s Matrix Laboratories Ltd. JMACADEMYITM Page 41

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7. M/s Wockhardt Ltd 8. M/s Lupin Ltd. Data of the select companies were taken for fifteen years, that is from 1995-96 to 2009-10 financial years and analyses have been made about the causes for such M&A and how it helped the companies in improving their critical mass. For the purpose of the study secondary data have been used. The annual reports of the concerned companies have taken as the base for collecting data and detailed analyses have been done. Primary information was collected by personal interview with the official of concerned companies. Mergers and Acquisitions of Select Companies in India: The Indian companies are looking forward for inorganic growth through M&A, since the targets for being global are $300 million annual sales for an international generic company and $1 billion annual sales for an international research driven company and fast pace growth is possible through M&A. Usually companies focus on few therapeutic segments, to have broad product line, M&A are obvious. The present study examines how each M&A has helped the companies in improving the product base, sales and market coverage required to reach the critical mass. The following table gives the list of M&A of select companies. Table No: 3 Mergers & Acquisitions Company-Wise
Name of the Company M/s Ranbaxy Laboratories Ltd M/s Dr. Reddys Laboratories Ltd M/s Sun Pharmaceuticals Ltd M/s Nicholas Piramal Ltd M/s Lupin Ltd Details of M&A and Stakes Crosland Research Laboratories, OHM Laboratories, Rima Pharmaceuticals, RPG Aventis, Niphon Pharmaceutical Industry, Vorin Laboratories, Terpia, Ethimed, Mundogen, Be-Tabs, HMS, Zentech, Jupiter. BMS, American Remedies, Cheminor Drugs,Beta Pharma, Dow Pharma, Roche API business, Tamilnadu Dadha, MJ Pharmaceuticals, Milet Laboratories, Gujarat Lyka Organics, Pradeep Drug Company, Hindustan Anti-Biotics, Phlox Pharma, Valeant Pharmaceuticals, Taro. Roche Products, Boehringer Mannheim, Rhone Poulenc, ICI, Sarabhai Piramal, Anaforton&Cefi Brands, MINRAD, Rx Elite, BSVs Anesthetics business. Kyown Pharmaceutical Ltd, Rubamin Laboratories Ltd, Hormosan Pharma GMBH (Hormosan) Generic Healthy Pty Ltd, Pharma Dynamics, Multi-care Pharmaceuticals Inc. Ranit Pharma, Dee-Pharma Ltd-Sterile Plant

Medicorp, Vorin, Vera Laboratories, Fine Drugs and Chemical Ltd, Mchem, Doc Pharma, Concord, Explora R.R. Medi Pharma, Merind, Wallis Laboratories, C.P Pharma, Pine Wood, Morton Grove, Dumex, Negma Lerads. Source: Compiled from Annual Reports of the Concerned Companies, CMIE: Indian Industry various issues, Company websites, Business Today 10th September, 2006. Personal Interview.

M/s Aurobindo Pharma Ltd M/s Matrix Laboratories Ltd M/s Wockhardt Ltd

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M/s Ranbaxy Laboratories Ltd: Ranbaxys takeover of Crosland Research Laboratories has given a niche to therapeutic segments of dermatology and orthopedics. This also helped the company to have an additional turnover of Rs. 760 millions. The companys acquisition of OHM Laboratories has helped in faster access to rapidly growing North American generics market. The acquisition of Rima Pharmaceuticals of Ireland provided opportunity to have a niche in European Union market the second largest in the world. The opportunities of generic market in France made the company to look in for acquisition in this area. The generic market in this country is expected to grow to $2.1 billion. Although the French pharma market is third largest in Europe, generics played an insignificant role so far. During the recent past the government has introduced new laws governing generics, which gave incentive to pharmacists for generic substitution in this factor, and consolidation of the generic manufacturers in France made French market attractive.8It was in this direction that RPG Aventis a French company acquisition was aimed at. The acquisition of RPG Aventis also helped the company to reach the $ 1 billion turnover making it the first Indian company to reach the global status. The company is making its presence in the Japanese market by a stake of ten percent in Niphon Pharmaceutical a subsidiary of Niphon Chemiphar Co. The company has also taken a stake of thirty percent in Hyderabad based Vorin laboratories, manufacturers of ciprofloxacin and norfloxacin bulk activities. The acquisition of unbranded generic business of Allen, a division of Glaxo Smithkline complements the product portfolio of the company for Italian market. The acquisition of Terapia made Ranbaxy a leading market player in Romania. Ethimed acquisition helped the company in expanding its operations in the Benelux countries. The acquisition of Mundogen expanded the companys product portfolio in Spain. The acquisition of Be-Tabs in South Africa helped to expand its market operations in that country. Dipak Chattaraj, President of Ranbaxy Pharmaceuticals Inc(RPI) talking on the acquisition of HMS stated that critical mass has now been achieved within RPI. The product portfolio of currently marketed generic products now exceeds thirty products with an additional eight products slated to be launched by year-end. In order to internalize and establish a strong sales organization the assets and talent of HMS have been acquired. For the past three years HMS has been sole field force, as well as advisor in developing pricing, marketing and promotional programs. The acquisition of HMS was a logical business decision.9 Further partnership with Zenotech was to work on areas of oncology and bio-general. Bio-pharma has a market of $ 65 billion and oncology has $21 billion in U.S.A.10Jupiter partnership helped to have a niche in peptides. Stake in Be-tabs made RPI as first largest generics in South Africa Generics market.10 The analysis shows how the M&A helped RPI in reaching the critical mass.

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M/s Dr. Reddys Laboratories Ltd: The companys acquisition of BMS has given a niche over hundred products. The primary business of BMS was manufacturing and marketing of generic pharmaceutical products in U.K. The acquisition of American Remedies was intended to enrich and complement product portfolio, strengthen all India stockist network and to strengthen marketing and distribution efforts. This deal complements product portfolio of the company. The take-over of Cheminor Drugs was aimed at increasing the turnover of the company. Cheminor had a turnover of Rs.215 crores at the time of take-over. This deal made the company as the third largest in India. The acquisition of Beta Pharma provided an entry into the German market which is Europes largest market share of $7 billion.12 Dow Pharmas acquisition helped to have access to small molecule facilities in U.K. The acquisition of Jet generics gave access to generic finished dosage facility. The reasons for acquisitions are to have a wide product portfolio, wider market access and manufacturing facility. All these are aimed at reaching the critical mass. M/s Sun Pharmaceutical Ltd: The basic objective behind M&A was to increase turnover. The take-over of Tamilnadu Dadha Pharma made the company enter into therapy areas with well-known basket of products as well as trained field force. Merger with Gujarat Lyka Organic Ltd provided an access to manufacturing facility for cephalexin bulk active for the international market. The take-over of MJ Pharmaceuticals helped to have access to formulation plant approved by U.K MCA. Sun Pharma intends to use MJ Pharmaceuticals as a manufacturing base for European generic market. Acquisition of Caraco a U.S based manufacturer of generics provides an entry into the U.S generic market. Milet labs acquisition has added brands in ophthalmology, an area with high growth potential. Take-over of Pradeep Drug company provided WHO cGMP approved site for bulk actives and intermediaries for India and the neighbouring markets. The acquisition of Hindustan Anti-biotics helped the company to have access to manufacturing facilities enabling it to expand its product range particularly in the manufacture of Pencillin-G. The acquisition of Phlox pharma provided an access to bulk drug at Baroda. The take-over of Valeant Pharmaceuticals helped the company to have an access to bulk and formulations plant in Hungary, Bryan and Ohio.13The acquisition of Taro was to have market in U.S.A, Israel and Canada. The details of the company also show that a wide market coverage, broad product portfolio, and ready access to manufacturing facilities were the reasons for M&A by the company. M/s Nicholas Piramal India Ltd: Nicholas Piramal eventually grew through the acquisition route. Take-over of Roche products added multi-vitamins, anti-infectives and cardiovascular products. The acquisition of Boehringer Mannheim JMACADEMYITM Page 44

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India made the company to have access to diagnosis and diabetes segment. Rhone Poulenc India acquisition helped an entry into respiratory segment. ICI acquisition added CVS beta blockers critical care products. The merger with Sarabhai Piramal provided an edge in CNS, pain segment and antiinfectives. The acquisitions of Anaforton &cefi brands from khandelwal labs added anti-spasmodic, cefixime based drugs. The recent acquisitions of the company include MINRAD. This helped in having unique manufacturing know-how for all inhalation anesthetic products, experienced team and patented process for sevoflurance. Rx Elite acquisition contributed to excellence in contract services and distribution, as Rx Elite had strong and experienced R&D team. The analysis of the company also shows that M&A were a part of strategy for critical mass. M/s Lupin Ltd: The acquisition of Kyowa Pharmaceutical Ltd propelled Lupin directly into the elite league of the top ten players in Japan. Kyowa had rich product portfolio and R&D, and manufacturing facilities. The acquisition of Rubamin Laboratories Ltd helped the company to emerge as a part of global CRAMS (contract research and manufacturing services) strategy.14 The company had four major acquisitions in the year 2008-09. Hormosan Pharma Gmbh, a German generic company acquisition added products in the CNS segment. A substantial stake in generic healthy Pty Ltd in Australia strengthened the existing product portfolio with generics prescription and OTC (over the counter) products. The stake in Pharma Dynamics, a south African company gave an edge in cardiovascular segment. The acquisition of Multicare Pharmaceutical Inc in Philippines made the presence in womens health and child care segment.15The analysis of the company also shows that M&A were a part of strategy for critical mass. M/s Aurobindo Pharma Ltd: The acquisition of Ranit Pharma has attributed access to manufacturing facility for anti-virals, antifungals and anti-emetics. It has also acquired Dee-pharma Ltd sterile plant. The reasons for all other acquisitions have been to have all the synergies of large-scale operations and large market coverage. M/s Matrix Laboratories Ltd: Merger of Medicorp and Vorin helped in accessing the manufacturing of APIs for the anti-bacterial, antifungal, CNS, gastrointestinal, anti-retroviral, anti-virals, anti-depressant CVS. These companies had a large base of customers, a presence in regulated market, access to sophisticated technologies, innovative JMACADEMYITM Page 45

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product development as well as U.S. F.D.A, ISO, U.K.MCA, TGA Australia and ISO-1400 approved facilities.16Merger with Vera laboratories Ltd for a synergy in manufacturing capacity, product profile and effluent handling facilities. Merger made Matrix as one of the largest US F.D.A approved API manufacturer in India.17 The stake in Mchem group gave advantage in the Chinese market and cost advantage in manufacture of API, ARV and CVS products. Concord acquisition provided edge in research and commercial manufacturing capabilities in the areas of fermentation and bio-catalysis, market in U.S.A and Europe and FDA approved manufacturing facility. Explora take-over gave advantage in APIs high anti-cancer and corticosteroids drugs and presence in the U.S market.18The recent acquisition of DOC Pharma added sixty products to the product-line and also facilitated a presence in Europe. M/s Wockhardt Ltd: The take-over of RR Medi Pharma helped the company to expand its manufacturing facilities and widen market access. The acquisition of Merind contributed to making the company as one of the major manufacturers of vitamin B12. Wallis laboratories acquisition helped to have access to U.K market, which has a $1 billion market for off patent drugs. The acquisition of C.P Pharma has helped the company to reach a turnover of Rs. 1100 crores. C.P Pharma has well established markets in natural insulin, injectable unfractionated heparin anticoagulants, injectable anti-biotics, ophthalmology, injectable analgesics, sedatives and migraine treatment. This acquisition further helped to gain sales revenue of fifty-three percent from international market mainly from Europe and the U.S. The take-over of Pine wood Laboratories has given a foot print in Europe and the U.K, Ireland and Germany. The take-over of Negma Lerads in France and Morton Grove Pharmaceutical in U.S helps to increase revenues to fifty-four percent in Europe. The acquisition of Dumex added to heritage brands namely Protinex and Farex. The study of the company also shows that the reasons are concerns for critical mass. Conclusion: The study clearly showed that reasons for M&A were for integration of sources of raw material, cross selling opportunities, reduction in cost, R&D advantage and wide product portfolio that all aimed at reaching the critical mass. The industry is witnessing a significant M&A deals which will continue in the future. This will gather momentum as companies try to build up strengths by acquiring companies with complementary strengths that offer synergies of scale and portfolio. References:
1. http://www.economywatch.com/mergers-acquisitions/international/pharmaceutical-sector.htmlDate:13-9-2010

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2. 3. 4. 5. 6. 7.

8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

http://economictimes.indiatimes.com/news/-by-company/corporate-trends/India-led-MAs-touch-40-billion-inJanuary-June-2010/articleshow/6088162.cmsdate: 15-9-2010. Ranbaxy Laboratories Limited Annual Report 2008. Subba Rao S.V.R., Game Plans for Post GATT Era Action Agenda of Indian Pharmaceutical Industry, Panther Publishers Private Ltd, Bangalore, 1999 pp. 93-94 Cantwell John, Grazia D Santangelo, M&A AND THE Global Strategies of TNCs, The developing Economies, vol XL No.4, December 2002,pp.400-434. The Economic Times, 19th April,2003, p.7 Srinivas Lanka, Director, Aurobimdo Pharma limited at a Conference on Chremical Petrochemicals and Pharmaceutical Industry Jointly organized by Federation of Indian Chamber of Commerce and Industry, Government of Andhra Pradesh, IICT and The Indian Chemical Manufacturers Association, Express Pharma Pulse, Vol.8, No.23, 25th April,2002,p. 19 Jayasree .M., Ph.d Thesis on The Impact of WTO-TRIPS on Indian Pharmaceutical Industry Andhra University, Waltair, 2005. http://www.ranbaxyusa.com/newsdisp8102000.aspx Date 14-9-2010 Annual Report of Ranbaxy-2007 Ibid. Business World,27th February,2006. Business Today, 12th March, 2006, p.97 Annual Report of Lupin 2007-08. Annual Report of Lupin 2008-09. Annual Report of Matrix 2002-03. Annual Report of Matrix 2003-04. Annual Report of Matrix 2005-06. http://www.nandinichemical.com/2010janjournal.html

Ms. Raavi Radhika has 19 years of experience in teaching Advanced Management Accounting, Costing Accounting, International Financial Management Her doctoral thesis on Lending by Co-Operative Banks to Priority Sector in Ranga Reddy Dist has been submitted to Osmania University. She has presented and published several research papers in national and international publications. She has also presented several papers in National and International Seminars and conferences in the areas of Financial Management and H.R.

A.V.Seeta Mahalakshmi HOD, Dept Commerce, Monteseri Mahila Kalasala, Degree College, Vijawada, A.P

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