Comment: As pharma buyouts taper, focus shifts to smaller firms

Is the euphoria over mergers and acquisitions seen in the Indian pharmaceutical industry during the past three years finally settling down?

While cross-border deals did not completely subside in the last one year, a long pause is becoming apparent.

This may not be arising out of an immediate concern of an industry-wide slump or even a toned down growth estimate. Instead, it could be calling for a correction phase in expectations on both sides — the seller and the buyer.

A broad industry consensus has emerged that a deal like Abbott’s acquisition of Piramal Healthcare’s India prescription business may be unique, or even unusual, and will be tough to match in terms of valuations.

As seen typically in India and elsewhere, founders or promoters — unless in desperate need of exiting their businesses — raise the bar higher than the last best priced deal, no matter how good or bad their asset quality is. That perhaps amounts to irrational logic and is quite worrisome. For them, catching up on the higher side of the valuation parameters is going to be a futile exercise in the light of extremely volatile global financial markets.

To be sure, though the rupee’s weakness versus the dollar is attractive for inbound deals, investment bankers typically look to put operational synergies as strategic pulls than leaning too much on external factors like currency exchange rate issues.

Still, it may not be all darkness ahead.

Interestingly, there has been a fair interest in smaller deals in the pharmaceutical space.

Among others, Par Pharma, a comparative heavyweight in the US generic drug industry, bought out Chennai-based Edict Pharmaceuticals in March for about $37 million. The attraction was Edict’s capabilities in niche first-to-file products and manufacture of solid oral dosage forms.

Then, in November, Singapore’s Invida bought out Shalaks to bolster its presence in dermatology drugs. Though Invida shared no data related to valuations, an overarching fact that emerged was the seller’s inclination to part with the business and Invida’s commitment to grow the targeted asset.

Among the other big deals was Sanofi’s buyout of the nutraceuticals business of Mumbai-based Universal Medicare.

Sanofi, globally, is known to have rigid due diligence standards.

Again, what perhaps worked is the understanding between the two parties to sell and buy, and a commitment to healthy growth, though an industry observer suggested Universal Medicare could not have been a “willing seller.”

A senior stock market analyst said rightly that no Indian company is feeling the urgent need to sell off, mostly because of the big growth numbers being put out by market audit firms. The fact that the market size would potentially double in less than 10 years is keeping most companies averse to a transaction.

What may not be noticed clearly by them is that larger companies with their extreme financial muscle are mostly seen consolidating their respective positions in the list of top 20 companies. Some mid-sized firms among the next 30 still throw up astounding numbers, in part because of their relatively smaller network in regional markets or by their sheer capabilities in product development.

Though prescription generation trends cannot be very scientifically measured in India, there looks to be a strong favourable bias amongst prescribers for products that are easier on patients or those that help get a higher rate of compliance.

One view shared by a boutique investment banker is that some large-sized buyers may even feel comfortable doing deals with a set of smaller players, either because of easier access to them or simply, less of ego.

Another factor that draws immediate advantage is that a select bunch of smaller companies may be keen for product-based alliances. For an MNC, this could be a suitable segment to make a dent.

In contrast to getting lured to larger companies with high expectations, product-based alliances could be risk-reward-based and could be an ideal fitment — the smaller company gets a large canvas and the bigger one gets a say in untapped prescription pockets.

Deals in the Indian pharma space may be set for a transformation.