Piramal scripts smartest sellout

Fifteen months of rumours, three behemoths wooing, and the fourth gets the bride.

The dowry was the mega-kicker.
On Friday, Piramal Healthcare said it has sold its Rs 2,000-crores-a-year domestic formulations business for a jaw-dropping Rs 17,454 crore to US giant Abbott Laboratories.

And with that, Ajay Piramal has proved he’s the smartest dealmaker on Generics Avenue.

Abbott paid more than eight times the formulation unit’s current sales and five times Piramal Group sales (of Rs 3,617 crore).
Yet, the Piramal Healthcare stock fell 11.81% because the markets perceived there’s little left in the firm after the deal.

Abbott India shares soared as much as 14.4% before closing up 3.7%, on fears it may have overpaid. The US parent’s shares
opened 1% down on the New York Stock Exchange.

Abbott CEO Miles D White said it’s all about “a race”, in a conference call late on Friday.

“Markets like India are so significant in terms of future growth that it is important for us to be there early in a meaningful, strong way,” he said.

Piramal will get $2.12 billion upfront and $400 million in each of the next four years.

The buyout propels the $30 billion plus Abbott to pole position in the $8 billion Indian market for medicines.

Also, with the deal, there’s a paradigm shift in India’s pharma
landscape — the top slots are mostly taken by the multinationals.
There’s only Cipla at No 2. Ranbaxy, now a subsidiary of Japanese major Daiichi Sankyo, is at No. 3 and British giant GlaxoSmithKline at No. 4.

Prior to 2008, nine of top 10 pharma companies in India had local promoters.

“Multinationals’ control will strengthen after this deal. Such valuations will spur other domestic pharma companies to sell out,” said an industry veteran who has worked with both foreign and local drugmakers.

The domestic formulations business contributed 54% to Piramal’s turnover.

What remains with it is the contract research and manufacturing services or Crams business, pathology laboratories, the global critical care business, and the over the counter (OTC) business; which together generate sales of Rs 1,700 crore.

“For both parties, it’s a win-win. Fantastic value for Piramal and a solid boost for Abbott after its acquisition of Belgian firm Solvay in 2009,” said Sujay Shetty, associate director, PricewaterhouseCoopers.

Ajay Piramal, chairman, Piramal Group said the company on its own would not have been able to expand the domestic formulations business globally.

“Abbott can expand it better. We went with Abbott as both our values match, and they were fully convinced about our formulations business, apart from, of course, the valuation. It’s just a selloff of a segment. The shareholding pattern of the company will remain same,” Piramal said.

That’s perhaps why he kept insisting he’s not selling out. The street just didn’t get it.

White said the company doesn’t want to justify the deal on economic terms.

“The deal will bring significant returns in the next say 5 years and will be a huge profit driver. It will allow us to take the products outside India and enhance our portfolio in emerging markets, which currently makes up 20% of our total business.”

Industry forecaster IMS Health predicts leading emerging markets will show annual pharmaceuticals sales growth of 14 to 17% through 2014, against just 3 to 6% a year for developed markets.
Abbott estimates its India business to grow at 20% annually, with sales tipping $2.5 billion by 2020.

With Rs 17,454crore in pocket, Piramal will have to pay tax @30% — it’s unlikely to be 22% under capital gains since there is no stock sold here — repay Rs 1,300 crore debt, and use the rest to grow its existing businesses (contract research, pathlabs, OTC, critical care), give a special dividend,  and according to Piramal, look at newer areas and sectors for growth.

The cash flowing from the deal will also be used towards developing Piramal’s new chemical entity (NCE) pipeline, which currently consists of 14 novel molecules for cancer, diabetes, inflammation, and anti-infectives and falls under Piramal Life Sciences Ltd which is a separate entity.

“Now on, our focus in the domestic market will be on the OTC and patented products space. We will look at launching novel molecules in future and concentrate on drug discovery,” said Piramal.

Sarabjit Kour Nangra, an analyst with Angel Broking in Mumbai, said growth will now depend on how Piramal scales up its residual business.

“But a big cash cow will be out,” Nangra said.

Analysts expect the residual business to grow at a compounded annual rate of 15% over the next two years.

“Contract research revenues de-grew by 16% in the last fiscal due to de-stocking issues, and biotech companies having inadequate funds. This year, it could grow at 10-15%,” says a research analyst from a brokerage firm.

The deal is the third-largest inbound acquisition in any sector in India, just behind Japanese drugmaker Daiichi Sankyo’s $4.2 billion takeover of Ranbaxy in 2008.

Since then, further pharmaceutical deals have been expected, as global majors search for growth and low-cost production of generics, as patents on major branded drugs are set to expire.
GlaxoSmithKline has frequently been rumoured to be eyeing Dr Reddy’s, while Cipla is cited by analysts as a takeover target.
How did Ajay Piramal negotiate such a fantastic deal?

Obviously, he wasn’t forthcoming, but talk of Pfizer, Sanofi-Aventis and GlaxoSmithKline being in a bidding race must have certainly helped.

Why is Abbott paying so much? Clearly, the plan is not just to grow domestic business, as it said, points out an analyst, not wishing to be named.

“And this may not be the last of the acquisitions made by Abbott either. They could also try to grow the Piramal generics portfolio by branding it.”

At the end of it, the winner remains Ajay Piramal.

“He has played his cards superbly. He never entered into generics like Dr Reddy’s and therefore is not in trouble on that score,” said an analyst, not wishing to be named.

And he has certainly left peers salivating.
With Reuters