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India market charged with deals

08 April 2010 | News

India market in 2009 has seen a rise of inbound deals both in terms of volume and value. “India is the place to be and every company has an India strategy. Inbound deals in India are either because of geographical expansion or from the CRAMS side,â€? says a Mumbai-based analyst.  

There have been multiple small scale outbound deals but not a large scale blockbuster transaction like the Dr Reddy's Labs acquisition of Betapharm. “There has been an overall contraction of cross-border merger and acquisition (M&A) transactions between 2008 and 2009 in India. The drop in outbound deals was even more visible (30-40 percent). In fact, many Indian companies had to offload their domestic and foreign assets to shore up liquidity,� says Kapil Khandelwal, director, Makven Capital, a niche investment banking and advisory services company.

A quick view across all sectors in 2009 reveals an overall drop in M&A deals in India. Indian companies were involved in a total of 356 M&A deals, which dropped 34 percent as compared to 2008, according to a study by Venture Intelligence, a research service focused on private equity and M&A transaction activities in India.

However, with the global financial crisis beginning to ease, industry observers believe biotech might be the next top acquisition target.for most M&A and private equity deals. A recent study by Grant Thornton, an advisory firm reveals that the sectors where PE firms are most active now are  pharma, healthcare and biotech, along with real estate and infrastructure management, IT and BPO. Analysts predict that in the near future though a large scale outbound acquisition  from India looks remote but this will not stop the flow of small and mid-size deals.

Outbound deal aversion

Most analysts opine that companies are currently on the  wait and watch mode. Navroz Mahudawala, associate director, Transaction Advisory Services, Ernst & Young, says, “Between 2004 and 2007, Indian companies were on a major acquisition spree with Dr Reddy's Laboratories (DRL), Ranbaxy and Wockhardt being in the forefront for outbound deals. Various factors have changed since then.â€?  

Today, Wockhardt is a debt-ridden company trying to raise cash by offloading non-core businesses such as animal healthcare and hospitals, while Ranbaxy is now a subsidiary  of Japan's Daiichi Sankyo Group. DRL has incurred massive losses in its German subsidiary Betapharm. These top Indian pharma companies have now given way to newer rivals in the market-Glenmark Pharma, Zydus Cadila, Lupin and Piramal Healthcare who, however, go in for small outbound deals or brand acquisitions.

Outbound deal sizes today vary anywhere between Rs 45-225 crore ($10-50 million) unlike a few years ago, when Indian companies had ambitious targets of hitting the Rs 2,000 crore ($500 million) plus mark. “Being in the cautious mode, there were few deals across the globe and now there is more of an inbound focus,� adds Mahudawala.

A Venture Intelligence study revealed that in life sciences sector, in 2008 there were 35 outbound deals, 2009 saw a sharp dip to less than half-13 deals to be precise. This coupled with the economic downturn which hit world markets led to credit squeeze. Sujay Shetty, associate director, PricewaterhouseCoopers, says, “Since the markets were down, Indian companies became too cautious and did not want to spend money for any acquisition. The financial slowdown resulted in lack of money and management, and the companies started concentrating on adjustment,   on getting more synergies out of the older acquisitions.â€?

This was a wake up call for many Indian companies. “The global financial crisis and fears of the slowdown in the economic growth activity impacted the valuations of the companies. Many active acquisition-discussions for outbound deals slowed down or literally froze as the expectations of rock-bottom valuation emerged rather than inherent value of the assets. This delayed the deal making and closure activities,� explains Khandelwal.

Indian companies in the CRAMS space, however, have been consistent in their outbound investments over the years, they have strengthened their market position by actively pursuing overseas acquisitions to expand their customer base and this also includes the period of global economic crisis.

“There have been more deals in CRAMS, formulations and generics, but, hardly any in the API segment,â€?   says Mahudawala. Jubilant Organosys acquired Hollister-Stier Laboratories, US, for Rs 550.76 crore ($122 million) in 2007 and Draxis Health, Canada, for Rs 1,182 crore ($262 million) in 2008. These acquisitions have provided Jubilant access to new technologies, expanded service portfolios, global manufacturing and research sites, international regulatory approvals and a ready client network. A KPMG report suggests that private equity firms have invested in Indian CRAMS companies for funding the expansion of their research and manufacturing capacities and for acquisitions. In 2008, Jacob Ballas and New York Life Investment Management invested Rs 194 crore ($43 million) in Themis Laboratories and Baring Private Equity Partners India invested Rs 67.72 crore ($15 million) in Sphaera Pharma.
Outbound deals have also shown a consistency in cases where Indian companies are looking at entering new geographical regions. “Companies that are overexposed to developed markets like the US and Europe, where there is high price erosion or competition, they start looking at other markets like the emerging markets, some look at Africa or Latin America for expanding their presence,â€? adds Shetty. 

Above all, the year 2009 was a year of consolidation and emphasis on increase in sales for Indian companies. This trend, it is said, will continue in the coming years. Dipta Chaudhury, program manager-South Asia and Middle East, Pharma and Biotech Practice, Frost & Sullivan, says, “Though the recession had hit many global companies, performance of Indian companies had remained steady. This, however, required concentrated efforts and also reduced the risk appetite for the companies. With global mergers and acquisitions also taking place, the pharma scenario was unpredictable on an international level. This reduced the scope of deals from India in 2009.� A KPMG report points out that in the near term, the focus will be on consolidation, as the life sciences sector continue to face regulatory barriers, pricing and intellectual property challenge.

Strategic inbound focus
India Inc, now, has an inward focus which means an M&A could happen at two levels – either through domestic acquisitions or being acquired by a foreign company. Mahudawala says, “It is on a case-by-case basis. Most of the inbound deals happened out of financial compulsion or specific strategic decision like the Wockhardt-Abbott and Orchid-Hospira deals.� There is definite activity in the biotech segment, particularly in the vaccine segments. The global H1N1 and other endemics are one of the key drivers for M&A activities to acquire assets and capacity that are attractively valued.

“The reason for increase in inbound deals is simple, larger foreign companies look at India as an emerging power and can add significantly to their numbers. The current trend is that the MNCs are targeting Indian companies that have strong foothold in the local market. So, the deals are not very segment specific. But vaccine market is quite hot these days,� adds Shetty. The Shantha Biotech-Sanofi Pasteur deal that happened last year was a landmark deal with Shantha selling out at eight times their valuation at Rs 3,475 crore ($770 million), as was much unexpected deal of Orchid selling its injectibles business to US-based Hospira in December 2009.

“As the value of the Indian assets and subsidiaries have decreased, the inbound deals become an attractive value proposition for foreign players to increase their stake in their Indian subsidiary, like the deal by Pfizer, or acquire an outright stake into Indian companies.â€?  adds Khandelwal.

Apart from the large scope of the Indian market, the competitive advantage enjoyed by Indian companies is unparalleled in terms of cost, and competency. “In addition, through experience it has been seen that Indian companies enjoy the privilege of understanding the Indian market better than any new entrants.� adds Chaudhury.

The way forward   
Now, the India market is far too attractive and dynamic, and it is driving the growth of global market in several segments. While vaccines are pitched to be the hot pick for deals and transactions, other sectors include medical devices, imaging and diagnostics. “In terms of volume, we can expect deals in the medical devices, life sciences tools, medical equipment and testing and diagnostics segments to be comparably high, but the average ticket size in such sectors will be smaller,� says Khandelwal.

Despite facing a difficult year, margins for most companies have picked up in the first half of 2010 and Indian companies are back on the track of going global. “The economic climate is improving and the funds are available. Valuation overseas is also better than in the domestic market. Indian companies can go out for quick franchisees and businesses,� adds Shetty.

There is scope for a pick-up in the small outbound deals but the focus again will be on domestic consolidation and inbound deals. An outbound deal of over Rs 2,000 crore ($500 million) scale seems highly unlikely. There is a possibility of a large scale deal if the Sun-Taro issue is settled. But, we will see deals mostly in the range of Rs 45-225 crore ($10-50 million). 

“Outbound deals from India will definitely see a rise in the coming years. With Indian companies showing confidence in their business model and expansion plans, they will allocate a certain percentage of their income towards outbound deals. However, most of the large Indian companies in the pharma sector have already invested for establishing offices in across the world and are still integrating their acquisitions,� adds Chaudhury.

Industry watchers are positive that inbound deals will definitely see a surge in the second half of  2010. Talks about two big pharma companies' plan for large scale acquisition in India are doing the rounds. “There are certain factors that may impair too many inbound deals from happening in the coming years such as exaggeration/over evaluation of a company, and quality issues as seen in the case of Ranbaxy),â€? adds Shetty.

Experts, however, caution. Market analysts believe that as of now there are very few sellers from India because of expectations reaching higher levels. While commenting on the market scenario, CEO of a top pharma company, says, “Indians become unrealistic when it comes to valuation of their assets. This might prove to become a hindrance to inbound deals�.

Outbound/Inbound deals
M&A transactions in HLS sector
Year No of Deals Amount ($ M )
2009 41 $2,101m across 19 deals with announced value
2008 67 $5,692m across 33 deals with announced value

Inbound M&A transactions in HLS sector
Year No of Deals Amount ($ M )
2009 13 $1,770m across 11 deals with announced value
2008 4 $4,898m across 3 deals with announced value

Outbound M&A transactions in HLS sector

Year No of Deals Amount ($ M )
2009 13 $113m across 5 deals with announced value
2008 35 $490m across 11 deals with announced value
Source: Venture Intelligence

Millipore Corp, US
Millipore, India
Majority stake in their Indian subsidiary
Aurobindo Pharma
Trident Life Sciences
Merger with wholly owned subsidiary
Merck KGaA
(through Merck Specialities)
Bangalore Genei (India)
Sanmar Group's company that specialises in developing products for proteomic and genomic research
IDL Specialty Chemicals
Fully-owned subsidiary of Gulf Oil Corporation
PerkinElmer, Inc
Surendra Genetic Labs
Acquired the genetic screening business
Serum Institute
Orchid Chemicals
Open market stake buy out
Purchase the nutritional business of Wockhardt
Sanofi Pasteur
Shantha Biotech
Acquisition of Mérieux Alliance's French subsidiary, ShanH, which owns a majority stake in vaccine company, Shantha Biotechnics
Daiichi Sankyo
Zenotech Laboratories
Open offer to increase stake
Pfizer, USA
Pfizer India
Open offer to increase stake
Ambalal Sarabhai Enterprises
Suvik Hi-tek
Stake acquisition
Zandu Pharmaceutical Works
Increase stake in the company
Pharma Dynamics
Majority stake in the company
Panacea Biotec (through its
subsidiary Kelisia Holdings)
Pharm Athene Inc
Stake in the company
Matrix Laboratories
Fine Chemicals Corp
Increased the stake in the company to 100%
Perrigo Company
Vedants Drugs and Fine Chemicals
Majority stake in the company
Cadila Pharmaceuticals
JV formed under CPL Biologicals to manufacture vaccines
Kerala Ayuveda
Arya Vaidya Pharmacy
Acquired animal health division
Lindopharm GmbH, Germany
Acquired German business Esparma of Wockhardt
Pfizer Animal Health
Vetnex Animal Health Limited
Exit by ICICI Ventures
Lanxess AG
Gwalior Chemicals
Acquired chemical businesses and assets
Camlin Fine Chemicals
Sangam Laboratories
Entry into the alternative medicine space
Novartis AG
Novartis India
Open Offer to increase stake
Generic Health
Increased stake from 30% to 50%
Biovel Lifesciences
Entry into vaccines business

"The global financial crisis and fears of the slowdown in the economic growth impacted the valuations of the companies. This delayed the deal making and closure activities"
- Kapil Khandelwal, director, Makven Capital

“Between 2004 and 2007, Indian companies were on an acquisition spree with Dr Reddy's Laboratories, Ranbaxy and Wockhardt being on the forefront for outbound deals. Various factors have changed since then"
- Navroz Mahudawala, associate director, Transaction Advisory Services, Ernst & Young

"The reason for increase in inbound deals is simple, larger foreign companies look at India as an emerging power and can add significantly to their numbers. The current trend is that the MNCs are targeting Indian companies that have strong foothold in the local market�
- Sujay Shetty, associate director,  PricewaterhouseCoopers

"Outbound deals from India will definitely see a rise in the coming years. With Indian companies showing confidence of their business model and expansion plans."
- Dipta Chaudhury, program manager, Pharma and Biotech Practice, Frost & Sullivan

Nayantara Som
(Inputs: Jahanara Parveen & Rahul Koul)


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