If you can't beat them, join them, seems to be the strategy that's driving global pharmaceutical companies to ink deals with Indian pharma companies.
Faced with unimpressive growth prospects back home, global pharma is now increasingly forging tie-ups and alliances with domestic companies. The recently announced joint venture between US-based Merck (MSD) and India's Sun Pharmaceuticals is one such. Earlier, companies such as Pfizer Inc., GlaxoSmithKline plc and Bayer had sealed similar deals with Indian drug makers such as Dr Reddy's, Aurobindo Pharma and Cadila Healthcare respectively. The Sun-Merck deal, therefore, only reiterates this trend.
The trend, though not new, highlights the strong growth prospects that emerging markets, including India, have to offer. Sluggish prescription trends, pricing pressure, intensifying generic competition and pipeline failures in developed markets are expected to restrict the growth of global pharma market to mid-single digits through 2014, the pharmerging markets (includes 17 countries) in contrast, are estimated to grow 14-17 per cent in the same period, according to IMS Health.
What Indian drug makers also have on offer is a distribution network and brands in the domestic market and proven low-cost manufacturing capabilities. In the Sun-Merck deal, the latter gets ready access to Sun's expertise in innovative product development under SPARC and its strong manufacturing infrastructure.
The trend, however, isn't by any means one-sided. The domestic pharma companies too are positioned to benefit from the marketing prowess and experience, not to mention the deep pockets of MNCs. For instance, in the Sun-Merck deal, Sun will benefit from the latter's marketing expertise, competence in product development (clinical trials as well regulatory approvals) and its presence in emerging markets outside of India.
While the financial details of most such deals – GSK-Dr Reddy's, AstraZeneca-Torrent, Abbott-Cadila and the more recent Bayer-Cadila and Sun-Merck – haven't been made public, there is no denying that the Indian counterparts stand to gain, though mostly over the long-term, by way of royalty and milestone payments. Take the case of Pfizer-Aurobindo licensing and supply deal struck in May-2009. The deal had come at a time when the latter was somewhat strapped for cash. Aurobindo has since benefitted from steadier cash flows. Moreover, such deals give Indian companies a short-cut access to global markets, which otherwise would have taken a lot of time to build. And even if they managed to, survival would have been a challenge.
Not on sale
An interesting sidelight here is that global pharma in some of its recent deals (such as Cadila-Bayer, Biocon-Pfizer and Merck-Sun) have chosen to forge alliances with the Indian companies instead of part-purchasing or acquiring stakes in them. Even though it may be too early to tell, the high valuation benchmarks set by the Ranbaxy-Daiichi and Piramal Healthcare-Abbott Laboratories deals could have been an influence here.
Considering that there aren't too many ‘good acquisition bets' now available in the domestic market, the asking price for acquisitions would be not come cheap. By partnering their way into emerging markets, global companies can circumvent the valuation imbroglio and avoid high payouts as well as risks.