Buyouts that worked and those that didn’t

It’s been an exciting journey for the Indian pharma industry, punctuated by landmark inbound and outbound acquisitions over the last two decades. Even as multinationals aggressively pursued the Indian market, home-grown companies, attracted to opportunities overseas, widened their global footprint.

The shopping list for Indian companies ranged from select brands and manufacturing assets to buyouts of entire companies. Now looking back at these acquisitions, did Indian companies shop smart? Not all of them.

Most acquisitions are made after assessing the target company’s profit potential. But acquisitions failed to pay off when surprise regulatory changes derailed plans. Budgeting for these may have helped companies take wiser decisions.

Hit by regulation

Dr Reddys Laboratories’ acquisition of the Germany’s fourth largest generic drug maker Betapharm is a classic example. It was among the largest deals in the Indian pharma history. The company acquired Betapharm for $480 mn (Rs 2,607 crore) in 2006, valuing the company almost three times its trailing sales.

But soon after the acquisition, the German government moved to a tender-driven procurement policy for drugs.

This intensified competition and led to severe pricing pressure on select products. As a result, Dr Reddys had to write down Rs 156 crore as impairment on intangibles within a year of acquisition, with more write-offs over the next few years.

Not just that, subsequent amendments to the healthcare law mandating that patients use low-cost medicines endorsed by their insurance providers, added to the pricing pressure. Revenues from this business are yet to stabilise as the pricing environment remains volatile.

Betapharm’s revenues slid from Rs 809 crore in 2007 to Rs 519 crore by 2012. Over the last five years its profitability has taken a significant beating; from a profit of Rs 171 crore in 2007, the company reported loss of Rs 75 crore in 2011-12. Betapharm accounted for over 5 per cent of Dr Reddys’ consolidated revenues in 2011-12.

To protect its operating margins, Betapharm is in the process of shifting production to India. Currently, the company derives a third of its sales from products manufactured in India and expects to increase this ratio going forward. But any meaningful benefit from shifting manufacturing to India may not accrue in the near term.

Instead, adverse market conditions and pricing pressures are likely to weigh down on Betapharm’s performance in the next 2-3 years. Post the Betapharm experience, the company is going slow on big ticket acquisitions. Dr Reddys is pursuing targets which will provide them access to niche capabilities and technology.

Pricing pressure

Similarly, Biocon’s investment in Germany based Axicorp failed to take off, because of the severe competition and pricing pressure in the German tender business.

However, Biocon managed to divest its 78 per cent stake in Axicorp back to its promoters in March 2011, after clinching a global development and marketing deal with Pfizer.

When most pharma companies were chasing bigger acquisitions to mop up revenues, Lupin took a slightly different approach. It acquired the US rights for cholesterol-lowering drug brand Antara from Oscient Pharma after the latter filed for bankruptcy in September 2009. According to a release by the company, Lupin acquired the brand for $39 million. With three brands currently in its basket, Lupin is exploring inorganic opportunities in the US branded space.

Next to brands, Japan’s potential as a market has been of immense interest to Lupin. Having started off as a tie-up, Lupin’s association with Japanese drug maker Kyowa culminated in a buyout.

The company acquired Kyowa Pharma in 2007 to tap into the country’s $3-billion pharma market.

New launches and ramp-up of existing products helped Kyowa quadruple its sales in the last five years. Cost rationalisation helped Kyowa improve its profit margin by 6.6 percentage points in the last three years.

The company is also pursuing opportunities in niche therapy areas such as ophthalmology and dermatology.

Niche space

Sun Pharma’s acquisition of Israel-based Taro Pharma has been one of the most successful deals in the Indian pharma history.

Sun gained controlling interest of nearly 66 per cent in Taro Pharma after a three-year legal battle with its erstwhile Israeli promoters.

Post acquisition, Taro Pharma has given Sun’s performance a much needed face-lift. With Taro, Sun gained entry into the niche dermatology space. Sun’s strong network complemented Taro’s products portfolio. This helped the company grow revenues by over 29 per cent annually during 2010-12.

Taro’s operating margins surged from 28 per cent in September 2010 to 58.4 per cent by December 2012, making it Sun’s crown jewel. Sun’s investment in Taro Pharma has grown almost five times in the last three years. The company also acquired the US-based specialty dermatology company DUSA Pharma and the generics business of URL Pharma last fiscal.

nalinakanthi.v@thehindu.co.in