Consolidation in the Indian pharmaceutical industry

Whether M&A activity has really caused consolidation

Group 5
(0165/49) Mandar Korlahalli
(0317/49) Sharat Marar
(0327/49) Siddharth Kumar
(0340/49) Srikanth Lingamneni
(0389/49) Venugopal Bidarhalli
(0402/49) Pramod Waghamode
(4006/19) Ajay Bagaria
Agenda
Project overview
Indian pharmaceutical industry overview
Analysis of M&A activity
Analysis of market concentration
The international scenario
Conclusion

8/8/2014 Group 5 2
Project overview
Project scope
The scope was limited to deals done by or of an Indian company post 2000
Research
methodology
The research was divided into the following parts: industry analysis, M&A trend, market
concentration trend, developing an explanation for concentration trend using the M&A
analysis and finally comparing the results with the international scenario
Data sources
Bloomberg and ACE for industry and company specific data about M&A deals, annual
revenue figures of all the players in the industry, patent expiry data, FTF and ANDA
approval pipelines etc.
CRISIL and ICRA reports were used as sources of secondary research. Data for patent
expiration was obtained from the US FDA website.
Limitations and
scope for
further analysis
Many M&A deals have undisclosed consideration amount and hence data pertaining to
those deals were not included in the analysis.
Drug pipeline data for specific companies over the decade was not available.
8/8/2014 Group 5 3
INDIAN PHARMACEUTICAL INDUSTRY OVERVIEW
Market, Performance drivers, Timeline
8/8/2014 Group 5 4
Indian pharmaceuticals: A USD 32 billion industry
Market segments

Generics

API
Industry overview M&A activity analysis Concentration trend International scenario
0.00
20000.00
40000.00
60000.00
80000.00
100000.00
120000.00
140000.00
2000 2005 2010 2015
I
N
R

(
m
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Sales growth
Company Ranbaxy Dr Reddys Sun Pharma Lupin Cipla
12 (% market
share)
10.86 8.55 6.99 6.17 6.12
8/8/2014 Group 5 5
Drivers: Patent expiries, generics penetration, regulations
Patent expirations
Most Indian firms operate
in the generic drugs
segment
This advantage is
substantial when the
companies enjoy exclusive
rights
Industry overview M&A activity analysis Concentration trend International scenario
Generics penetration
Opportunity: Generic
penetration in Europe has
been low
Regulatory norms
FDI Norms
Patents Act

0
50
100
150
200
250
US Patent expiration
Number of patents expiring Number of exclusivity rights
8/8/2014 Group 5 6
Timeline
Industry overview M&A activity analysis Concentration trend International scenario
Patent Control Build Capability Control Relaxation Post Patent Regime
Indian Patent Act, 1970
Process Patent
Abolished product
patent
Increase Exports
Low cost structure
Reverse Engineering
Increased interest from
MNCs
Helped cost cutting
Product Patent Act, 2005
Abolished Process Patent
Implement VAT
Shift: Excise duty to MRP
Drug Price Control Order,
1970
Price Control of all bulk
drugs

Renewed interest from
MNCs
Lower tariff barrier
Relax FERA
regulations
Growth & Competition
Average growth of 12%
Declining profits: rise
of share of generics
Implement Schedule M
Necessitated compliance
cGMP specification

Growth of small scale
units
Low Entry Barrier
Incentives to SSIs
Increased Competition
Number of
companies increased
to 20,000
Interest in generic
markets
Manufacturing &
Marketing JVs
Stronger brands
Export significance
Major player in CRAMS
One- third of ANDA
approvals by Indian
Companies
1970 - 1979 1979-1995 1995-2005 2005-2013
8/8/2014 Group 5 7
AN ANALYSIS OF MERGERS AND ACQUISITIONS BY
INDIAN PLAYERS
Overview, M&A activity of top 10 players
8/8/2014 Group 5 8
Overview of M&A activity
Acquisition of foreign companies by Indian
companies
MNCs acquiring Indian firms Post Patent
Number of M&A deals vs Value of deals
Industry overview Concentration trend International scenario M&A activity analysis
8/8/2014 Group 5 9
Industry overview Concentration trend International scenario M&A activity analysis
8/8/2014 Group 5 10
Year Sum of Announced Total
Value of Deal (USD
million)
2000 198.91
2001 913.29
2002 395.92
2003 180.74
2004 493.06
2005 622.54
2006 2275.04
2007 1160.81
2008 5696.76
2009 842.31
2010 6081.7
2011 1850.37
2012 3143.8
2013 542.82
Grand
Total 24398.07
Surge in number of deals and value of
deals post 2005 product patent regime
Industry overview Concentration trend International scenario M&A activity analysis
8/8/2014 Group 5 11
Major Reasons
Diversification into a different business in the value chain (vertical
integration)
Expanding Current portfolio
New Drugs for different ailments
Drugs with different methods of intake
Industry overview Concentration trend International scenario M&A activity analysis
8/8/2014 Group 5 12
Reasons for Cash Deals
Huge cash pile in MNCs due to declining R&D expenditure
Foreign players not interested in Indian stocks
Asset Sales typically cash deals
AN ANALYSIS OF INDUSTRY CONCENTRATION
Concentration trend, Reasons for trend
8/8/2014 Group 5 13
HHI has dropped since
2002
Halved from 800 to 400
in 2012
Concentration has gone down
Top 10 market share
Industry overview M&A activity analysis International scenario Concentration trend
HHI Deal structure
Share of subsidiary
revenues in
consolidated income
has risen significantly
(15% to 32%)
True for all players in
the market
Subsidiary revenues
Market shares for the top
10 players in the industry
has dropped from around
70% to 58%
0
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8/8/2014 Group 5 14
Reasons for counter-intuitive trend: Slow growth of top players
Indian industry growth rate: 20-21%
Growth of top 10 of 2002: X%
The smaller firms in the industry have increased their market share to almost 10%
from virtually 0%
8/8/2014 Group 5 15
Industry overview M&A activity analysis International scenario Concentration trend
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
Market shares
Top 10
10-20
20-30
30-40
Rest
Industry Growth
rate
# deals Value of
deals
Ranbaxy Laboratories Ltd. 14% 20 447.19
Dr Reddys Laboratories Ltd. 20% 17 895.48
Piramal Enterprises Ltd. 7% 25 1852.92
Aurobindo Pharma Ltd. 15% 10 9.67
Glaxosmithkline Pharmaceuticals 10% 3 888.51
Lupin Ltd. 22% 12 54.61
Cadila Healthcare Ltd. 21% 26 199.22
Wockhardt Ltd. 19% 7 446.02
Pfizer Ltd. 0% 5 257.07
Sun Pharmaceutical Inds. Ltd. 28% 16 1075.19


Reasons for counter-intuitive trend: industry factors
Primary driver: patent expiries -> Indian companies can then produce generics
Abbreviated New Drug Approvals (ANDA) -> required to produce generic versions
of drugs
Sun Pharmaceuticals has double the number of ANDA approvals as compared to
the top 2 players in the industry (Ranbaxy and Dr. Reddys) who constitute 20% of
market
FY 2007: Dr. Reddys -> 168% revenues growth; Reason: Exclusive rights to 2 drugs
+ German Acquisition
Industry overview M&A activity analysis International scenario Concentration trend
8/8/2014 Group 5 16
Reasons for counter-intuitive trend: M&A among smaller firms
Smaller players werent left out in the M&A activity
Market share of these companies: just above 40%; yet the value and number of
deals in both cases is quite significant.
Industry overview M&A activity analysis International scenario Concentration trend
0
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10000
12000
14000
Top 10 Rest
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Cumulative Adjusted deal value
Number of deals (secondary axis)
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Top 10 Rest
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Cumulative deal value
Number of deals (secondary axis)
8/8/2014 Group 5 17
THE INTERNATIONAL SCENARIO
Consolidation in the US & in Western Europe
8/8/2014 Group 5 18
Consolidation in US pharmaceutical industry
Trend:
Similar concentration trend in the US in spite of M&A activity
Reason:
Earlier: 1-2 players > 25 % market share but now industry has
more number of players with 5-10% market share .
Growth of top firms < market growth rate.


Industry overview M&A activity analysis Concentration trend International scenario
8/8/2014 Group 5 19
0
1
2
3
4
20-30% 15-20% 10-15% 5-10%
2004
20-30% 15-20% 10-15% 5-10%
0
1
2
3
2007
0
1
2
3
4
5
20-30% 15-20% 10-15% 5-10%
2012
Consolidation in Western European pharmaceutical firms
Trend:
Falling HHI until 2010 and sharp rise after that
Reasons:
High M&A activity in pharmaceutical industry in Europe
In 2012 NOVO NORDISK had nearly 23%
Industry overview M&A activity analysis Concentration trend International scenario
8/8/2014 Group 5 20
0
1
2
3
4
20-30% 15-20% 10-15% 5-10%
2004
0
1
2
3
4
20-30% 15-20% 10-15% 5-10%
2007
0
1
2
3
4
5
20-30% 15-20% 10-15% 5-10%
2012
Conclusion
Indian pharmaceutical industry: high growth rate of about 19% (CAGR) over the
last decade.
More than 500 M&A deals were executed for various reasons, mainly geographical
expansion and diversification.
Concentration level of the industry has actually gone down over the past decade
as measured by HHI and sum of market shares of top four and twenty five
companies.
Reasons:
Innate structure of the industry
Very high growth rates of smaller players
Significant number of M&A deals executed by smaller players
8/8/2014 Group 5 21