Indian pharmaceuticals sector witnessed 51 deals being announced in the year 2016, with aggregate disclosed deal value of $4.6 billion. Unlike the trend in the previous years, outbound and domestic transactions drove most of the deal activity this year with 21 deals in each of these category, shows an EY report titled Transactions 2017.
According to the EY report, the outbound and inbound activity in 2016 stood at $2.1 billion each and the domestic deal-making was concentrated in smaller value bands with an aggregate deal value of $342 million. Out of the total domestic deals, $272 million worth of deals were restructuring transactions. There were at least 4 deals in this nature in the year under review.
An EY pharma deals expert expect that the year 2017 would be again a good year for outbound deals.
“2017 could be a good year for outbound deal activity from India to the US, given the present state of the US pharma sector and valuations. Domestic consolidation could continue on a sporadic basis, the pace of which will always be set by succession and value unlocking considerations, even as business fundamentals such as price controls and thinning product pipelines start playing an increasing role,” said V Krishnakumar, M&A Partner (Pharmaceuticals), EY India.
This could be a good year for private equity buyouts in India, as inbound strategic interest is selective, added Krishnakumar.
Considering industry sub-segments, sterile injectables led the pack in 2016 with nearly $2 billion of deal value, followed by other generic formulations with an aggregate deal value of $1.6 billion. There were two deals in the CDMOs/CROs segment worth $258 million, and 7 relatively smaller deals (worth $42 million) in the biotech segment.
Two large inbound sterile injectable deals announced this year included China-based Shanghai Fosun Pharmaceutical (Group) Company Ltd acquiring an 86 per cent stake in Gland Pharma Limited for up to $1.26 billion and US-based Baxter International Inc acquiring Claris Injectables Ltd, a wholly owned subsidiary of Claris Lifesciences Ltd, for $625 million. Both these deals have been in the making for a long time.
Indian pharma majors continued their quest for market and product expansion overseas the trend of comparatively larger (by Indian standards) overseas acquisitions that was kicked off in 2015 continued in the year 2016 as well.
Indian players continued to look for access to under-penetrated markets and expand their product offerings. The major outbound deals announced during the year includes Intas Pharmaceuticals Ltd, through its wholly owned subsidiary Accord Healthcare Limited, entered into an agreement to acquire Actavis UK Ltd and Actavis Ireland Ltd from Teva Pharmaceutical Industries Ltd for an enterprise value of $767 million.
The other deals in 2016 were Dr. Reddy’s Laboratories’ agreement with Teva Pharmaceutical and an affiliate of Allergan plc to acquire a portfolio of eight ANDAs in the US for $350 million, Sun Pharma’s foray into the Japanese prescription market by acquiring 14 brands from Swiss drug firm Novartis for $293 million and Lupin Ltd’s expansion in Japan by acquiring 21 products form Shionogi & Company Ltd for $150 million.
A bunch of smaller deals were also announced by Indian pharma companies in the emerging markets last calendar year. These include, Sun Pharma’s transaction, through its wholly owned subsidiary, to acquire 85.1 per cent stake in Russia-based JSC Biosintez for $60 million, Strides Shasun’s acquisition of a 51 per cent stake in Australia-based Generic Partners for $17.7 million. In another transaction, Strides Shasun had also announced the acquisition of majority stake in Kenya-based Universal Corporation for $14 million.
The recent change in Foreign Direct Investment (FDI) regulations, according to EY report, also augurs well for deal sentiment, given that, brownfield investments of upto 74 per cent (as against 49 per cent earlier) are now allowed under the automatic route. Indian players continued to look for access to under-penetrated markets and expand their product offerings.
The report said that India continues to enjoy a prominent position in the global generic pharma space, due to the large number of US FDA approved sites coupled with low capex and operating costs.
While, the consultant remained cautiously optimistic on the US-India inbound deal corridor at this time. The recent policy announcements made in the US on drug price controls, bidding processes for generics, a potential “border adjustment tax”, and degrees of outsourcing/ offshoring by US Pharma companies has created some sort of uncertainties.
“While it is true that India continues to offer competitive advantages to US pharma companies as a development and manufacturing base for generics, it remains to be seen as to what impact the aforementioned policy related announcements might have on inbound deal sentiment in the short to medium-term,” the report said.
On the other hand, 2017 might be a promising year for outbound activity from India to the US, given that US valuations have significantly corrected and there aren’t too many US-based acquirers with adequate financial strength. This presents Indian pharma companies with a much needed opportunity to step in and close portfolio gaps at reasonable prices.
While the Japanese government has been vocal on the need for broad-based introduction of generics, it is yet to reflect at a ground level. Nonetheless, we believe that the opportunity will open up in the medium to long term. This promise continues to inspire Indian pharma companies to build/consolidate their positions in Japan, it added.
Back home, domestic consolidation in the industry will continue. The pace of such consolidation, as always, will continue to be dominated by succession and wealth diversification related considerations, even though business fundamentals such as price controls and the lack of product pipelines will also play its part, the report said.