A 'Bigger Foothold': What Does the Abbott-Piramal Deal Mean for Indian Pharma?

: India Knowledge@Wharton (http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4484)

A 'Bigger Foothold': What Does the Abbott-Piramal Deal Mean for Indian Pharma?
Published : June 03, 2010 in India Knowledge@Wharton

In May, U.S.-based Abbott Labs secured the top spot in India's growing pharmaceutical industry with its US$3.72 billion takeover of Piramal Healthcare's branded generics business. At the same time, hopes have receded of a wholly Indian pharmaceutical major emerging as a global player. According to Wharton faculty and industry experts, changing global business models and the resources needed to develop blockbuster drugs are propelling Indian companies to join forces with multinationals through strategic alliances or as targets for acquisitions.

The Piramal purchase offers "an incredible strategic platform," according to Michael Warmuth, senior vice-president, established products, in Abbott's pharmaceutical products group. Based in Abbott Park, Ill., Warmuth is responsible for growing his company's global branded generics portfolio. The Abbott-Piramal combine reports to him, but he notes it will be run as a standalone business unit after the merger takes effect later this year. Abbott will pay US$2.12 billion upfront and four annual installments of US$400 million from 2011 for Piramal's healthcare solutions business.

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"We want to expand in emerging markets, and you can't be taken seriously without having a strong or dominating presence in India," Warmuth says. Emerging markets will in the next few years account for 70% of the growth in the global pharmaceutical industry, and India is "an important and critical part" of that, he adds. He expects Abbott's Indian revenues to grow to US$2.5 billion in the next decade, up from the combined company's current revenues of about US$500 million. Also, India's US$8 billion pharmaceutical industry is poised to double by 2015, he adds. Emerging markets will grow by 14% to 17% between now and 2014, compared with 3% to 6% in developed markets, according to an April 2010 report from IMS Health, a research services firm in Norwalk, Conn. The global pharmaceutical industry will add US$300 billion in revenues to reach US$1.1 trillion by 2014, the report stated. The Abbott-Piramal deal is the latest in a wave of consolidation within the global pharmaceutical industry over the past few years. It is much smaller than two of 2009's biggest M&A deals -- Pfizer's US$68 billion purchase of Wyeth and Merck's US$41 billion buy of Schering-Plough. However, Abbott has valued Piramal's formulations business at about eight times sales, which is almost twice that of what Japan's Daiichi Sankyo paid for its US$4.6 billion purchase of a controlling stake in India's Ranbaxy Laboratories in June 2008. "If you want the best companies you will pay a premium; however, we feel it was the right price," says Warmuth of the Piramal acquisition. Incidentally, Daiichi Sankyo took a US$3.5 billion write-off on its Ranbaxy acquisition but has maintained it made the right decision. Wharton management professor Saikat Chaudhuri says the relatively higher valuation makes sense for Abbott. "Sure, it is on the higher side, but we are also taking about a lot of potential in these markets and multiple synergies," he says. "There are revenue synergies; the reach of generic drugs could be expanded globally, and Piramal's sales and distribution network can be used to more effectively market drugs that are developed elsewhere. On top of that, India is a growing market." The valuation is appropriate, says Ajay Piramal, chairman of the group's holding company Piramal Enterprises. "It is the best business available in India and has been growing at 25% [annually] in the last
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they have realized that those pipelines are running dry. the Abbott-Piramal deal is primarily focused on the domestic   All materials copyright of the Wharton School of the University of Pennsylvania. "In terms of size.7 billion. "Piramal's 350 products [are] clearly our interest. and there might be considerable competition for them.cfm?articleid=4484) two years. The collaboration includes medicines for pain. among other categories. pharmaceutical industry and other multinationals are looking to get into the branded generics space. The U.8 billion for the same year." Springboard to Global Markets According to Warmuth. the global pharmaceutical industry players have all been trying to diversify their business." Uneasy Amid the Top 10? Globally. In the past few years. "Abbott has a unique challenge. while Abbott India is focused on gastroenterology.upenn. Abbott and other Big Pharma companies face the twin challenges of slow growth in the developed markets and maturing product pipelines that are getting harder to replenish with newer. or make or market them in emerging markets. among other activities. says Piramal.                    Page 2 of 5  . and has popular pharmaceutical brands including the antacid Digene and painkiller Brufen. blockbuster drugs. Warmuth says. they would try and buy major pipelines of blockbuster drugs. You won't be at all surprised that if we evaluate that." Abbott has been operating in India for 100 of its 122 years. So I don't find it that surprising. "In earlier waves of M&A deals. anti-infectives and nutritionals. pain. scale and scope. it is smaller than the other pharmaceutical players." Unlike other pharmaceutical acquisitions that have been targeted at buying Indian generic capacity to service Western and emerging markets. inflammation and anti-infectives.and Piramal is one of the leaders. diagnostic medical devices and services and clinical research. and it is seeking ways to differentiate itself by gaining a bigger foothold in an up and coming market like India. "and I can see a number of reasons for that.S. Now. Piramal's pharmaceutical products span dermatology. It allows Abbott to commercialize two dozen Zydus Cadila drugs in 15 emerging markets." Chaudhuri says.wharton. but that alone is not enough. You have to create a whole organization." In fact. Abbott bought Solvay in its quest to enter emerging markets in Asia and Eastern Europe. "Time is limited. Increased funding expands the scope for drug research. "No Indian company has done that in the last 60 years. and leading Indian companies are attractive -. and we could build on and accelerate that. cancer and cardiovascular." he says. neurological and respiratory diseases. It will. is purely for Abbott's plans to grow its Indian business. The Piramal group has agreed that for eight years after the deal's closing. however. and to add drugs for hypertension and Parkinson's disease." she says of the Piramal valuation." he says. and that takes time. neurosciences and metabolic disorders. 10 days before the Piramal acquisition.A 'Bigger Foothold': What Does the Abbott-Piramal Deal Mean for Indian Pharma?: India Knowledge@Wharton (http://knowledge." Piramal Healthcare focuses on oncology. Abbott announced a licensing and supply deal with Indian pharmaceutical company Zydus Cadila. with product launches beginning in 2012. which is about half of industry leader Johnson & Johnson's revenues of $61. over-the-counter consumer products." Wharton professor of healthcare management Patricia Danzon agrees. metabolic disorders.edu/india/article. other pieces have to fall in place. and are trying to diversify. Piramal on its own has that opportunity. "We have no plans immediately to export Piramal products [to third-country markets] but we will evaluate that. There are a limited number of Indian generics companies that are attractive. [The the Abbott-Piramal deal] puts drug research on a faster track. "It's a higher markup on a smaller base. The Piramal and Zydus Cadila deals are consistent with Abbott's purchase in September 2009 of Belgian drug company Solvay for about US$7 billion. according to Chaudhuri. the Piramal acquisition. it will not enter the business of generic pharmaceutical products in India. at least initially. Abbott also faces the pressure of playing catch-up with its bigger rivals. Piramal notes. "Essentially. Piramal Healthcare also retains custom manufacturing. Indian companies can hope to become truly global pharmaceutical companies only through drug discovery. It ranks eighth in the global pharmaceutical rankings with 2009 revenues of $30. besides vaccines. continue research in drug discovery through an affiliate company.

" But he also sees why that is the case: "It requires a lot of commitment. Dr. "Indian companies don't have the capital required to go into that area of innovation.000. Sanofi-Aventis bought Shanta Biotechnics. "Some of the benefits of having those low-cost locations allow them to export their drugs to the U. and banned some of its drugs. according to Mumbai-based business magazine Business India.edu/india/article.S. but I would expect MNCs doing acquisitions in India to partner with companies that do have facilities approved by the FDA or the EMEA (European Medicines Agency)." says Chaudhuri. the West continues to dominate pharmaceutical innovation. and companies in India and other emerging markets could play a supportive role." "It is like a reality check for Indian pharmaceutical companies. Abbott competed with other suitors for Piramal Healthcare's branded generics business. "I don't think these sorts of mergers are driven primarily by a desire to sell in India. she sees a bigger agenda for Abbott." Abbott would get Piramal's manufacturing facilities in Baddi in Himachal Pradesh state. he adds that he expected some of them to become true global pharmaceutical players. Dr. she cautions that "it is most effective for drugs that are moderately priced. As Ranbaxy. Changing Business Models -. says Danzon. referring to the financial resources and expertise in newer-age drugs based on biologics research.] why toil and struggle with this. Food and Drug Administration charged the Indian company with numerous violations on quality and safety fronts." he says. and there is some patriotic sentiment in that. adding. He doesn't expect to face the kind of problems Daiichi Sankyo found itself in after its Ranbaxy acquisition. [Otherwise. Warmuth says Piramal's manufacturing standards and capabilities meet global regulatory standards. He visualizes how an Indian pharmaceutical entrepreneur might weigh the pros and cons of growing globally in today's environment: "If you have the scientific base and the resources. I don't see any of these promoters interested in the long haul.. say a few billion dollars. "It's about getting access to manufacturing capabilities and a portfolio of products that can be sold in other emerging markets. Several other deals occurred over the past one year." To be sure. or other developed countries." In fact. it is recognition of the fact that growth in healthcare will come from emerging economies. However. then maybe we can talk." she says. the Dabur Group had sold a 74% stake to Fresenius Kabi of Singapore for about US$200 million.wharton. for about US$788 million." referring to Piramal retaining select portions of its business including diagnostics and contract manufacturing facilities. given how health care reform is on the anvil in many countries and cost containment pressures will be even greater?" He adds: "Let's go to something that is booming." says Danzon. "Big Pharma will stay big only by selling its wares in India and China. much like Infosys and Wipro Technologies in IT Services." the magazine said in an editorial. These other   All materials copyright of the Wharton School of the University of Pennsylvania. Reddy's Labs and other Indian drug makers made inroads into developed markets with generics. but with a patriotic tinge." India certainly offers a large and growing domestic market with rising incomes and increasing health insurance coverage.. when the U.and Commitment All the same. which according to media reports included Pfizer. "There are risks.A 'Bigger Foothold': What Does the Abbott-Piramal Deal Mean for Indian Pharma?: India Knowledge@Wharton (http://knowledge.upenn.cfm?articleid=4484) market. "Indian firms that had the potential and were leaders in generics have not been able to pull it off.                    Page 3 of 5  . Sanofi-Aventis and GlaxoSmithKline. whose recent triumphs include several international acquisitions and the Nano small-car brand). bringing the combined entity's workforce to about 7. and about 5. according to Danzon. a vaccine maker in Hyderabad. The potential to expand with very high priced specialty products is seriously limited. The industry has been buzzing with talk of Big Pharma companies like Pfizer and GlaxoSmithKline courting Indian companies like Cipla.000 employees. Earlier. unlike Azim Premji (who heads software services major Wipro Technologies) or Ratan Tata (head of the Tata Group.S." says Chaudhuri."The deal is intended to consolidate Abbott's toehold in India. "I am disappointed. Chaudhuri acknowledges those new realities. Reddy's Laboratories and Torrent Pharmaceuticals.. "Ranbaxy was the first [to sell out]. That is one reason pharmaceutical multinationals are doing deals with the relatively small number of well established Indian companies that have met international standards in manufacturing. biotech and pharmaceutical innovation is capital intensive.

" she says. according to Danzon." she adds. The earlier regime recognized patents on pharmaceutical processes but not on pharmaceutical products." he says. Warmuth is unfazed by the imponderables he may face in Abbott's India quest.upenn. the prices could be as much as 30% lower than the originator drug. she adds." A key differentiator here is that unlike in the U. sold through sales forces and marketed to physicians. but about how we maximize the opportunity.A 'Bigger Foothold': What Does the Abbott-Piramal Deal Mean for Indian Pharma?: India Knowledge@Wharton (http://knowledge. "That means putting a lot of domestic companies out of business. in the U. she says. "Right around that time. custom reprints. Against that backdrop.S. For consumers. companies like Abbott and others getting into new generic drug markets must be watchful of the changing lay of the land there as well." according to Danzon." Danzon says. "it doesn't make sense" to pay high prices for generics companies. and developed markets and their search for other sources of innovation. it is a tough thing to do in an emerging market. posters or plaques. they require them to have roughly the same active ingredients. But that is also changing. and one way they try to do that is by expanding the use of generics." However. a couple of acquisitions of generics companies in recent years have "turned sour" as regulatory agencies changed the rules of the game in favor of lower-cost drugs. Mexico. The takeaway for Abbott and others eyeing the global generics business is that "other countries will eventually evolve towards the cheaper. you don't need a big sales force. please contact PARS International: reprints@parsintl. is in the process of changing its regime to require generics to be bioequivalent. unbranded drugs dominate the generics market. it is about how we take full advantage of the opportunity.S.S." This is a single/personal use copy of India Knowledge@Wharton.cfm?articleid=4484) recent triumphs include several international acquisitions and the Nano small-car brand).wharton. allowing companies to reverse-engineer copies of the branded and patented drugs of western companies. and are really like branded drugs. whereas in the U. for example. branded generics model. so politically and economically. model. the great value in generics is getting it cheaper. It makes a lot of sense if they can pull off all the integration issues. It is not so much a concern about the downside.                    Page 4 of 5  . branded generics command relatively high prices and margins. "All countries are trying to control their health care spending. "price is a key factor. she says.   All materials copyright of the Wharton School of the University of Pennsylvania.edu/india/article.S. Reddy's Laboratories' 2006 acquisition for US$570 million of German generic drug maker Betapharm of Germany as one that was caught in the midst of regulatory changes.. fairly high priced market to one that was in direct contracts with insurance companies. A big chunk of Betapharm's valuation was for its sales force. These other players are not even interested in doing that. the regulatory regimes in many countries including India do not require generic drugs to be bioequivalent to the originator products. "With Piramal. Danzon points to Dr. so if they want to go into the R&D side. the rules of the game for Indian companies changed dramatically after India strengthened its patent laws in 2005 to comply with the World Trade Organization's rules on intellectual property rights.. they need the capital and the expertise the MNCs can bring. they can be 80% or 90% lower." Danzon adds that the emerging business plan for generics companies is essentially around selling to pharmacists. "Their old model can't work anymore. according to Danzon." Along with desire. (212) 221-9595 x407. there will always be concerns.com P. not physicians. and not physicians." Abbott may have to confront that if and when the rules change in India. "That transition is the next evolution for generics." Danzon says. Also. "You have to be very skilled at it to survive and have very good controls on cost processes. from the standpoint of the MNCs. which is intensely price-competitive and one where decisions are taken by pharmacists. They don't seem to have that type of desire. with the drying up of R&D productivity in the U. but with generics companies. "In many countries. the German generics market was transforming from a physician-driven." Regulatory Detours However. she explains. [acquisitions like that of Piramal are] a cost-effective way to bring in a portfolio of branded generics." In the branded generics model. "A lot of things make me stay up at night. "At the same time. For multiple copies. e-prints. "And they get much more bang for their buck if they get cheap generics.

edu/india/article.cfm?articleid=4484)   All materials copyright of the Wharton School of the University of Pennsylvania.A 'Bigger Foothold': What Does the Abbott-Piramal Deal Mean for Indian Pharma?: India Knowledge@Wharton (http://knowledge.wharton.upenn.                    Page 5 of 5  .