indian pharmaceutical industry_final presentation

8/3/2019 Indian Pharmaceutical Industry_Final Presentation

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India is among the fastest growing pharmaceutical markets in the

world. The size of the Indian pharmaceutical industry is around $12 billion.

It is expected to grow at an annual compound annual growth rate(CAGR) of 10-11 per cent.

The industry spends around 18 per cent of its revenue on research

and development (R&D).

India is expected to join the league of top 10 global pharmaceuticalsmarkets in terms of sales by 2020 with the total value reaching US$50 billion, according to a report by PricewaterhouseCoopers (PwC).

Indian Pharmaceutical Industry: An Overview



India’s exports of drugs, pharmaceutical & fine chemicals stood at US$

9.26 billion during April 2010–Feb 2011, up 16.15 per cent as comparedto US$ 7.97 billion in the same period during the previous year.

The drugs and pharmaceuticals sector attracted foreign directinvestments (FDI) worth US$ 4.89 billion between April 2000 and

August 2011, according to the latest data published by Department of Industrial Policy and Promotion (DIPP).

Indian Pharmaceutical Industry: An Overview (Contd…)



Indian sector represents 8% of the global industry total by

volume, putting it in 4th place worldwide, it accounts for 13%by value, and its drug exports have been growing 30%annually.

The “organized” sector of India's pharmaceutical industryconsists of 250 to 300 companies, which account for 70% ofproducts on the market, with the top 10 firms representing30%.

Approximately 75% of India's demand for medicines is met bylocal manufacturing.

Indian Pharmaceutical Industry: An Overview



Rank Company Revenue ‘10(Rs. in crs) Revenue ‘10(Rs in bn)

1 Cipla 4,198.96 41.989

2Ranbaxy(Taken over byDaiichi Sankyo in 2008)

4,162.25 41.622

3 Dr. Reddy'sLaboratories

3,763.72 37.637

4 Sun Pharmaceutical 2,463.59 24.635

5 Lupin Ltd 2,215.52 22.15

6 Aurobindo Pharma 2,081.19 20.801

7GlaxoSmithKlinePharmaceuticals Ltd

1,773.41 17.734

8 Cadila Healthcare 1,613 16.13

9 Aventis Pharma Limited 983.80 9.838

10 Ipca Laboratories 980.44 9.8044

Top 10 Pharmaceutical companies inIndia, as of 2010



M&A has been the key strategy adopted by Indian companies to

gain a foothold in the export markets Large Indian companies have increased their foothold in the

regulated markets

Small and medium sized players are focusing on semi-regulated

markets Increased penetration, access to established distribution

networks and increase in buyer confidence due to localizedpresence, have been the key factors driving acquisition led growth

Indian companies preferring theinorganic growth route (M&A)



Reasons for Consolidation inIndian Pharmaceutical Sector

Enhancing revenuethrough global presence.

Greater market share.

Enhanced geographicalexpansion.

Better market access.

Widening productportfolios.

Strengthening R&Dcapabilities.

E.g. Glaxo - SmithklineBeecham merger

Strengthening distributionnetworks



Increasing efficiencies through leveraging economies of scale.

Gaining access to new technologies.

Lowering cost structure.

Establishing new areas in pharmaceutical value chain.

Alleviating regulatory constraints in penetrating overseasmarket.

Through acquiring companies with valid drug licenses.

Reasons for Consolidation in IndianPharmaceutical Sector (Contd…)



Ranbaxy vs Dr. Reddy’s

Ranbaxy

Founded in 1961

India’s largest & oldestpharma company

Taken over by DaiichiSankyo in 2008

Presence in 49countries & serves

customers in 125countries.

Dr Reddy’s

Founded in 1984 by Dr. Anji Reddy

Leading global genericsplayer

Strong foothold in APIs(Active Pharmaceutical

Ingredients)

Market its product in100 countries focusing

on Europe, India, US &Russia.



Business Segments

Segments Dr. Reddy’s Ranbaxy

APIs Yes Yes (Small Presence)

Generics Yes Yes (Large Presence)

Branded Generics Yes Yes

CRAMS Yes No

Research Activities Yes No



Strategic growth pursuit

Ranbaxy’s focus- the generics business and it hasaggressively pursued the same.

Dr Reddy's is more diversified as compared to

Ranbaxy in terms of business segments. It also has a division which takes care of the

contract manufacturing and research business.

Dr Reddy controls its entire value chain as againstRanbaxy which works in it favour.

67% of Dr Reddy's total revenues come from North America, Europe, Russia and the CIS while thatfrom Ranbaxy is 50%.



Strategic growth pursuit (Contd…)

R&D costs for both the companies are almost in a similar range.

But recently, Daiichi Sankyo hived off the new drug discovery research

(NDDR) unit from Ranbaxy. This will bring down the research costquite substantially in the next few years. Dr Reddy's consistently isinvesting 6% plus of revenues in R&D activities.

Ranbaxy was not as successful as Dr Reddy's with its exclusivity opportunities in the US market due to the US FDA finding fault with the

manufacturing standards at two of its plants at Dewas and PoantaSahib.

The company had to shut down these plants and therefore the sales of 30 of its products stopped in the US market.



The DAIICHI – RANBAXYAcquisition Deal



Pre-merger profile of the companies:

The Daiichi – Ranbaxy Deal

-15th Largest

drug maker inthe world.

-MarketCapitalizationof $30 billion.

-Low cost

production.

-

-Largest in the India

-8th in largest in the globalgeneral pharmaceuticals

-Serving in over 125 Countries

-Ground operations in 49countries & Manufacturing in

11 countries.

-2nd largest in Japan

-22nd Largest in the world

-Operations in 50 countries.-Producer of high quality

drugs



Presence in emerging markets for Daiichi-Sankyo (Geographical diversification).

Entry into non-proprietary drugs for Daiichi-Sankyo (Product Extension). Todevelop new drugs to fill the gaps and take advantage of Ranbaxy’s strong areas.

Realization of sustainable growth through a complementary business model. Toovercome its current challenges in cost structure and supply chain.

Acceleration of innovation drug creation by optimizing value chain efficiency.

The acquisition of Ranbaxy by Daichi represents a major entry for the Japanesefirm into the high growth business areas of generic drug. The acquisition showsthat global pharma companies are making efforts to cope up with strong genericdrug makers.

To match the competitor's strategy.

Strategic objectives behind the deal



Nature of the transaction

All cash transaction.

Specific nature of thetransaction – Off MarketTransaction

Acquisition funded throughdebt and existing cash reserves.

The deal was financed througha mix of bank debt facilities

and existing cash resources of Daiichi Sankyo.

Daiichi-Sankyo has taken shortand long term loans of USD 2.6

billion which is almost 50% of the total funding requirementof the deal.



Parties involved

Daiichi-Sankyo

Nomura Securities Co., Ltd.,the Japan headquarteredinvestment bank, acted as theexclusive financial advisor.

Jones Day as the legal advisoroutside India.

P&A Law Offices as the legal

advisor in India. Mehta Partners LLC as the

strategic business advisor, and

Ernst & Young as theaccounting and tax advisor.

Ranbaxy Lab Ltd.

Religare Capital MarketsLimited, a wholly ownedsubsidiary of ReligareEnterprises Limited, is theexclusive financial advisor toRanbaxy and the Singhfamily.

Vaish Associates are the legaladvisors to Ranbaxy and theSingh family



Synergies

Considering that Ranbaxy is

a generics company andDaiichi Sankyo an innovatorcompany, both the businesses complement eachother with negligible

overlap.(Daiichi will supportRanbaxy's R&D efforts andcontract research business)

Ranbaxy provides a low costmanufacturing set-up to

Daiichi Sankyo.



Ranbaxy geographically diversified presence across the globe will

enable it to provide a wider reach to Daiichi Sankyo' productportfolio, including India.

Ranbaxy has a small presence in the Japanese market where thegenerics market holds good opportunities.

The deal strengthened the financials of Ranbaxy (making it debt

free and cash rich) and help it grow aggressively -organic. Ranbaxy bypassed a lot of European and U.S. companies that

were finding it difficult to enter the Japanese market, wheresafety and testing requirements are a lot higher.

This deal made the amalgamated company to be the 15th largest

pharmaceutical company in the world

Synergies (Contd…)



The Deal

Daiichi-Sankyo acquired34.8% stake in Ranbaxy on11th June, 2008

It made an open offer to theRanbaxy shareholders foranother 20%

Picked up another 9.12%through preferentialallotment

It was an all cash transaction. Size of the deal: US$ 4.9

Billion As per the deal, total value of

Ranbaxy was US $ 8.5Billion.



The transactional process



Anticipated benefits of the deal

Daiichi-Sankyo

Strengthen the position of thecompany.

Acquisition will provide lowcost manufacturing.

Market access to over 60countries .

Ranbaxy Lab Ltd.

Company will become one of the top5 in generic business.

Access to Daiichi’s advanced R&Dfacilities.

Access to Japanese drug market

Infusion of an additional $ 1 billioninto the company. Surplus cash of Rs.3,000 crores

flows in. The market capitalization goes to

$8billion & the net worth goes up.



Market reaction to the acquisition,2008

Share price of Ranbaxy rose

by 3.86% to Rs 526.40 onJune 9th

Daiichi Sankyo agreed to pay as much as $4.6 billion for a50.1%stake in Ranbaxy

The stock ended almost flat at

Rs 560.80 on June 11th . June 13- it spiked to Rs 660

and settled at 567.75 points, amere 0.15%. Increase.



Summary of the deal structure



How did Daiichi go about acquiringRanbaxy??



Nature of Transaction Acquisition Consideration (Rs.

in crs)Open market share purchase 7458

Share purchases from foundingfamily

10169

Share purchases by issue of new share

3742

Direct acquisition relatedexpenditure

131

TOTAL 21500

How did Daiichi go about acquiringRanbaxy??

Rs. 21,500 crs (USD 4.9 billion)



Particulars Rs. In crs

Book Value of assets and liabilities (cash, inventory,

etc….)

3470

Inventories (Increase in inventories to fair value) 88

Tangible assets (land) 440

Intangible assets 260

Intangible assets (Increase in current products, etc… to

fair value)

1805

In – process R&D expenses 304

Deferred tax liability -881

Minority interests -1981

Goodwill 17995

Total consideration 21500

Valuation of Ranbaxy

USD 4.01 bn

USD 4.90 bn



Shareholders Pre acq (%) Post acq (%) Change (%)

Singh 34.82 - (100.00) Singh’s family 19.00 - (100.00)

Daiichi Sankyo - 63.92 100.00

Mutual Funds 5.56 2.58 (53.59)

Banks 1.71 0.32 (58.47) Insurance Companies 14.39 9.19 (36.13)

FIIs 12.42 4.41 (64.49)

General Public 12.1 19.53 61.40

Total 100.00 100.00

Shareholding patternPre & Post Acquisition



The deal values Ranbaxy at $8.42 billion

An enterprise value to sales (EV/sales) of 3.5x the estimated earnings for 2008.

An EV/EBITDA of 23x the forward earnings for the current year.It was a very attractive multiple.

Daiichi Sankyo paid about 4.7x Ranbaxy’s sales for the

acquisition, as against2.7x paid by Mylan for Merck KGaA’s generic unit at a price of for $7.6 billion in 2007.

The high valuation was due to Ranbaxy’s strong infrastructure,presence across geographies, a robust product pipeline, includingupsides from the settlements.

Reason for higher valuation



The EPS showed a double fold increase without much of

increase in gross profit which indicated that the reserves &surplus should have been made available accordingly.

The balance sheet of Daiichi Sankyo indicated that thecurrent liabilities had increased to 161% when compared to

current assets which had decreased by (15.43%). COGS significantly decreased in the year 2008 due to the

increase in Purchase of Investments owing to theacquisition.

Impact of the deal on Daiichi’sfigures



Daiichi Sankyo though learnt about the US FDA

Invocation ignored it expecting it to get resolved. Shouldhave estimated the full extent of the legal risk arising outof the US FDA letters.

Lack of proper due diligence. Daiichi, in its eagerness totap the expertise of a generic drug maker, took the risk of buying Ranbaxy for top dollar.

Three weeks after the deal, Daiichi reported currency-exchange losses of nine billion rupees in 2008 owing tothe Goodwill evaluation at the time of acquisition.

Why is Daiichi struggling??Due Diligence



- This is a classic example of anacquirer paying top price withoutlooking too closely at the quality of the goods.

“ Daiichi continues to pay for the huge risk it took in the

deal .”

Stock market verdict“Ranbaxy shares have staged a huge

rally since hitting a low of Rs.133 inMarch 2009, trading at Rs. 465 on

March 14, 2011.”

The Initial Verdict



Stock price movements

Rs.133 on March 2009



Increasing competition in domestic market- Most mid-large size companies beginning to refocus on the domestic

market and invest aggressively.- MNCs clearly stepping up from steady state to high investment phase.

Mid-size companies face question of survival, given… - Drying product pipe lines - post product patent regime (in 2005).- High promotional costs on the back of increased competition.

Alternate business interest of promoters or second generation- Ranbaxy promoters diversifying into healthcare and financial services- Piramals & Dabur Pharma’s Burman family have other interests

Attractive valuations- Piramal– Abbott transaction at 9x sales- Ranbaxy –Daiichi transaction at 5x sales

Reasons for Indian Companies toMerge/Partner



Key reasons for M&A activity:-

Existence of complimentary assets between the localsales force/ process capabilities of Pharma companiesand innovator drugs of MNCs.

Attractiveness of India as a market

Ability to improve the value offered to customers through value innovation.

We also conclude that this trend of M&As will continue inthe near future.

Conclusion



Recommendations/Guidelines forcompanies seeking acquisition

Tap into local/emergingmarkets Sizeable market share in local

market. Presence in otheremerging markets is anadded bonus.

Leaders in higher marginsegments as opposed to lower

margin ones. Companies which are cash

strapped/higher debt- equity ratio due to previousacquisitions.

Leverage process capabilities

Existing ANDA filings.

Previous record of ANDA filings

Number of FDA approved

plants running.



Thank You

indian pharmaceutical industry_final presentation

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