FINANCIAL RATIONALE BEHIND ABBOTT PIRAMAL DEAL

The deal between US Pharma giant Abbott and Piramal Healthcare

involved the purchase of latters Healthcare Solutions unit for $3.72
billion. According to the agreement, the purchase of assets was
through a $2.12 billion up front payment with $400 million annual
payments for four years beginning 2011. The deal not only made
Abbott the largest pharma company in India but also bolstered the
emerging markets growth for the company.
The deal resulted in Abbott becoming the market leader in India
with a 7 percent stake in the market. According to market analysis,
the pharma sector sales were as high as $8 billion in 2010 and were
expected to double by 2015. Analysts from Abbott predicted that
the resulting deal with Piramal Healthcare will help the firm grow at
20 percent year on year and the sales will reach $2.5 billion by
2020.
The deal with Piramal was not the first acquisition for Abbott as it
had purchased Belgian chemical giant Solvay in September 2009,
which allowed it to strengthen its presence in emerging markets in
Asia. The deal also allowed Abbott a control to the Indian subsidiary
of Solvay, Solvay Pharma India.
The main reasons for Abbotts purchase of Piramal can be identified
as follows
1. Reduction in expenses in forms of approvals from regulatory
authorities, which is also a time consuming process.
2. Abbott gained access to markets of Tier 3 cities, where it
was not present and along with this it was able to leverage the
sales force of nearly 7000 employees of the combined entity.
3. Abbott had revenues of about 950 crores from India and was
at 18th position in the Indian Pharma market. The deal saw
Abbotts revenues rising through to 2950 crores in a short
duration and allowed the firm to reach the paramount position
in the Indian pharma market.
4. Other advantages for Abbott include
a. Lower Production Costs Production costs in India are
nearly 50% lower than those in US
b. Plant construction costs (FDA approved) are lower in
India (30-50%) as compared to US
c. Manpower costs in India are nearly 1/10th of those in US.
Thus the acquisition resulted in reduction of nearly 90%
of production costs. (The cost savings are applicable

across all hierarchical levels i.e. from operators,

research scientist etc.)
d. Savings in Raw Materials Bulk drugs in India can be
manufactured at 40-50% of the ethical costs as
compared to US. A lot of raw materials are available
locally thus reducing the manufacturing costs. Also, the
Excipients and Intermediaries are sourced locally at 2030% lower costs.
Piramals plans for Deal Proceeds
1. Piramal paid capital gains tax of 22%
2. The firm used the balance to pay off 1300 crore debt
3. The remainder was available for providing funds to expand
existing businesses and for undertaking new businesses
4. Piramal sold branded generics and retained the technology
driven businesses.
EPILOGUE
Today Global pharmaceutical companies are no longer looking at
acquisition merely as a tool to achieve cost optimization but as a
means to grow through portfolio expansion as they face the
mounting pressure of several drugs going off patent in matured
markets. The deal between Piramal and Abbott is considered to be
as one the most successful deals in the Indian Pharmaceutical
industry. Both the parties were in a win-win situation at the
completion of the deal. From Abbotts point of view, it got access to
all the Piramals branded drugs. It bolstered its growth strategy in
the Asiatic developing regions and got a great market reach. From
Piramals point of view, the biggest advantage was that it got a very
high value for its business and was able to reduce its debt
obligations and besides this they were able to work on the
expansion plans for their other businesses with ease due to the cash
inflow.
The deal also helped bringing in Indian pharmaceutical sector in a
good light after the debacle of Daichi and Ranbaxy deal, where
there was a lack of clarity, undisclosed facts between the two
companies, and a sub standard due diligence for the deal.