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PROJECT ON
MERGERS AND ACQUISITIONS IN
PHARMACEUTICAL SECTOR
SUBMITTED TO:
Dr. VERSHA VAHINI
SUBMITTED BY:
RONAK KARANPURIA
I.D. NO. 534
LL.M. 2ND YEAR
TABLE OF CONTENTS
INTRODUCTION ...................................................................................................................5
UNDERSTANDING THE CONCEPT OF MERGERS AND ACQUISITIONS ............7
MERGERS OR AMALGAMATIONS ......................................................................................................7
ACQUISITIONS AND TAKEOVERS .......................................................................................................7
REGULATIONS GOVERNING MERGERS AND ACQUISITIONS IN INDIA ..........................................................8
CONCLUSION ......................................................................................................................35
BIBLIOGRAPHY ..................................................................................................................37
Page 4
Page 5
medicines and allowed only process patent protection for pharmaceutical inventions. As a
result, Indian companies could produce new medicines which had been introduced in the
international market but were not available to needy patients in India. This made possible the
production and sale of new medicines at affordable prices. These policy initiatives during this
period cumulatively made India not only self-sufficient but also a net exporter of generic
medicines. While the Indian pharmaceutical industry recorded spectacular growth from 1991
till the first half of the 2000s, it is now facing serious threats to its self-sufficiency and ability
to compete in the generic medicines market. Much of which is due to the country's reintroduction, on January 1st, 2005, of a system of product patents; before which, only patents
for processes were permitted to be issued, a fact that had been instrumental in the domestic
industry's huge success as a worldwide exporter of high quality generic drugs. The new patent
regime has also led to the return of the pharmaceutical multinationals, many of which had left
India during the 1970s. Now they are back, and looking at India not only for its traditional
strengths in contract manufacturing but also as a highly attractive location for research and
development (R&D), particularly in the conduct of clinical trials and other services.
Over the last few years, Indian pharmaceutical companies have been increasingly targeted by
multinationals for both joint venture agreements as well as for acquisition. Some of the recent
collaborations include Bayer and Zydus Cadila agreeing to set up a joint venture called Bayer
Zydus Pharma (BZP), for the sales and marketing of pharmaceutical products in India, Sun
Pharma working with MSD (Merck & Co) to market and distribute Merck's Januvia
(sitagliptin) and Janumat (sitagliptin+metformin), Lupin-Lilly agreed to enter into
collaboration to promote and distribute Lillys Huminsulin range of products in India and
Nepal, Biocon-Pfizer JV collaboration to give Pfizer exclusive rights to commercialize Biocon
products globally including co-exclusive rights with Biocon in Gernmany, India and Malaysia,
etc. Some of the Indian pharmaceutical companies that have been acquired by MNCs in recent
times include US$ 4.6 billion acquisition of Ranbaxy by Daiichi Sankyo of Japan, Mylan taking
over Matrix Labs, Sanofi buying Shantha for US$ 783 million in 2008, Abbott of USA buyout
Piramal Healthcare in 2010, Aventis acquired Universal Medicines for over US$ 100 million
etc.
This report highlights the structure, regulatory framework, top market players, competitive
scenario etc. of the Indian Pharmaceutical Industry and presents a review of major Mergers
and Acquisitions in Indian pharmaceutical industry and the reasons of the said mergers and
acquisitions.
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Vertical merger
Conglomerate merger
Page 7
Payment by cash or securities: - As per the proposal, the acquiring company will exchange
shares and debentures and/or cash for the shares and debentures of the acquired company.
These securities will be listed on the stock exchange.
The Act regulates the various forms of business combinations through Competition
Commission of India. Provisions relating to combinations include Section 5, 6, 20, 29, 30 and
31 of Competition Act, 2002. Section 5 of the Act defines combination by providing threshold
limits on assets and turnovers. At present, any acquisition, merger or amalgamation falling
within the ambit of the thresholds constitutes a combination. According to Section 6 of the Act
no person or enterprise shall enter into a combination, in the form of an acquisition, merger or
amalgamation, which causes or is likely to cause an appreciable adverse effect on competition
in the relevant market and such a combination shall be void. A
combination is either a merger of two enterprises or the acquisition of the control, shares,
voting rights or assets of an enterprise or an enterprise that belongs to a group if it meets the
jurisdictional requirements. Although the Act does not expressly so state, the term
combination include horizontal, vertical and conglomerate mergers.
Further, CCI on May 11, 2011 issued the Competition Commission of India (Procedure in
regard to the transaction of business relating to combinations) Regulations, 2011
(Combination Regulations). These Combination Regulations will now govern the manner
in which the CCI will regulate combinations which have caused or are likely to cause
appreciable adverse effect on competition in India (AAEC).
Under the Act, Enterprises intending to enter into a combination have to give notice to the
Commission. But, all combinations do not call for scrutiny unless the resulting combination
exceeds the threshold limits in terms of assets or turnover as specified by the Competition
Commission of India. The Commission while regulating a 'combination' shall consider the
following factors:
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Whether the benefits of the combinations outweigh the adverse impact of the
combination.
Thus, the Competition Act does not seek to eliminate combinations and only aims to eliminate
their harmful effects.
FEMA is regulating the cross border mergers and acquisitions. The foreign exchange laws
relating to issuance and allotment of shares to foreign entities are contained in The Foreign
Exchange Management (Transfer or Issue of Security by a person residing outside India)
Regulation, 2000 issued by RBI vide Notification No. FEMA 20/2000-RB dated 3rd May,
2000. These regulations contained general provisions for inbound and outbound cross border
mergers and acquisitions in India. Under these provisions once the scheme of merger or
amalgamation of two or more Indian companies has been approved by a court in India, the
transferee company or new company is allowed to issue share to the shareholders of the
transferor company resident outside India subject to the condition that:
The transferor company or the transferee or the new company is not engaged in
activities, which are prohibited in terms of FDI policy.
The Securities and Exchange Board of India (the SEBI) is the nodal authority regulating
entities that are listed on stock exchanges in India. The Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has been repealed by the
Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 (the Takeover Code) with effect from October 23, 2011. The
changes introduced in the new regulations are based substantially on the recommendations of
Achuthan Committee that the SEBI had set up to review the working of the 1997 Regulations.
The Takeover Code restricts and regulates the acquisition of shares, voting rights and control
in listed companies. Acquisition of shares or voting rights of a listed company, entitling the
acquirer to exercise 25% or more of the voting rights in the target company, obligates the
acquirer to make an offer to the remaining shareholders of the target company to further acquire
at least 26% of the voting capital of the company. However, this obligation is subject to the
exemptions provided under the Takeover Code. Exemptions from open offer requirement under
the Takeover Code inter alia include acquisition pursuant to a scheme of arrangement:
1) involving the target company as a transferor company or as a transferee company, or
reconstruction of the target company, including amalgamation, merger or demerger,
pursuant to an order of a court or a competent authority under any law or regulation,
Indian or foreign; or
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Amalgamation defined under Section 2(1B) of the Income Tax Act, 1961 means the merger of
one or more companies with another company or the merger of two or more companies to form
a new company in such a manner that the following conditions can be satisfied:-
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1) All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation.
2) All the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated companies by virtue of the
amalgamation.
3) Shareholders holding at least three-fourths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the
amalgamated company or its nominee) becomes the shareholders of the amalgamated
company by virtue of the amalgamation.
Tax Concessions
If any amalgamation takes place within the meaning of Section 2(1B) of the Act, the
following tax concession shall be available:
1) Tax concession to amalgamating company
2) Tax concession to shareholders of the amalgamating company
3) Tax concession to amalgamated company
1) Tax Concession to amalgamating company: Capital Gains tax not attracted: According to
Section 47(vi) where there is a transfer of any capital asset in the scheme of amalgamation, by
an amalgamating company to the amalgamated company, such transfer will not be regarded as
a transfer for the purpose of capital gain provided the amalgamated company, to whom such
assets have been transferred, is an Indian company.
2) Tax concessions to the shareholders of an amalgamating company [Section 47(vii)]:
Whereas shareholder of an amalgamating company transfers his shares, in a scheme or
amalgamation, such transaction will not be regards as a transfer for capital gain purposes, if
following conditions are satisfied:
The transfer of shares is made in consideration of the allotment to him of any share or
shares in the amalgamated company, and
The amalgamated company is an Indian company
The cost of acquisition of such shares of the amalgamated company shall be the cost or
acquisition of the shares in the amalgamating company. Further, for computing the period of
holding of such shares, the period for which such shares were held in the amalgamating
company shall also be included.
3) Tax concessions to the amalgamated company: The amalgamated company shall be
eligible for tax concessions only if the following two conditions are satisfied:
The amalgamation satisfies all the three conditions laid down in Section 2(1B), and
The amalgamated company is an Indian company
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UNDERSTANDING THE
PHARMACEUTICAL INDUSTRY
The word pharmaceutical comes from the Greek word Pharmakeia. The modern
transliteration of Pharmakeia is Pharmacia. The pharmaceutical industry develops, produces
and markets drugs or pharmaceuticals licensed for use as medications.
Worldwide, the pharmaceutical industry operates in two categories namely, innovative and
generic. Innovative companies are those that create knowledge and spend a lot of money on
R&D to develop new medicines. Generic companies are adoptive in name and permit copying
of medicines only after the expiry of the patent or for unpatented drugs. They copy the
knowledge already created by innovative companies and charge low prices since they do not
incur any basic research cost. Based on this categorization, globally, pharmaceutical companies
deal in two categories of pharmaceutical products namely generic2 and/or brand medications3
and medical devices. They are subject to a variety of laws and regulations regarding the
patenting, testing and ensuring safety and efficacy and marketing of drugs.
In India, the pharmaceutical products are generally categorised as branded medicines, brandedgenerics and generic medicines4. The basis of distinction between branded medicines, brandedgenerics and generic medicines categorization is as follows:
Branded medicines: contain one or more ingredients marketed under brand names
given to them by their manufacturers in India. These are normally promoted to doctors.
[In western countries brand-name medicines are defined differently: the term refers to
new drugs developed by the innovator patent holding companies].
A generic drug (short: generics) is a drug which is produced and distributed without patent
protection.
3
A brand name drug is a medication sold by a pharmaceutical company under a trademarkprotected name. Brand name medications can only be produced and sold by the company that
holds the patent for the drug. Brand name drugs may be available by prescription or over the
counter.
4
Department-related parliamentary standing committee on health and family welfare fortyfifth report on Issues relating to availability of generic, Generic-branded and branded
medicines, their formulation and therapeutic efficacy and effectiveness.
Page 13
contain the same ingredient(s) as brand-name medicines but are manufactured after the
expiry of patents by companies other than innovators. These are marketed under new
brand names].
The pharmaceutical sector consists primarily of three types of players: bulk drugs producers,
pure formulators, or integrated firms (which produce both bulk drugs and market formulations).
Bulk drugs form the therapeutically relevant active pharmaceutical ingredients (APIs)5 that are
processed further to prepare formulations eventually consumed by patients. A drug formulation
is in product form, which is ultimately administered to the user. According to estimates, the
proportion of formulations and bulk drugs is in the order of 75:25. There are over 60,000
formulations manufactured in India in more than 60 therapeutic segments6. More than 85% of
the formulations produced in the country are sold in the domestic market. India is largely selfsufficient in case of formulations, though some lifesaving, new-generation-technology-barrier
formulations continue to be imported.
The Indian pharmaceutical industry has the highest number of plants approved by the US Food
and Drug Administration outside the US. It also has the large number of Drug Master Files
(DMFs)7 which gives it access to the high growth generic bulk drugs market. The industry now
produces bulk drugs belonging to all major therapeutic groups requiring complicated
manufacturing processes and has also developed good manufacturing practices
(GMP) compliant facilities8 for the production of different dosage forms.
Setting up a plant is 40% cheaper in India compared to developed countries and the cost of
bulk drug production is 60-70 per cent less. The strength of the industry is in developing cost
effective technologies in the shortest possible time for drug intermediates and bulk activities
without compromising on quality.
The Indian pharmaceutical industry traditionally relied on reverse engineering i.e. product
copying, through which vast profits were made. In recent years, however, the larger domestic
companies have realised the need to undertake original research and/or penetrate into the
regulated generics markets in the USA/EU in order to survive in the global market. At the
Like anti biotics & anti bacterials, anti-cold & anti cough, vitamins & tonics , anti malarials,
skin creams including sunscreens, eye drops, ear drops etc.
7
A GMP Facility is a production facility or a clinical trial materials pilot plant for the
manufacture of pharmaceutical products. It includes the manufacturing space, the storage
warehouse for raw and finished product, and support lab areas.
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same time, the Indian pharmaceutical industry is renowned for supplying affordable generic
versions of patented drugs for illnesses like HIV/AIDS to some of the worlds poorest
countries.
The demand for pharmaceutical products in India is significant and is driven by low drug
penetration, rising middle-class & disposable income, increased government & private
spending on healthcare infrastructure, increasing medical insurance penetration etc.
Strengths
Well established network of Laboratories and R&D infrastructure for new drug
discovery and development;
Access to pool of highly trained and skilled scientists, both in India and abroad;
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Weaknesses
Lack of resources to compete with MNCs for New Drug Discovery Research and to
commercialize molecules on a worldwide basis;
Lack of strong linkages between industries and academia;
Lack of culture of innovation in the industry;
Low per capita medical expenditure and healthcare spend in country;
Inadequate regulatory standards;
Production of spurious and low quality drugs tarnishes the image of industry at home
and abroad.
Opportunities
Licensing deals and collaborations with MNCs for New Chemical Entities and New
Drug Delivery Systems;
Providing marketing operations to sell MNC products in domestic market;
India can be niche player in global pharmaceutical R&D by developing world class
infrastructure;
Contract manufacturing arrangements with MNCs;
Potential for developing India as a centre for International Clinical Trials;
Increasing incomes and buying power of people especially in rural areas has opened
the great opportunity for Indian pharma companies. Around 70% of the total population
of India is residing in rural areas;
Growing awareness for health and increasing spending on health.
Threats
Product patent regime poses serious challenges to domestic industries unless it invests
in R&D;
DPCO (Drug Price Control Order) puts unrealistic ceilings on product prices and
profitability and prevents pharmaceutical companies from generating investible
surplus;
Entry of foreign players (well-equipped technology based products) into the Indian
market.
Current Scenario
Indian pharmaceutical industry is estimated to be worth US$4.5 billion, growing at about 8 to
9 per cent11 annually. It grew at 15.7 per cent during December 2011. According to McKinsey,
by 2015 it is expected to reach top 10 in the world beating Brazil, Mexico, South Korea and
Turkey.
McKinsey & Companys report, India Pharma 2020: Propelling access and acceptance,
realizing true potential, predicted that the Indian pharmaceutical market will grow to US$55
billion in 2020; and if aggressive growth strategies are implemented, it has further potential to
reach US$70 billion by 2020. While, Market Research firm Cygnus report forecasts that the
Indian bulk drug industry will expand at an annual growth rate of 21 per cent to reach US$16.91
billion by 2014. On the other hand, formulation industry is expected to grow at 17% CAGR
(compound annual growth rate) to reach US$21 billion in FY 2012.
As per the IMS Prognosis Report of 2011, Indias pharmaceutical spending has been steadily
increasing. It ranked 15 in 2005, 12 in 2011 and is expected to escalate up to 8 by 2015. Some
statistics as of mid-2011 are as below:
Pharmaceutical Statistics
Total turnover in US$
26 billion
12 billion
13.9 billion
Formulation exports
5.8 billion
API exports
8.1 billion
10%
1.5%
Approx. 42 lakh
1707.52 million
10
It is granted when a new product has been invented by the person. The product so invented
may either be more or less useful product than an already known product , or a new product
altogether.
11
Company
Ranbaxy Labs
7,686.59
Cipla
6,977.50
6,686.30
Lupin
5,364.37
Aurobindo Pharma
4,284.63
Cadila Health
3,152.20
Jubilant Life
2,641.07
Wockhardt
2,560.16
IPCA Labs
2,352.59
GlaxoSmithKline
2,345.88
Source: www.moneycontrol.com
Most of the Pharma companies have shown considerable decline in growth in the first half of 2011.
The slowdown is widely visible in the Chronic and Acute categories. Anti-invective, pain and
gastro together contribute 1/3rd of the total pharma market. The pharma companies have started
facing challenges in domestic market due to increase in competition from unlisted MNCs
12
Includes more than 35 different markets entailing South East Asia, Asia Pacific, Africa
& Middle East.
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in this segment. They are rapidly expanding their field force to extend their geographical reach.
Companies like Cipla, Torrent and IPCA which are mainly focused on Indian market are already
feeling the heat. Growth rates of companies such as Cadila, Dr. Reddy and Ranbaxy have already
come down.
Basing on the changing macro factors and economic growth Emkay Research has expected the
growth estimates of the pharma companies to decrease. It cut down the domestic growth estimates
for Cadila, Cipla, Dr. Reddy, IPCA, Sun Pharma and Unichem for FY12 and FY13 by 2% to 5%
and retained the growth estimates for Lupin, Ranbaxy, GlaxoSmithKline, Pfizer, Torrent and
Glenmark.
Company
FY12 Domestic
Growth
Earlier growth
estimates
Cadila Health
12%
15%
Cipla
10%
15%
10%
15%
IPCA Labs
10%
17%
Sun Pharma
15%
18%
Unichem
5%
9%
Lupin
19%
19%
Ranbaxy Labs
12%
12%
GlaxoSmithKline
13%
13%
Pfizer
14%
14%
Torrent
12%
12%
Glenmark
16%
16%
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Regulatory obstacles
Lack of proper infrastructure
Lack of qualified professionals
Expensive research equipments
Lack of academic collaboration
Underdeveloped molecular discovery program
Divide between the industry and study curriculum
Page 20
Regulatory Legislations:
1. Relevant legislations (includes but not limited to the following):
3. Regulatory agencies
DCP is responsible for the policy, planning, development, and regulation of the chemical,
petrochemical, and pharmaceutical industries in India. This department aims:
To provide impartial and prompt services to the public in matters relating to chemical,
pharmaceutical and petrochemical industries.
To take steps to speedily redressal of grievances received.
To formulate policies and initiate consultations with Industry associations and to amend
them whenever required.
CDSCO lays down standards and regulatory measures of drugs, cosmetics, diagnostics and
devices in the country. It regulates clinical trials and market authorization of new drugs. It
14 http://chemicals.nic.in/
15 http://cdsco.nic.in/
Page 21
also publishes the Indian Pharmacopoeia. The main functions of the Central Drug Standard
Control Organization (CDSCO) include control of the quality of drugs imported into the
country, co-ordination of the activities of the State/Union Territory drug control authorities,
approval of new drugs proposed to be imported or manufactured in the country, laying down
of regulatory measures and standards of drugs and acting as the Central Licensing Approving
Authority in respect of whole human blood, blood products, large volume parenteral, sera and
vaccines. The CDSCO functions from 4 zonal offices, 3 sub-zonal offices besides 7 port
offices. The four Central Drug Laboratories carry out tests of samples of specific classes of
drugs.
The organization is also entrusted with the task of recovering amounts overcharged by
manufacturers for the controlled drugs from the consumers.
It also monitors the prices of decontrolled drugs in order to keep them at reasonable
levels.
FDI, up to 100 per cent, under the automatic route, would continue to be permitted for
green field investments in the pharmaceuticals sector.
FDI, up to 100 per cent, would be permitted for brown field investment (i.e. investments
in existing companies), in the pharmaceutical sector, under the government approval
route.
But, The Finance Ministry favours capping FDI in the pharmaceutical sector at 49 per cent in
existing units, whereas the DIPP has been supporting 100 per cent FDI through the FIPB route.
Now, The Department of Industrial Policies and Promotions (DIPP) is set to decide on 49 per
cent foreign direct investment for brownfield projects in pharmaceutical projects either through
automatic route or approval route.
16 http://www.nppaindia.nic.in/index1.html
17 http://dipp.nic.in/English/investor/FDI_Policies/FDI_policy.aspx
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Under the proposed rules, for any merger or acquisition (M&A), the overseas investor will
have to seek permission from the Foreign Investment Promotion Board (FIPB). After six
months, it will be the monopoly watchdog Competition Commission of India (CCI) which will
vet such deals. This decision was taken after directions were received from the Prime Minister
along with the Cabinet members who had shown concerns arising out of several acquisitions
of domestic pharmaceutical companies by overseas firms. The above measures were suggested
by a high-level committee, headed by Planning Commission Member Arun Maira.
The FDI in the Indian pharmaceutical industry is mainly market- seeking. Indias advantage
for MNCs in the pharmaceutical industry is, first of all, the large domestic market with a 1.1
billion population and an annual increase of 2.2%. Indias large population and wide disease
pattern make the country attractive for pharmaceutical firms. Relatively cheap manpower and
skilled labour are other factors that attract foreign investors. India has an exceptional advantage
in pharmaceuticals due to its good human resources and highly skilled work force. English is
widely spoken, which makes communication easy for foreign investors. The production of
pharmaceuticals is also relatively cheap in India and there is a strong production base in the
country. It is easy to get good quality bulk drugs, which is attractive for foreign firms. Because
of Indias focus on reverse engineering and development of production processes, it has high
technical competence in production in the pharmaceutical industry, which makes its industry
attractive for foreign investors. The industry is also very highly competitive among suppliers,
which gives the MNCs a good bargaining position. India has many advantages for foreign
investors and consequently, the country has future potential to become an attractive destination
for outsourcing in drug discovery and clinical research.
Clinical trials in India cost US$25 million each, whereas in US they cost between
US$300-350 million each.
In India investigational new drug stage costs around US$10-15 million, which is almost
1/10th of its cost in US (US$100-150 million).
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Partnerships for supply of bulk drugs and formulations with the generic companies as
well as innovators.
For regulated markets such as the US, there are companies focussing on value added
generics, niche segments or patent challenges in the US.
Apart from these strategies Indian companies have to devise newer strategies continuously to
survive in the highly competitive global market in an industry that is characterised by - high
capital requirement, high technical requirement, high process skills, high value addition
prospects, high export volumes, high market sophistication.
Page 26
Besides consolidation in the domestic industry and investments by the US and European firms,
the spate of mergers and acquisitions by Indian companies has ushered an era of the "Indian
Pharmaceutical MNC". After traversing the learning curve through partnerships and alliances
with international pharmaceutical firms, Indian pharmaceutical companies have now moved
up a step in the value chain and are looking at inorganic route to growth through acquisitions.
Many top and mid-tier Indian companies have gone on a global "shopping spree" to build up
critical mass in International markets. Also, given the easy access to global finance the Indian
companies are finding it easier to fund their acquisitions.
Incentives for Mergers and Acquisitions by Indian companies
The Indian companies excel as far as the back end of the pharmaceutical value chain is
concerned i.e. manufacturing APIs and formulations. Over the past few years, the Indian
pharmaceutical companies have also stepped up their efforts in product development for the
global generic market and this is visible with the DMF filings at the US FDA. About 30% of
the new DMF filings at the US FDA are being filed by Indian companies.
Acquisitions are the quickest way to front end access. What is interesting is the fact that apart
from market access i.e. marketing and distribution infrastructure, the acquiring company also
gets an established customer base as well as some amount of product integration (the acquired
entities generally have a basket of products) without the accompanying regulatory hurdles.
There are also entry barriers for companies from the developing countries, and acquisitions
make it easy for these organizations to find a foothold in the developed markets.
Page 27
products. Other than Wockhardts acquisition of C. P. Pharma and Esparma, it has taken at
least three years for the other global acquisitions to see break-even.
Most of the acquiring companies have to pay greater attention to post merger integration as
this is a key for success of an acquisition and Indian companies have to wake up to this fact.
Also, with the increasing spate of acquisitions, target valuations have substantially increased
making it harder for Indian companies to fund the acquisition.
Global Scenario
In the last year of the decade, the world saw the biggest merger of this industry i.e. the Pfizer
buyout of Wyeth for a staggering $68 billion. The combined company will create one of the
most diversified companies in the global healthcare industry. Operating through patient-centric
businesses that match the speed and agility of small, focused enterprises with the benefits of a
global organizations scale and resources, the company will respond more quickly and
effectively to meet changing healthcare needs. The combined company will have product
offerings in numerous growing therapeutic areas, a strong product pipeline, leading scientific
and manufacturing capabilities and a premier global footprint in health care.
Further the takeover of Solvay pharmaceuticals by US drug maker Abbott Laboratories and the
proposed merger of Novartis AG and Alcon Inc. have sent the share markets on a high tide.
The reason behind such bullish response is mainly the excitement among investors that the
imminent merger of these companies will create a multi-national drug maker in India. Other
major global takeovers in the pharmaceutical sector are shown in the following table:21
Sl. No
Company (Acquirer)
Company (Target)
For Amount
1.
Roche
Genentech
$46.8 billion
2.
Merck
Schering Plough
$41.1 billion
3.
Bayer
Schering
$19.7 billion
4.
Schering Plough
Organon
$14.4 billion
5.
Takeda
Nycomed
$13.6 billion
6.
Sankyo
Daiichi
$7.7 billion
Though global mergers have positive ramifications on markets, profitability and consumer base, it
has its flipside also. Takeovers may ensue in stifling of competition and thereby creating monopoly
in the market. The Patented drugs become available to the acquirer company and the R&D of those
drugs may also suffer in the process.
21 http://research.ijcaonline.org/iccia/number4/iccia1026.pdf
Page 28
Indian Scenario
The Indian Pharmaceutical industry is a favourite one when it comes to cross border M&A.
This is hugely due to the fact that such takeovers are beneficial in-house quick growth
strategies. The desire to gain foothold in the market of another country is another major reason
behind such mergers. Such transactions help the company save itself from the pain-staking
procedure of establishing a nouveau entity in an alien country. Entry into a domestic market is
a key driver of cross-border mergers. It helps companies save significant time that may be
needed to build the green-field businesses of similar scale. At times M&A also cater as ego
enhancers of MNCs. Other factors associated to such transactions include lack of research and
development, productivity, expiring patents and generic competition.
The Indian pharmaceutical industry is known for its generics, cost effectiveness and
competitiveness. The nature of diseases in India is varied and the market is ever expanding.
Large global pharmaceutical companies aim towards establishing a low-cost base out of the
country. A number of Indian companies have made acquisitions in the global market. With
domestic drug sales of almost $5 billion, Indian companies have also developed a considerable
service industry for the global pharmaceutical market. Approximately 32 cross border
transactions worth $2000 million have been executed by domestic pharmaceutical companies.
There are likely to be more acquisitions in regulated markets in the US and Europe.
Indian companies are also following the route of mergers and acquisitions to make inroads in
the foreign markets. They need to consolidate further in different parts of the world to become
trans-national players. Indian companies will have to rise above the statement of Michael Porter
(1990), that most multi-national firms are just national firms with international operations.
They shall certainly be at an advantage, as their strong national identities will give them a
competitive advantage in the global markets.
There can be two types of mergers and acquisitions:
Cross-Border Mergers and Acquisitions: Cross border mergers and acquisitions can be
further classified as Outbound and Inbound mergers and acquisitions
Some examples of the domestic mergers and acquisitions22 that took place in the year 2011-12
are as follows:
Deal Date
Company (Acquirer)
Company (Target)
02 Aug 2012
26 Jul 2012
Biocon Ltd.
31 Jan 2012
Biocon Biopharmaceuticals
Pvt. Ltd.
Suven Nishtaa Pharma Pvt.
Ltd.
07 Jan 2012
Orchid Research
Laboratories Ltd.
17 Sep 2011
31 Mar 2011
29 Mar 2011
22 http://research.ijcaonline.org/iccia/number4/iccia1026.pdf
Page 30
Company (Acquirer)
Company (Target)
For Amount
Biocon
Axicorp (German)
$30 million
$11million
Wockhardt
Esparma (German)
$11million
Wockhardt
C. P. Pharmaceuticals (UK)
$17.9 million
Wockhardt
$265 million
Wockhardt
$38 million
Zydus Cadila
Alpharma (France)
Ranbaxy
$70 million
Nicholas Piramal
Biosyntech (Canada)
$4.85 million
Sun Pharma
Taro (Israel)
$500 million
Cadila Healthcare
$26 million
companies. A few more takeovers in the generic industry will lead to neutralization of the
Indias generic revolution which in itself is a stumbling block for the Indian economy. The
reason for such interest of foreign companies in the generic market is the strategy for the
innovators to retain the innovation potential while acquiring huge generic potential.
Company (Acquirer)
Company (Target)
For Amount
Ranbaxy (India)
$4.6 billion
Abbott (USA)
Piramal (India)
$3.72 billion
Sanofi Aventis
Shantha (India)
$783 million
Mylan (USA)
Matrix (India)
$736 million
Reckitt Benckiser
Paras (India)
$724 million
Hospira
Orchid (India)
$400 million
$219 million
Abbott (USA)
Wockhardt (India)
$22.5 million
cardio-vascular and anxiety-related drugs (Life style drugs). The company has been focusing
more on international markets, new tie-up, new products and R&D activity. Ranbaxy has come
under close scanner of the US FDA which banned many of its products due to non-compliance
of standards. However, similar investigations in other countries found no such violations.
In November 2008, Daiichi Sankyo of Japan acquired Ranbaxy Laboratories at US$4.6 billion
for a controlling stake of 63.92% of Ranbaxys equity shares (position as of December, 2008).
Daiichi paid Rs. 737 ($15.42) per share. Pursuant to the change in the ownership of the
Company, the Board of Directors of the Company was re-constituted on December 19, 2008
(Annual Report 2009). As per the Companys 2009 annual report the coming together of
Ranbaxy and Daiichi Sankyo is a path-breaking confluence that, in one sweep, catapults the
new, empowered entity to the status of the world's 15th largest pharmaceutical Company.
Individually, the two pharmaceutical giants are formidable-one, India's largest generics
Company and the other, among the largest innovator companies in
Japan. This possible motive for the acquisition seems strategizing market position, combined
with strengths of both generic market networks and skills in innovation.
Many dubbed the deal as panic selling by Ranbaxy unable to visualize and strategize its
position in the changing market landscape. Others noted that the deal was not about creating
synergies but about creating the best out of the then prevailing share prices. However, this deal
has raised a lot of questions about future competitiveness of the Indian generic industry in the
light of possible change in generic pharma strategy by Daiichi. Some commentators have
suggested that Ranbaxy being a firm that immensely benefited out of national policies should
not have been allowed to be acquired by a foreign stakeholder (Kumar Nagesh, 2008). Citing
regulations for protecting domestic industries by other countries, it is argued that Ranbaxy
being a national industry, a law prohibiting such acquisitions is much needed. They remark
that considering that Indias fledgling technological capabilities are attracting global attention,
blocking such deals would be desirable. It is feared that Ranbaxys case may become a
trendsetter for many such future deals. On a broader industrial policy perspective, a couple of
deals have the potential to jeopardize the national capability in the industry.
Post-acquisition, it has been a rough ride for Ranbaxy. It posted a huge loss in 2009 and ended
its financial year with a loss of Rs. 915 crore, against a profit of Rs. 787 crore it posted last
year. Ranbaxy Laboratories will launch in India an anti-hypertensive drug, Olvance - the first
product from its parent Daiichi Sankyos portfolio to be introduced through it. It is noted that
the launch of Olvance marks the beginning of a productive engagement that will harness the
respective strengths of Daiichi Sankyo and Ranbaxy to establish a much stronger platform for
Ranbaxy in India (Mint. 2009).
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Rights to 350 brands and trademarks of generics, including Phensedyl cough syrup
Market share close to 7% in the Indian generic market
Strong presence in India (growth rate 13-17%)
Complete product portfolio
Access to other emerging market
The Business Transfer is being undertaken for an all cash consideration of USD 3.72 billion.
Out of the said amount USD 2.12 billion would be payable by AHPL (Abbott Healthcare
Private Limited) to Piramal Healthcare on closing of the sale and a further USD 400 million is
payable upon each of the subsequent four anniversaries of the closing commencing in 2011.
The assets transferred include Piramal Healthcares manufacturing facilities at Baddi,
Himachal Pradesh and rights to approximately 350 brands and trademarks and the employees
of the Formulation Business.
The Piramal group has agreed that for eight years after the deal's closing, it will not enter the
business of generic pharmaceutical products in India, or make or market them in emerging
markets.
26 http://www.abbott.sk/App_Publisher/UserFiles/PiramalABTFinal%20Rel.pdf
27 http://www.currentagreements.com/q/3j2rnoEcw8WV0lR7pCIPUI?type=pdf
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CONCLUSION
Section 5 of the Competition Act, 2002 prescribes the thresholds under which combinations
shall be examined. Section 6 states that No person or enterprise shall enter into a combination
which causes or is likely to cause an appreciable adverse effect on competition within the
relevant market in India and such a combination shall be void. These sections were notified
earlier this year and came into effect as of June 1, 2011. Besides this, The CCI also has the
power to order a division of enterprise, if the merged entity is abusing its dominant position.
This means that if the merged entity engages in any form of exploitative or exclusionary
practice, the CCI can take suitable action including asking the merged firm to break up. So far,
no case of a demerger has come up before the CCI.
Mergers and Takeovers in the pharmaceutical sectors have grown considerably in the past few
years. It has been a common trend that large pharmaceutical companies which enter into
transactions with effectively or potentially competing companies, in many cases are found to
do so patents are about to expire, so as to maintain their market share and try to reduce
competition with other new generation drugs.
New trends of mergers and acquisitions in the transnational pharmaceutical market may suggest
that, for the drug industry, this may be a good way of neutralizing competition and getting high
market shares. Given the peculiarities of the market, it is important to pay particular attention
to whether such mergers are creating barriers to generic entry or causing potential harm to
innovation. The former issue of generic entry is of particular relevance to developing countries
where generic competition is necessary to ensure low cost medicines to the public at large.
It is apprehended that mergers would lead to increased prices of drugs. Similar concerns were
raised by the health ministry that acquisition of Indian pharmaceutical companies by
multinationals could orient them away from the Indian market, thus reducing the domestic
availability of drugs produced by them. The ministry argued the trend of takeovers may result
in cartelisation and concentration of market shares by few and a clutch of companies dictating
prices of drugs critical for addressing public health concerns.
Nonetheless, to add to this is the grave issue that many mergers and takeovers in this sector
would not attract CCI scrutiny as they may not meet the prescribed financial threshold
requirements. Under the existing law, only M&As that involve target companies with a
turnover of above Rs. 750 crore and assets worth more than Rs. 250 crore need to be vetted by
the CCI.
A High Level Committee was constituted to study the recent acquisitions of Indian pharma
companies by large foreign MNCs by the Planning Commission on June 30, 2011 under the
Chairmanship of Mr Arun Maira. The report submitted by the Committee in September
mentions that the threshold criterion for target companies is on the higher side. This is
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especially true when compared to small pharmaceutical companies. Therefore it is likely that
a strict compliance with the rules may not catch many of the small pharmaceutical mergers and
take overs. This can be a serious problem. From the consumer perspective, whose interests the
antitrust laws are supposed to safeguard, medicines are among the most important products
consumed. Given the potentially serious implications of overlooking the loss or delay of new
and improved medical treatments as a result of a merger, it is submitted that the law should
specifically empower and require the antitrust enforcement agencies to review and respond to
concerns arising from combinations in the pharmaceutical industry, whatever the current size
of the merging companies happens to be (Dror Ben-Asher, 1999).
Consistent with this argument is the Committees recommendation that pharmaceutical
companies be exempt from such threshold requirements for these reasons. This would bring
about two thirds of the pharmaceutical mergers under the careful scrutiny of the CCI.
Furthermore, it is important also to assess the impact of combinations on innovations. An
innovation market consists of the research and development directed to particular new or
improved goods or processes, and the close substitutes for that research and development (U.S.
Antitrust Guidelines on Licensing of IP, 1995). Mergers and acquisitions in innovations
markets such as pharmaceuticals, pose a threat for subsequent entry of products by stifling
competition at the R&D and product development stage. It is a concern that acquisitions that
involve takeover of generic companies may lead to change in priorities of these companies and
adversely impact the competition in generic markets. This has been well noted by competition
agencies in other countries such as USA and EU.
The USA and EU competition authorities have reviewed several mergers of large multinational
pharmaceutical companies that took place in the last decade. Their reviews examined whether
the mergers would reduce competition in research and development, including clinical trials in
particular therapeutic areas, as well as whether the mergers would lead to excessive
concentration of the markets for particular therapeutic groups and products. For example, the
review of the 2004 merger between Sanofi-Synthlabo and Aventis was found to reduce
competition in three pharmaceuticals in the USA. As a condition of the merger, the FTC
required divestment of products that were still at the clinical trials stage of development. It
required divestment of manufacturing facilities to a competitor (GlaxoSmithKline), and
required the companies to help GlaxoSmithKline to complete clinical trials and gain regulatory
approval. The FTC also required divestment of clinical studies, patents and other assets related
to cytotoxic colorectal cancer medicines to Pfizer (FTC, 2006). In the words of Arun Maira:
We must pay attention to the acquisitions and mergers taking place in the pharmaceutical
sector. We do not want to be in a position where acquisitions are distorting the industry and
oligopolistic or monopolistic conditions are created, We have created sophisticated
mechanisms like the CCI where the necessary gate-keeping could be done before such
takeovers or acquisitions take place. Therefore, we no longer need to follow the FIPB (Foreign
Investment Promotion Board) route when there are other instruments to scrutinise a
deal.(Matthew and Basu, 2011). While CCI is relatively new, concerns remaining regarding
its capacity to scan such mergers.
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BIBLIOGRAPHY
Reports and Articles
Websites
www.about.com
www.business.gov.in
www.dnb.co.in
www.wikipedia.org
www.news-medical.net
www.business-beacon.com
www.pharmabiz.com
www.cci.gov.in
www.medindia.net
www.slideshare.net
www.scribd.com
www.blogger.com
www.moneycontrol.com
www.pharma-iq.com
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