M&A In India May Lose Steam As Potential Sellers Raise Prices, Investment Bankers Say

A rebound in the Indian stock market and two recent high-value takeovers sparked "irrational hope" in overvalued mid-size companies.

MUMBAI, India - Greed is getting in the way of several prospective mergers and acquisitions in the Indian pharmaceutical industry, two senior investment bankers told PharmAsia News, reiterating that multinational companies are still keenly scanning for companies that fit into their global programs.

High valuations attributed to two past deals, namely Daiichi Sankyo's takeover of India's largest drug maker Ranbaxy for $4.6 billion and the more recent $784 million Sanofi-Aventis deal to acquire Shantha Biotechnics from fellow French firm Merieux Alliance, have upset a few other negotiations, as Indian sellers raised their expectations and have taken a "wait and watch" approach.

Value And Expectations Mismatch

An investment banker, involved in some of the biggest transactions in the pharma space in India, said there are a handful of listed companies that have no traction for growth beyond the next three years and had been eager to side with multinational companies or to engage in an integration plan but the gap between the price expected and the right value is widening.

"If you look at the general indices, there is no justification to pay over 10 times of the present EBITDA [earnings before interest, tax and depreciation] levels for most of the companies," he said on the condition of anonymity.

Another veteran from the Indian industry - who had held a position on the board of directors of companies - told PharmAsia News that he was aware of a large European company considering integrating in India but the choices are becoming difficult.

The expert, who is consulting with a company in Southern India, said a few private equity players backed off from a recent financial investment of around $200 million because the valuation was stretched to a ridiculous level of $300 million.

"It became futile to talk at that stage," he said, noting that the "shifting stands" may not bode too well for the reputation of Indian companies.

Many Buyers, No Sellers

He said that while he thought there were many buyers - almost in every segment from brands to manufacturing units - not many are willing to sell at this juncture. A recovery in the Indian stock market earlier than expected could have influenced thinking that was too positive for the seller, he noted.

G.V. Prasad, chief executive at Dr. Reddy's referred to the same dilemma to PharmAsia News a few weeks ago and indicated that deals will slow down in India, at least for the next year, due to the extremely high valuations given to Indian companies by aggressively bidding foreign players (Also see "Sanofi Beats GSK To Buy Merieux Alliance's Stake In India's Shantha Biotech; Move Aimed At Stronger Vaccines Business In Emerging Markets" - Scrip, 27 Jul, 2009.).

In the last two years, the world's top five pharmaceutical companies namely Pfizer, Sanofi-Aventis, GlaxoSmithKline, Novartis and Johnson & Johnson have scaled up their presence in India through deals in manufacturing, introduction of patented brands, increasing their holdings in Indian affiliates or shoring up research infrastructures.

Sanofi-Aventis acquired Shantha Biotech with a view to developing its vaccine manufacturing capacity and enhancing its research capabilities in India (Also see "Sanofi-Aventis Sees India's Shantha As Global Hub For Its Biotech Plans" - Scrip, 28 Aug, 2009.).

"This has caused a fresh round of irrational hope for promoters of many medium-sized Indian companies and so a correction is desired. Sooner or later, these companies will be back in the market for deals at a significantly lower valuation but there will be few takers," the banker warned of an inevitable consolidation.

Appetite To Buy Continues

For over a year, not only top global companies, but a few with transnational presence have been showing tremendous appetite to acquire in India, and deals have been struck on a wide range of synergies.

German hospital products and injectables company Fresenius Kabi acquired Dabur Pharma with a view to developing a stronger oncology portfolio and presence In India; Perrigo bought out Vedants Drugs to establish a larger manufacturing base for active ingredients; Merck bought out Bangalore Genei to sharpen its global biotech discovery programs; and Swiss-headquartered Lonza, the world's top contract manufacturing company, took over assets of Simbiosys, a small provider of services to the biotech industry.

One of India's largest pharmaceutical companies, Wockhardt, carved out and sold its nutrition business to U.S.-major Abbott while its animal products business was hived off to French firm Vetoquinol as part of a larger financial restructuring process.

Intermittent buzz continues in the Indian industry about a few companies intending to sell. These include Piramal Health, Dr. Reddy's and Wockhardt, which is believed to be in talks to sell its domestic business as well as the biotech arm, but these companies have either stayed away from commenting or denied any dialogues with foreign firms. Among the most talked-about names as potential suitors are Pfizer, GlaxoSmithKline and Sanofi-Aventis (Also see "After The Supply Pact, Will GSK Go For An Equity Deal With Dr. Reddy's?" - Scrip, 14 Sep, 2009.).

"Which ever way you want to look, consolidation is inevitable in India and no multinational can do without a presence in India. ...So the lines will have to merge at a more reasonable point," the banker said.

- Vikas Dandekar ([email protected])

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