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July 09, 2007

Do Indian pharma cos. suffer from overseas shopping addiction?

Economic Times' Corporate Dossier supplement has a two-part article - here and here - on the voracious appetite Indian pharmaceutical companies have developed for buying overseas assets.
In an industry where size and wide geographic presence is critical, Indian companies are going for bigger targets using their expanded operating cashflow. Just to give you an idea of what they are up against in the generics business , Teva, the largest generic drug company with revenues of $8.4 billion, is nearly six times the size of the India’s biggest pharma company Ranbaxy. “An acquisition-led strategy always comes with the risk of overpaying for assets, and the challenge of integrating the two merging entities,” says a pharma analyst with an international broking house.

..."The market is getting crowded, but show me an asset that comes cheap today . I see no point in hanging on to numbers like valuation and letting them dictate business. It all boils down to how you build value with the acquisition," says GV Prasad, vice chairman and CEO, Dr Reddy's . The Hyderabad-based major's appetite for acquisitions is very strong and Prasad says raising finances is not a big issue. He, however, concedes that quality assets are few and far between these days. "Merck would have been a great fit at the company level, but unfortunately we could not close the deal," he says.

...Another problem both Ranbaxy and Dr Reddy's have to contend with after their big ticket buys (Terapia and Betapharm respectively) is that both of them are extremely profitable, with marginal scope for improvement in operations and production . Not surprisingly, both Terapia and Betapharm were under the scalpel of private equity investors, who had turned them around quite smartly. In fact, Betapharm is the fourth largest generics player in Germany with a 3.5% share of the market. Despite a 10-15 % price cut effected by all players in the market last year, its margins were at a healthy 55%. For Ranbaxy, Terapia delivers strategic Romanian and pan-European synergies, especially after the country entered the EU starting this year.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.