‘100 per cent FDI permission in medical equipment sector will facilitate M&A transactions’

Ever since Indian industries have started globalising their business, M&As have played a significant role in corporate restructuring and expansion. Anand Bhageria, Partner at Singhi Advisors and Narayan Shetkar, Director at Singhi Advisors talks about the M&A activities within the pharma and healthcare industry, in conversation with Raelene Kambli

How many M&A deals were closed in healthcare last year?

Shetkar: In 2014, 22 deals were closed totaling $150 million. In 2015, eight deals were closed till date totalling $150 million.

What is the current state of M&A deals within these two sectors?

Shetkar: Consolidation will accelerate with:

• Single state/ regional players will enter other regions to gain presence/ entry
• Large healthcare groups will eye speciality chains to fulfill the service offerings
• Strategic tie-ups (like Apollo – Sanofi for Sugar Clinics – diabetes) will increase
• Multinational companies are continuing to collaborate with Indian pharma firms to develop new drugs
• Indian players are focussing on entering new markets with new opportunities. For e.g.  Lupin is making inroads into new markets such as Latin America, Russia and other East European countries.
• Foreign generic companies are looking for acquisitions in India

After the Ranbaxy-Daiichi deal went through a lot of hitches, deals in the pharma sector decreased. Are there any signs of improvement?

Bhageria: To our mind, even though the volume of pharma deals that happened in 2008 could not be touched till 2015, Indian pharma sector has seen consistent and numerous deals since 2008-2015 and the deal outlook is positive for the coming years. The reason for the spurt in deals in 2008 could be the pre subprime levels. Thus, inspite of the issues which surfaced in the Ranbaxy-Daiichi deal, there have been other large ticket deals like Mylan-Famy, Ranbaxy-Sun, Elder-Torrent, Agila-Mylan, Ascent-Watson, Piramal-Abbott Shantha-Sanofi etc. post the Ranbaxy-Daiichi deal which further confirms the good health of the Indian pharma sector.

Is the Indian pharma industry expected to witness major consolidations in the API sector?

Bhageria: Yes, we expect consolidation owing to the following reasons:

• Financial distress amongst independent API players. Several of these companies have acquired critical skills/ regulatory approvals. However, they are reeling under huge debt and long working capital cycles; and have poor ROCE levels. Large players, working with banks and the existing promoters, could revive these units by providing necessary capital injection and aligning debt.
• APIs are the critical, building blocks of the pharma chain and yet account for less than 10 per cent of the pharma industry globally. We believe that Indian pharma players wanting to expand/augment their API manufacturing capabilities would actively look to pursue such opportunities. Larger industry players would also help in meeting stringent regulatory compliance requirements of these units.

What is the news in the healthcare sector? Which are the major deals that happened last year?

Shetkar: Diagnostics players will tap the IPO market and acquire speciality diagnostics like molecular and genomic testing. Regional diagnostics players will expand their geographic reach further

The majore deals are as follows:

• Manipal Group entered Rajasthan by acquiring the 250-bedded Soni Hospital.
• Narayana Hrudayalaya entered East India by acquiring 325-bedded West Bank Hospital for Rs 200 crores
• Sun Pharmaceutical Industries acquired Ranbaxy Laboratories for a total consideration of $4 billion (Rs 240 billion) from Daiichi Sankyo Company in an all stock transaction. Upon closing, Daiichi Sankyo received 8.9 per cent stake in Sun Pharma.
• Japan-based Meiji Holdings acquired 100 per cent stake in Medreich for Rs 1,750 crores
• Strides Arcolab acquired 100 per cent stake in Shasun Pharma for Rs 1,300 crores
• Aurobindo Pharma acquired commercial operations of Actavis Group for total consideration of $ 40.76 million (Rs 240 crores).
• Aurobindo Pharma acquired US-based Natrol Inc for approximately $132.5 million (Rs 814 crores)
• Torrent Pharma acquired branded formulations business  of Elder Pharma in India and Nepalfor a total consideration of $ 322 million (Rs 2,000 crores).

Which are the big deals in the offing for the pharma and healthcare sector in 2015?

Shetkar: They are:

• Parkway Hospital of Singapore has acquired 51 per cent stake in Hyderabad-based 750-bed Continental Hospital for Rs 250 crores
• There are deals under progress in Seven Hills Hospital (Mumbai), Global Hospitals (Hyderabad), MedPlus (Pharmacy Chain)
• Daiichi Sankyo sold its entire 8.9 per cent stake in Sun Pharma for $3 billion
• Torrent Pharma is planning to acquire the dermatology business of Mumbai-headquartered Encore group in a deal size of Rs 350 crores
• Mylan Inc entered into a definitive agreement to acquire women’s health business in Mumbai-based Famy Care for $ 800 million (Rs 4,956 crores).

How will the tax proposals announced during Budget 2015 help both in-bound as well as out-bound M&As in theboth industries?

Shetkar: Increase of insurance cover will boost health insurance and indirectly benefit delivery providers and 100 per cent FDI permission in the medical equipment sector will facilitate M&A transactions.

What are your predictions for the coming months?

Bhageria: With steady demand being witnessed across therapy segments and price hikes taken by companies in line with Drug Price Control Order (DPCO) guidelines, we expect growth momentum to sustain in the near-to-medium term.

One important industry move that you would like to highlight?

Shetkar:  The national drug pricing regulator, National Pharmaceutical Pricing Authority (NPPA) intensified its bid to control prices of medicines in order to make them affordable. In a move aimed to bring down prices of some of the key medicines, NPPA fixed the price of 108 non-scheduled formulation packs of 50 anti-diabetes and cardiac medicines. However, it had to withdraw internal guidelines for further such price control actions issued under Para 19 of the DPCO, 2013 later.

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