It is notable to mention here, that it is the government's globalisation policies that made it possible for foreign players to enter the untapped Indian pharmaceutical market post 1991. A glance at this sector would show a prominent increase in deal activities in the pharmaceutical and related healthcare sectors since 2004. Deals rose by 20 per cent to 1,808 transactions. The aggregate value of deals increased by 53 percent to $112 billion in 2004. In 2004, there was a significant increase in pharmaceutical M&A activity with values rising to $100 billion almost reaching the record levels of 2000. In the drug and pharmaceutical sector there were eight deals valued at over $1 billion, compared to five in 2003 and since then there has been no looking back. There has been a steady increase in this trend. The pharmaceutical industry has clearly established Mergers & Acquistions as its ladder to attain fine-tune research abilities and reach out to global markets.
The present study is an attempt to analyse and bring out the effectiveness of such mergers and acquisitions in the case of Drugs and Pharmaceutical sector. Moreover, the occurrence of mergers and acquisitions deserves special attention in this industry, considering the inelastic demand for this industry does rely on a a third party (that is doctor) .
The author aims at throwing light on the trends in the Indian drugs and pharmaceutical sector since 1991, focusing on the mergers and acquisitions of foreign and domestic drug/pharmaceutical companies with the objective of increasing market share, acquisition of new technology and entering new economies into the widely untapped worldwide pharmaceutical market.
EVOLUTION OF DRUG AND PHARMACEUTICAL SECTOR IN INDIA
The decade which has just passed by witnessed some landmark mergers and acquisitons including those in the pharmaceutical industry. Elder Pharmaceuticals acquired 20 percent stake in the Neutra Health of UK for £5.63 million. In June 2007, Zydus Cadila acquired Brazilian company, Nikkho, for $26 million (approximately). Wockhardt bought out Negma Laboratories of France for $265 million. Glenmark Pharmaceuticals acquired 90 percent stake in Medicamenta, a pharma marketer and manufacturer in Czech Republic. Dr Reddy's Laboratories (DRL) acquired betapharm from Germany for €480 million. Sun Pharma acquired US-based Able Laboratories and the manufacturing facilities of ICN in Eastern Europe. The above mentioned illustrations are just a preview of the intense activity which has been taking place in this sector.
These instances do justice to the words of Mr Nagesh m joshi [1] who quoted in his article
"It's shopping season for the Indian pharmacos. Their buyout hunger has intensified over the past three years. All leading companies in India have been acquiring small overseas players as an essential part of their strategies".
But its is important to know this was not always the scenario. It has been a gradual process of evolution which commenced decades before.
BEFORE INDEPENDENCE
Indian pharmaceutical industry has grown over a period of time and has seen many ups and down during its evolution. Prior to independence bulk of the drugs were imported and very negligible quantity was manufactured in India.
AFTER INDEPENDENCE
After Independence many Multinational Companies established themselves in India and they progressed to manufacture drugs in bulk. The Multinational Corporations controlled during that phase approximately 70 to 80 per cent of the market. The prices of the medicines were very high, quiet out of reach of the Indian population.
Indian pharmaceutical industry was still regulated by product patent regime. Introducing the Patent Act 1970 allowed only process patent and put an end to product patent in the field of food, agrochemicals and pharmaceuticals.
This development came as a major boost to the Indian entrepreneurs to establish manufacturing units. The Patent Act 1970 legalized "reverse engineering" and Indian companies started manufacturing medicines at a cheaper rate than Multinational Companies. It helped the country break free from the curbs imposed by monopoly.
From Jan 1 2005 India issued the patent ordinance, to recognize foreign product patents, Under these circumstances Indian pharmaceutical manufacturers would not be able to manufacture patenteddrugs
CURRENT SCENARIO OF INDIAN PHARMACEUTICAL SECTOR
Pharmaceutical companies in India are growing at a very fast pace and this has made the Indian pharmaceutical industry as the second largest growing industry. The Indian Pharmaceutical Sector is currently the largest amongst the developing nations. . There is a worldwide structural trend evolving in pharmaceuticals and Indian companies play a key role in this framework, driven by their superior biotech and drug synthesis skills, high quality and vertically integrated manufacturing assets, differentiated business models and significant cost advantages.
Mergers and acquisitions are the part of this growth. The compounded annual growth rate of pharmaceutical sector in India is 12-15% and the global figures are 4-7% for the period of 2008-2013. With such a profound growth of pharmaceutical companies in India numerous pharmaceutical jobs can be seen. This in turn is helping biotechnology industry and booming the biotechnology jobs in India.
Profit margins of Indian companies are on the rise and the recent trend of mergers and acquisitions by Indian pharmaceuticals are likely to provide an upside to the growth numbers. The pharmaceutical sector offers an array of growth opportunities. This sector has always been dynamic in nature and the pace of change has never been as rapid as it is now. To adapt to these changing trends, the Indian pharmaceutical and biotechnology companies have evolved distinctive business models to take advantage of their inherent strengths and the "Borderless" nature of this sector. These differentiated business models provide the pharmaceutical and biotechnology companies' the necessary competitive edge for consolidation and growth. Pharmaceutical industry accounts for a significant contribution towards the total FDI into the country.
Pharmaceutical companies along with native companies are also competing with the top MNCs. Such a profound growth is because of the heavy population figures and with the increasing number of middle class people and their income the access to drugs and medicines is also increasing. Yet another finding of FICCI-Ernst & Young study reveals that the population of high income group in India is rising which will give rise to more influx of MNCs and expensive drugs. But still the low-priced generics are popular in Indian pharmaceutical industry.
It is a clear and highlighted fact that pharmaceutical sector in India has grown and it is the major contributor to exports from India.
Some Vital Information on Pharmaceutical Companies in India
In terms of volume - India's pharmaceutical industry is the third largest in the entire world.
In terms of value - India's pharmaceutical industry ranks fourteenth
By 2015 - It will be in the list of top 10 global pharmaceutical markets and it will touch US $ 20 billion. (research by angel broking)
2008-2009 - Saw 29% growth in exports of pharmaceutical drugs as compared to 2007
2013 - Indian formulation market is expected to touch US$ 13.7 billion
Major Pharmaceutical Companies in India
Ranbaxy Laboratories Limited
Dr. Reddy's Laboratorie
Cipla
Nicholas Pirama
Glaxo Smithkline (GSK
Zydus Cadila also known as Cadila Healthcar
Sun Pharma Industries
CONCEPT OF M & A
The past two decades has witnessed a wave of change in India like liberalization, technological advancements, globalization, and sustainable development to name a few. This includes a major corporate development called Mergers and Acquisitions (M&A). Although the 1956 Companies Act did envisage the concept of amalgamation, in the present day, mergers and acquisitions connote a much wider meaning than a few mere provisions. However the concept remains the same.
Merger, in common dialect, is a combination of two or more commercial organizations into one. It is a tool for expanding activities of a company or to augment their future profits. The less important company loses its identity and becomes part of the more important corporation, which retains its identity. It may involve absorption or consolidation. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:
Equity shares in the transferee company,
Debentures in the transferee company,
Cash,or
A mix of the above mode
The terms Mergers and Acquisitions are used inter-changeably. However there is a difference between the two- a friendly takeover is addressed as a merger whereas a hostile takeover is termed as an Acquisition.
Takeovers used to be mainly concentrated on stable and profitable industries like steel, automobiles, banks etc. But the past few years have seen the trend spilling on newer and more competitive sectors. The onset of the 21st century initiated a drift toward unexplored territories like the pharmaceutical sector.
Types Of Mergers
From the perception of business organizations, there is a whole host of different mergers. However based on the relationship between the two merging companies, mergers are classified into following:
(1) Horizontal merger- Two companies that are in direct competition and share the same product lines and markets i.e. it results in the consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini
(2) Vertical merger- A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship e.g. Ford- Bendix
(3) Conglomerate merger- generally a merger between companies which do not have any common business areas or no common relationship of any kind. Consolidated firms may sell related products or share marketing and distribution channels or production processes.
On a general analysis, it can be concluded that Horizontal mergers eliminate sellers and hence reshape the market structure whereas vertical and conglomerate mergers do not affect market structures.
The circumstances and reasons for every merger are different and these circumstances impact the way the deal is dealt, approached, managed and executed. .However, the success of mergers depends on how well the deal makers can integrate two companies while maintaining day-to-day operations. Each deal has its own flips which are influenced by various extraneous factors such as human capital component and the leadership. Much of it depends on the company's leadership and the ability to retain people who are key to company's ongoing success and will ensure its success in the future. It is important, that both the parties should be clear in their mind as to the motive of such acquisition.
Profits, intellectual property, consumer base are often objectives to the acquiring accompany. The motive will play a big role in influencing the risk profile of a Merger and Acquisition. Generally before the onset of any deal, due diligence is conducted so as to gauze the risks involved, the quantum of assets and liabilities that are acquired etc.
Mergers and acquisition in india are regulated by
The Companies Act , 1956
The Competition Act ,2002
Foreign Exchange Management Act,1999
SEBI Take over Code 1994
Stamp act(whch varies frm state to state)…etc
Which have been discussed in detail below.
PRESENCE IN THE DRUG AND PHARMACEUTICAL SECTOR
Mergers & acquisitions create a favorable environment for knowledge-base transfer, market expansion, and technology sharing among companies.
Recent acquisitions by Indian companies
Acquirer
Target
Target country
Reason/ Key attraction
Aurobindo Pharma
Milpharm
UK
Generic formulations business; UK market
Dishman Pharmaceuticals
Carbogen Amcis AG
Switzerland
R&D facilities in Switzerland
Synprotec
UK
CRAMS capabilities, facility in UK
Dr. Reddy's Labs
Betapharm
Germany
Front end in Germany
Roche's API facility
Mexico
Increasing presence in Contract Mfg.
Glenmark
Bouwer Bartlett
S.Africa
Front-end in S. Africa
Uno-Ciclo
Brazil
Harmonal brand portfolio, Brazilian market entry
Medicamenta
Czech Republic
European market
Jubilant Organosys
Target Research
USA
Capitalising on CRO opportunity
Trinity Labs Inc
USA
USFDA Approved facility in USA; pipeline of ANDAs
Matrix Labs
Explora Labs SA
Switzerland
Explora's expertise in bio-catalysis would help in development of high-potency API's
Doc Pharma NV
Belgium
Front-end in Europe
Mchem Pharma group
China
Backward integrtion, ARV manufacturing in China
Nicholas Piramal
Avecia
UK, Canada
Increasing presence in contract mfg.
Rhodia's Anesthetic business
Worldwide
International product-line
Ranbaxy
Nihon Pharma
Japan
Increasing stake to 50% to take advantage of Japanese generic opportunity
GSK's generics unit
Spain
Spanish Generics market
Terapia
Romania
Romanian market-presence, generics business
Ethimed
Belgium
Generics drug distribution business in Belgium
Allen
Italy
European market; Generics
Shasun Chemicals
Rhodia's Pharma unit
France
CRAMS
Strides Arcolab
Biopharma
Latin America
Entering emerging market - Venezuela
Strides Latina
Brazil
To establish presence in Brazil
Sun Pharma
Able Labs
USA
Mfg. facility in US; Turnaround potential
Valeant Mfg
USA
Controlled substance mfg. facility
Torrent
Heumann Pharma
Germany
Entry into German market
Wockhardt
Wallis & CP Pharma
UK
European market
Espharma
Germany
Complementary porfolio; European market
Pinewood labs
Ireland
OTC & renal therapy drugs; European market
Negma Laboratories
France
Portfolio of patented drugs; European market
Source: F&S & CII
The lack of research and development (R&D) productivity, expiring patents, generic competition and high profile product recalls are driving the mergers and acquisition (M&A) activity in the sector. This sector is unique in the sense that it traverses across geographies, as health has no boundaries, and this very boundary-less nature supports consolidation in this Industry. With the easy availability of capital and increased global interest in the pharmaceutical and biotech industry, the sector has become quite a `mergers-and-acquisitions' favorite
"The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent."-Richard Gerster, development economist
The Indian Pharmaceutical Industry today is in the front rank of India's science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the Indian Pharmaceutical Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in terms of technology, quality and range of medicines manufactured. All medicines are now made indigenously, From simple headache pills to sophisticated antibiotics and complex cardiac compounds.
Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharmaceutical Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years.
The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It is an extremely fragmented market with severe price competition and government price control.
The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals. There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals used for production of pharmaceutical formulations.
Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the drugs and pharmaceutical products has been done away with. Manufacturers are free to produce any drug duly approved by the Drug Control Authority. Technologically strong and totally self-reliant, the pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpower, strength of national laboratories. The Pharmaceutical Industry, with its rich scientific talents and research capabilities, supported by Intellectual Property Protection regime is well set to take on the international market.
What has been propelling the acquisition interest among pharmaceutical majors? The motivations are strategic: securing entry into the new markets, expansion of market coverage, or acquisition of key skills, or all of them.
Comments Ramesh Adige, Executive Director, Global Corporate Affairs and Communications, Ranbaxy, "M&As have helped us enter new markets, gain size and scale, enhance product flow and acquire new technology." Ranbaxy, India's second largest pharma company has completed 18 acquisitions since the year 2004.
Similar drivers may be seen in case of the recent acquisitions. Betapharm's acquisition gave DRL a large product basket of the German major-more than 150 APIs covering treatments for cardiovascular systems, central nervous system, gastrointestinal tract and metabolism, systemic anti-infectives, and musculoskeletal system.
Explains M B Chinappa, Vice-President, Finance, Biocon, "Through buyouts, a large number of Indian companies have acquired both, research capabilities in core business areas and the sales and marketing capabilities in the foreign geographies."
Acquisitions may also help the Indian pharmaceutical majors to adapt to the diversified cultures of local country markets. The knowledge of the culture and ability to manage a multi-cultural business will prove useful. For instance, DRL specifies that betapharm acquisition has proved advantageous as it could gain access to talent in niche areas including legal expertise, and relationships with the EU regulators.
Incentives for Mergers and Acquisitions by Indian companies
Build critical mass in terms of marketing, manufacturing and research infrastructure
Establish front end presence
Diversification into new areas: Tap other geographies / therapeutic segments / customers to enhance product life cycle and build synergies for new products
Enhance product, technology and intellectual property portfolio
Catapulting market share
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. For instance, there is a cultural and language barrier in Europe and Europe is high on the radar of Indian pharmaceutical companies. The sheer heterogeneity of Europe and the fragmented nature of its pharmaceutical market make acquisitions an easy route for entry into this region and the US being the largest pharmaceutical market in the world will always interest the Indian pharma companies for its sheer size.
Over the last two years, several Indian companies have targeted the developed markets in their pursuit of growth, especially via the inorganic route. Companies such as Ranbaxy, Wockhardt, Cadila, Matrix, and Jubilant have made one or more European acquisitions, while others are also scouting for potential targets.
Besides gaining a faster entry into the target market, one of the basic strategies behind the acquisitions remains that of leveraging India's low cost advantage by shifting the manufacturing base to India. At the same time, the acquired companies also serve as an effective front end for Indian companies in these markets
CASE STUDY
1.ABOOTT BUYS PIRAMAL
In the second-largest deal ever in the Indian pharmaceutical industry, US-based Abbott Laboratories has acquired the pharmaceuticals solution business of Piramal Healthcare for $3.72 billion(Rs 17,500 crore).
The Indian drug maker, which itself has made 15 acquisitions since 1988, insists it will remain in the industry and investing the remaining business.
It catapulted Abbott from just about nowhere to the top position in the Indian pharmaceutical market, with a market share of close to 7%. Abbott added 350 branded generic drugs from the Piramal portfolio, including Phensedyl, one of the top two pharmaceutical brands in the country.
Ajay Piramal, chairman of the Piramal group, told TOI. "The company's business will get an impetus with Abbott acquiring it."
For Abbott, it was a clear bid to capitalize on the gold rush in emerging pharmaceutical markets. For MNCs, emerging markets, with their cheaper generic medicines, are turning out to be the new battleground, given that most are witnessing stalled sales in Western markets. Since Western governments are looking to lower healthcare costs, companies now focus more on growing the developing markets.
Miles D White, chairman and CEO, Abbott had said that this strategic action would advance Abbott into the leading market position in India. The deal was complement their market-leading proprietary pharmaceutical offerings and pipeline in developed markets.
Abbott estimated the growth of its Indian pharmaceutical business with Piramal to approach 20% annually, with expected sales of more than $2.5 billion by 2020. With nearly $8 billion in annual sales in the year 2007, the Indian market is expected to more than double by 2015.
According to an analyst who while speaking to TOI requested anonymity: "Commercially, it is a fantastic deal. Piramal has always been the all-conquering Indian hero and one would have thought, should have been the last man standing instead of capitulating so easily. This one is a huge positive for Piramal, but a major negative for Indian pharmaceutical industry."
WHAT IS PIRAMAL SELLING?
Domestic formulations business
350 brands with a Rs 2,000-crore turnover
5,500 employees
Manufacturing units in Baddi (HP)
WHAT STILL REMAINS?
Assets with a turnover of Rs 1,700 crore
11 manufacturing units in four countries
Contract manufacturing business
Critical care business
Bulk drug supply business
Vitamins
Fine chemicals
Diagnostics and drug discovery
"This strategic action will advance Abbott into the leading market position in India and our strong position in branded generics and growing presence in emerging markets complements our market-leading proprietary pharmaceutical offerings and pipeline in developed markets," Miles D White, chairman and chief executive officer of Abbott, said in a statement.
The deal was to make Abbott, operating in India for the last 100 years, mainly selling digestive products like Digene and other antibiotics, the largest domestic player, with close to 400 products in the domestic market. Piramal's Healthcare Solutions became a part of Abbott's newly created stand-alone Established Products Division
2.DRL TAKEOVER OF BETAPHARM
Ranbaxy Laboratories Limited was formerly India's largest pharmaceutical company. Incorporated in 1961, Ranbaxy exports its products to 125 countries with ground operations in 46 and manufacturing facilities in seven countries. The company went public in 1973, and Japanese company Daiichi Sankyo gained majority control in 2008.
Betapharm Arzneimittel GmbH, a pharmaceutical company, manufactures and distributes generic medicines. Its medicines cover various illnesses from common cold to cardiovascular diseases. Betapharm Arzneimittel GmbH was formerly a subsidiary of Santo Holding (Deutschland) GmbH. The company was founded in 1993 and is based in Augsburg, Germany
In the year 2006, on Feb 15th, DRL, Dr. Reddy's Laboratories limited acquired Betapharm, the 4th largest generic pharmaceutical company in Germany. The acquisition deal also included the Beta Institute for the purpose of sociomedical research.
The major benefits of this acquisition to DRL were as follows:
DRL got immediate access to the generic market of Germany.
66% of generic market in Europe was held by Germany.
DRL gained strategic presence in EU.
It helped DRL in realizing its aim of becoming $1 billion mid seized company by 2008.
There was not much liability linked to this acquisition, as the Betapharm was growing constantly and had a well planned future.
DRL was also able to increase its product portfolio several fold.
Betapharm didn't have any manufacturing units, so it would allow for seamless integration with DRL.
Betapharm had a strong marketing infrastructure (distribution channels were well established with doctors, pharmacists, etc.).
DRL was able to reduce its dependence on US market.
Betapharm was successfully used as a vehicle to launch DRL's products in Germany.
The major benefits of this acquisition to Betapharm are as follows:
It was able to increase its product portfolio and grow faster in Germany.
It successfully used DRL's marketing infrastructure and global product development to expand its presence.
DRL provided competitive manufacturing costs, which eventually helped it develop its position in Germany.
DRL had well known Corporate Social Responsibility initiatives, so Betapharm could continue with its corporate philosophies.
3.RANBAXY ACQUIRES TERAPIA
In march 2006 Ranbaxy Laboratories Ltd had acquired 96.7 per cent of Romania's largest independent generics drug company, Terapia , for $324 million. The acquisition added around $80 million to Ranbaxy's turnover, which was $1.2 billion in the previous financial year.
Terapia had marketing rights for 157 drugs and ownned two manufacturing units. The acquisition gave Ranbaxy a boost in other countries of the region as 30 per cent of Terapia's product portfolio were registered in 15 countries, including Russia, Ukraine and Poland.
Terapia was an integrated, commercially focused pharma company which had a broad portfolio and deep new product pipeline , excellent R&D capabilities, world class facilities, low cost manufacturing, and strong distribution network which included the largest and most powerful generic sales force in the Romanian pharmaceutical market.
Terapia, established in 1921 was the biggest independent generic company of Romania with consistent growth and profitability over years. The advantages that Ranbaxy gained from the acquisition were -
A strong brand name that Terapia had.
In-house bioequivalence facilities that were of global standards.
Highly developed Research and development (S&D) facilities.
New products that were in pipeline.
Strong pharmaceutical sales force in Romania.
Lower operational costs.
The deal gave Ranbaxy access to -
Sixty products
Two manufacturing units
Access to 4,000 pharmacies in Romania.
Access to 450 hospitals
AUTHOR'S CRITICAL ANALYSIS
Mergers & Acquisitions In Pharmaceutical Industry has become part & parcel of business. Indian Pharmaceutical Industry has become quite profitable for foreign players as Indian Industry is growing by 15% as compared to other markets which are growing by only 4%.After the introduction of IPR laws in 2005 MNC's now feel quite safe in launching their patented molecules here in India. Earlier due to the existence of Process Patent many MNC"s were reluctant to enter Indian market but Product patent regime has changed the whole scenario all of a sudden. The dynamics of Pharmaceutical Industry is altogether different from any other industry. This is directly linked to health of society..Every company is in this industry for doing business or to make profits but this should not be at the cost of society's health.
Off late the trend noticed is that Foreign Players are also ready to pay several times the current valuation of firms.For e.g in case of Abbott- Pirama, Daichii-Ranbaxy deal etc.The figures that shocked the whole industry is that why foreign players are ready to pay such a huge amount for acquisitions.For e.g Abbott has invested 3.7 billion in the deal. To recover that sum of money Abbott will have to wait for at least 25 years. In my opinion no company Will wait for 25 years to recover that money.So two options are left with them, either to increase Prices or to increase sales by volume.If we go by second option it would be very difficult as Indian market is highly competitive. Research & Development is the only key to success in this business.
ADVANTAGES OF MERGERS AND ACQUISITIONS IN INDIA
There is bright scope for mergers and acquisition in pharmaceutical and drug industry considering the environment which the Indian market provides. some being-
Competent workforce: India has a pool of personnel with high managerial and technical competence as also skilled workforce. It has an educated work force and English is commonly used. Professional services are easily available.
Cost-effective chemical synthesis: Its track record of development, particularly in the area of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs.
Legal & Financial Framework: India has a 53 year old democracyand hence has a solid legal framework and strong financial markets. There is already an established international industry and business community.
Information & Technology: It has a good network of world-class educational institutions and established strengths in Information Technology.
Globalisation: The country is committed to a free market economy and globalization. Above all, it has a 70 million middle class market, which is continuously growing.
Consolidation: For the first time in many years, the international pharmaceutical industry is finding great opportunities in India. The process of consolidation, which has become a generalized phenomenon in the world pharmaceutical industry, has started taking place in India.
Other benefits including;
Enhancing revenue through global presence
Better market access
Widening product portfolios
Strengthening R&D capabilities
Strengthening distribution network
Increasing efficiencies through leveraging economies of scale
Gaining access to new technologies
Establishing a new area in pharma value chain
SHORTCOMINGS OF MERGERS AND ACQUISITIONS
While every coin has two faces, there are certain disadvantages of mergers and acquisitions also .
While growth via acquisitions is a sound idea in , there are challenges as well, which relate mainly to the stretched valuations of acquisition targets and the ability to turn them around within a reasonable period of time. The acquisitions of RPG Aventis (by Ranbaxy) and Alpharma (by Cadila) in France are clear examples of acquisitions proving to be a drain on the company's profitability and return ratios for several years post acquisition
One of the major problems that come with mergers and acquisitions is the poor reaction of the shareholders. This is one of the most sensitive but often ignored issues in a mergers and acquisitions scenario. The shareholders of the company which has been taken over often feel hostile. Moreover the mergers and acquisitions not only add to the resources of the company but also add the problems as well as the liabilities of the acquired or merged company.
Mergers and acquisitions under business consume an unbelievable amount of time and money. Whenever there are plans of mergers and acquisitions, they are kept confidential till the last minute. Only the lawyers, consultants, investment bankers other than the top officials of the company know about the deal. Although it is publicized later that a particular merger or an acquisition will benefit the shareholders of both the companies, it is the responsibility of the share holders to study the proposed deal for mergers and acquisitions before accepting the same.
The procedural challenges faced by companies in executing a merger can be broadly categorized under the following applicable laws:
1. The Companies Act, 1956
2. Securities and Exchange Board of India (SEBI) Takeover Code
3. Foreign Exchange Management Act, 1999.
4. Competition Act, 2000
While the Indian Companies Act, 1956, usually governs mergers in India, international deals involve additional compliances with rules laid down under the FEMA (Foreign Exchange Management Act, 1999) and associated laws. Further, listed companies are also subject to the rules and regulations laid down by the SEBI (Securities and Exchange Board of India). Compliances under the Companies Act require the Acquirer Company to prepare a scheme of amalgamation under section 393 of Companies Act, 1956. The draft scheme has to be agreed to by Target Company. Both company's Board of Directors should approve the scheme and authorize the directors to make an application to the High Court under section 391 of Companies Act, 1956. The copy of order is to be filed with the Registrar of companies within 30 days of passing of orders by the court.
The compliances under SEBI involve the following steps:
1. Acquirer must make a public announcement of- the offer price, the number of shares to be acquired from the public, identity of acquirer, purpose of acquisition, plans of acquirer, change and control over the target company and period within which the formalities would be completed.
2. The acquirer must make a public announcement through a merchant banker within 4 working days of entering into an agreement of acquiring shares or voting rights of the target company.
3. Relevant documents should be filed with the SEBI which include a copy of the public announcement in the newspaper, the draft, letter of offer and a due diligence certificate.
4. Correct and adequate information must be disclosed and comments should be incorporated by SEBI.
5. Letter of offers to shareholders of the target company must be sent within 45 days of the public announcement. The offer remains open for 30 days for acceptance by the shareholders.
6. The acquirer should determine the offer price after considering the relevant parametersOnce an offer is made an acquirer cannot withdraw it except unless the statutory approvals have been refused, the sole acquirer has died or if the SEBI merits the withdrawal of the offer. In case of cross-border mergers, the Foreign Exchange Management (Transfer or Issue of Security by a person Resident outside India) Regulations 2001 will be applicable.
Although the compliance of these rules and regulations seems easy, a lot of difficulties are faced during the actual application of those rules n procedures, and a lot more when the merger is a cross-border one.
There are often occasions when interplay between SEBI regulations and those of FEMA can make it difficult for deals to be structured.
There are numerous challenges faced by companies during cross-border mergers. A major obstacle is the legal disparity between the two merging entities, since these companies follow statutes of different countries. Hence even if the merger is a friendly one, the legal disparity creates a major road-block in structuring and finalizing the deal. Another issue is that of the complex legal set up especially in the financial sectors of any of the merged entities, thereby causing a problem in decision making processes.
Misuse of supervisory powers by the shareholder of the merged entity may also put the new business model at risk. There are other barriers like lack of funds, economical imbalance at the time of execution, political interference, shareholder's reluctance etc which recquire constant attention.
Apart from this, there are extra costs incurred like the off-costs and on-going costs during any cross border merger which are absent in domestic mergers. Consumer protection rules, differences in employee legislations, different accounting systems, data protection directives, cross-border business policies employed in different countries could cause obstructions to cross border M&A and can further escalate the cost.
CONCLUSION
The focus of the Indian Pharmaceutical Companies is also shifting from process improvisation to drug discovery and R&D. Indian companies are setting up their own R&D setups and are also collaborating with the research laboratories like CDRI, IICT etc.
Mergers, acquisitions and alliances have been taking place on an unprecedented scale, most notably with companies in the U.S, Europe and Japan. These transactions provide Indian companies with access to foreign markets and facilitate the process of seeking regulatory approval for new products. Money generated can be pumped back into drug discovery and clinical research to make Indian Companies self sufficient.
Moreover, if this industry is able to transfer a part of their improved performance due to consolidation to the consumers in the form of a price reduction and a better quality of drugs, it would be a welcome sign and on the other hand if it leads to increased market power and consequent price rise, then it would deserves special attention. To conclude, the future of Indian Pharmaceutical Sector looks extremely positive. The key is innovation and creativity, and the desire for building a global business model.
