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SUBMITTED BY: ANJALI MEHRA INSTITUTE OF COMPANY SECRETARIES OF INDIA NEW DELHI
UNDER THE GUIDANCE OF: MS. NEHA RAJ DEPUTY DIRECTOR (LAW)
DISCLAIMER
This project report/dissertation has been prepared by the author as an intern under the Internship Programme of the Competition Commission of India for academic purposes only. The views expressed in the report are personal to the intern and do not necessarily reflect the view of the Commission or any of its staff or personnel and do not bind the Commission in any manner. This report is the intellectual property of the Competition Commission of India and the same or any part thereof may not be used in any manner whatsoever, without express permission of the Competition Commission of India in writing.
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ACKNOWLEDGEMENT
It has been great honour and privilege to undergo training at Competition Commission of India, New Delhi. I would like to thank my intern guide Ms. Neha Raj (Deputy Director, Law) for being a guiding force throughout the course of this submission and being instrumental in the successful completion of this project report without which my efforts would have been in vain. Her constant guidance and willingness to share her vast knowledge made me understand this project and its manifestations in great depths and helped me to complete the assigned tasks. She has been kind enough to give me her precious time and all the help which I needed. I am immensely thankful for the strength that she has endowed me with. I would also like to express my heartfelt gratitude to the other staff of Competition Commission of India, for being immeasurably accommodating to the requirements of this humble endeavour.
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TABLE OF CONTENTS
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IMPACT OF MERGERS AND ACQUISITIONS ON INDIAN PHARMACEUTICAL INDUSTRY ............................... 26 MERGERS AND ACQUISITIONS TREND IN INDIA .................................................................................. 26 MERGERS AND ACQUISITIONS- CHALLENGE ...................................................................................... 27 GLOBAL SCENARIO ...................................................................................................................... 28 INDIAN SCENARIO....................................................................................................................... 29
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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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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.
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.
2) arrangement not directly involving the target company as a transferor company or as a transferee company, or reconstruction not involving the target companys undertaking, including amalgamation, merger or demerger, pursuant to an order of a court or a competent authority under any law or regulation, Indian or foreign, subject to (a) the component of cash and cash equivalents in the consideration paid being less than twenty-five per cent of the consideration paid under the scheme; and (b) where after implementation of the scheme of arrangement, persons directly or indirectly holding at least thirty-three per cent of the voting rights in the combined entity are the same as the persons who held the entire voting rights before the implementation of the scheme. Therefore if shares are acquired pursuant to a merger sanctioned by the Court under the Merger Provisions, the above mentioned conditions are fulfilled then the acquirer need not make an open offer for acquisition of additional shares under the Takeover Code. 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 parameters. Once 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.
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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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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.
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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 segments 6. More than 85% of the formulations produced in the country are sold in the domestic market. India is largely self-sufficient in case of formulations, though some lifesaving, new-generationtechnology-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
5
Any substance or combination of substances used in a finished pharmaceutical product, intended to furnish pharmacological activity or to otherwise have direct effect in the diagnosis, cure, mitigation, treatment or prevention of disease, or to have direct effect in restoring, correcting or modifying physiological functions in human beings.
6
Like anti biotics & anti bacterials, anti-cold & anti cough, vitamins & tonics , anti malarials, skin creams including sunscreens, eye drops, ear drops etc.
7
DMF is a document prepared by a pharmaceutical manufacturer & submitted solely at its discretion to the appropriate regulatory authority in the intended drug market and it contains complete information on an API or finished drug dosage form.
8
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
Cost competitiveness due to lower labour cost and production cost; Well-developed industry with strong manufacturing base; 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; Strong marketing and distribution network in domestic as well as international market; India is second largest country in terms of population in world with rich biodiversity; Expertise in reverse engineering and development of new Chemical process made Indian pharmaceutical industry as one of the strongest generic industry.
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Weaknesses
Low investment in innovative Research & Development; 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
Significant export potential to the developing as well as developed countries; 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; R&D efforts of Indian pharmaceutical companies hampered by lack of enabling regulatory requirement. For instance, restrictions on animal testing out-dated patent office; 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. Transformation of process patent9 to product patent10;
It is granted for a new process of manufacturing an already known product or for manufacturing a new product, or for manufacturing more articles of the same product that is reducing the cost of the already known product.
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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$21 billion in FY 2012. As per the IMS Prognosis Report of 2011, Indias pharmaceutical spending has been steadily increasing. It ranked 15 in 2005, 12 in 2011 and is expected to escalate up to 8 by 2015. Some statistics as of mid-2011 are as below:
Pharmaceutical Statistics
Total turnover in US$ Total Value of domestic market in US$ in 2010 Total exports in US$ Formulation exports API exports %Volume of global production %Value of global production Employment generation (direct and indirect) FDI Between April 2000-2010 in US$ 26 billion 12 billion 13.9 billion 5.8 billion 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. According to A Brief Report Pharmaceutical Industry in India, published in January 2011.
11
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Company
Ranbaxy Labs Cipla Dr. Reddys Labs Lupin Aurobindo Pharma Cadila Health Jubilant Life Wockhardt IPCA Labs GlaxoSmithKline
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
Cadila Health Cipla Dr. Reddys Labs IPCA Labs Sun Pharma Unichem Lupin Ranbaxy Labs GlaxoSmithKline Pfizer Torrent Glenmark
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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
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Regulatory Legislations:
1. Relevant legislations (includes but not limited to the following): Drugs and Cosmetics Act, 1940. Drugs and Cosmetics Rules, 1945. Drugs and Magic Remedies (Objectionable Advertisements) Act, 1954. The Indian Medical Council Act, 1956. Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 Drug Price Control Order, 1995. Essential Commodities Act (Section 3)
3. Regulatory agencies Central Drug Standard Control Organization (CDSCO). Drug Controller General of India (DCGI) Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers National Pharmaceutical Pricing Authority (NPPA) State level: State Drug Controllers and Inspectors
Other key laws that affect pharmaceutical sector include: Competition Act, 2002 Indian Patent Act, 1970 TRIPS Agreement
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.
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.
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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.
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A merger, acquisition, or co-marketing deal between pharmaceutical companies may occur as a result of complementary capabilities between them. A small biotechnology company might have a new drug but no sales or marketing capability. Conversely, a large pharmaceutical company might have unused capacity in a large sales force due to a gap in the company pipeline of new products. It may be in both companies' interest to enter into a deal to capitalize on the synergy between the companies. Besides mergers and acquisitions, Indian pharmaceutical companies are also following some strategies for their growth in global market such as:
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Geographic diversification with few companies focussing on increasing presence in the regulated markets and others exploring the developing/under-developed markets of the world. 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. Focus on offering research and manufacturing services on a contractual basis (CMOs and CROs).
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.
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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 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.
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.
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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 patientcentric 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:
Sl. No
1. 2. 3. 4. 5. 6.
Company (Acquirer)
Roche Merck Bayer Schering Plough Takeda Sankyo
Company (Target)
Genentech Schering Plough Schering Organon Nycomed Daiichi
For Amount
$46.8 billion $41.1 billion $19.7 billion $14.4 billion $13.6 billion $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.
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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 painstaking 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: Domestic 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 acquisitions that took place in the year 2011-12 are as follows:
Deal Date
02 Aug 2012 26 Jul 2012 31 Jan 2012 07 Jan 2012 17 Sep 2011 31 Mar 2011 29 Mar 2011
Company (Acquirer)
Elder Pharmaceuticals Ltd. Biocon Ltd. Suven Life Sciences Ltd. Orchid Chemicals & Pharmaceuticals Ltd. IPCA Laboratories Ltd. Calyx Chemicals & Pharmaceuticals Ltd. Intas Pharmaceuticals Ltd.
Company (Target)
Elder Health Care Ltd. Biocon Biopharmaceuticals Pvt. Ltd. Suven Nishtaa Pharma Pvt. Ltd. Orchid Research Laboratories Ltd. Tonira Pharma Ltd. Calyx Pharmaceuticals & Chemicals Pvt. Ltd. Dolphin Laboratories Ltd.
(Source: www.business-beacon.com)
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Company (Acquirer)
Biocon Dr. Reddys Labs Wockhardt Wockhardt Wockhardt Wockhardt Zydus Cadila Ranbaxy Nicholas Piramal Sun Pharma Cadila Healthcare
Company (Target)
Axicorp (German) Trigenesis Therapeutics (USA) Esparma (German) C. P. Pharmaceuticals (UK) Negma Laboratories (France) Morton Grove Pharma (USA) Alpharma (France) RPG Aventis (France) Biosyntech (Canada) Taro (Israel) Quimica e Farmaceutica Nikkho
For Amount
$30 million $11million $11million $17.9 million $265 million $38 million Euros 5.5 million $70 million $4.85 million $500 million $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)
Daiichi Sankyo (Japan) Abbott (USA) Sanofi Aventis Mylan (USA) Reckitt Benckiser Hospira Fresenius Kabi (German) Abbott (USA)
Company (Target)
Ranbaxy (India) Piramal (India) Shantha (India) Matrix (India) Paras (India) Orchid (India) Dabur Pharma (India) Wockhardt (India)
For Amount
$4.6 billion $3.72 billion $783 million $736 million $724 million $400 million $219 million $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 noncompliance 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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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.
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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
Nishith Desai Associates Report on Piramal Abbott Deal Natasha Nayak Report on Competition Impediments in the Pharmaceutical Sector in India RBI Circular No. 56 Dated Dec 09, 2011 India Biznews article on Indian Pharma Industry- April 13, 2012
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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