NATIONAL LAW SCHOOL OF INDIA UNIVERSITY

PROJECT ON MERGERS AND ACQUISITIONS IN PHARMACEUTICAL SECTOR

SUBJECT: MERGERS & ACQUISITION TRIMESTER: V 2013-14

SUBMITTED TO: Dr. VERSHA VAHINI

SUBMITTED BY: RONAK KARANPURIA I.D. NO. 534 LL.M. 2ND YEAR

TABLE OF CONTENTS
INTRODUCTION ...................................................................................................................5 UNDERSTANDING THE CONCEPT OF MERGERS AND ACQUISITIONS ............7
MERGERS OR AMALGAMATIONS ......................................................................................................7 ACQUISITIONS AND TAKEOVERS .......................................................................................................7 REGULATIONS GOVERNING MERGERS AND ACQUISITIONS IN INDIA ..........................................................8

UNDERSTANDING THE PHARMACEUTICAL INDUSTRY.....................................13

SWOT ANALYSIS OF INDIAN PHARMACEUTICAL INDUSTRY ....................................................................15 CURRENT SCENARIO ....................................................................................................................17 MAJOR PHARMACEUTICAL COMPANIES ...........................................................................................18 CHALLENGES .............................................................................................................................19 REGULATORY FRAMEWORK ..........................................................................................................20 FDI POLICY IN PHARMACEUTICAL SECTOR .........................................................................................22 NEW PHARMA PRICING POLICY ......................................................................................................23 INDIAN PHARMACEUTICAL SECTOR: FUTURE SCENARIO .......................................................................24

MERGERS AND ACQUISITIONS IN PHARMACEUTICAL SECTOR .....................25

.........................................................................................................................25 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
INTRODUCTION

CONCLUSION ......................................................................................................................35 BIBLIOGRAPHY ..................................................................................................................37

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Mergers and Acquisitions in Pharmaceutical Sector

INTRODUCTION
The Indian pharmaceutical industry currently tops the chart amongst Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It not only caters to the domestic market in fulfilling the countrys demands but also exports high quality, low cost drugs to more than 220 countries including USA, Russia, Singapore, South Africa, Kenya, Malaysia, Nigeria, Ukraine, Vietnam and more. It ranks very high amongst all the third world countries, in terms of technology, quality and the vast range of medicines that are manufactured. Pharmaceutical Industry in India is one of the largest and most advanced among the developing countries . It is ranked 3rd in volume terms and 14th in value terms globally. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. The Indian pharmaceutical sector is highly fragmented with more than 20,000 registered units. The pharmaceutical industry in India meets around 70% of the countrys demand for bulk drugs, drug intermediates, pharmaceutical formulations (patented & generic drugs), chemicals, tablets, capsules, orals and injectables. There are approximately 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: Indian Drugs & Pharmaceuticals Ltd., Hindustan Antibiotics Ltd., Bengal Chemical and Pharmaceuticals Ltd., Bengal Immunity Ltd., Smith Stanistreet Pharmaceuticals Ltd.). The sector comprises 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 and helped to put India on the pharmaceutical map of the world. The Indian pharmaceutical sector is now undergoing change. In the 1970s, the Government of India implemented a series of policy measures to achieve self-sufficiency in pharmaceutical production including legislation of the Indian Patent Act, 1970, Drug Price Control Order, Foreign Exchange Regulation Act and increasing the import tariff to promote the domestic industry, so as to enable the industry to meet the requirements of the Indian population. The Patents Act, 1970 abandoned product patent protection for
1

Includes USA, Japan and Europe.

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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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UNDERSTANDING THE CONCEPT OF MERGERS AND ACQUISITIONS

Mergers or Amalgamations
A merger is a combination of two or more businesses into one business. Laws in India use the term 'amalgamation' for merger. The Income Tax Act, 1961 [Section 2(1B)] defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than three-fourths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. Thus, mergers or amalgamations may take two forms:Merger through Absorption Merger through Consolidation Besides, there are three major types of mergers: Horizontal merger Vertical merger Conglomerate merger

Acquisitions and Takeovers

An acquisition is the purchase of one business or company by another company or other business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. The strategy of acquiring control over the management of another company either directly by acquiring shares carrying voting rights or by participating in the management is generally referred to as takeover. Takeovers may be broadly classified into hostile takeovers and friendly takeovers. When an acquisition is 'forced' or 'unwilling', it is called a hostile takeover. In an unwilling acquisition, the management of 'target' company would oppose a move of being taken over. But, when managements of acquiring and target companies mutually and willingly agree for the takeover, it is called friendly takeover.

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Regulations governing Mergers and Acquisitions in India

Mergers and acquisitions are regulated under various laws in India. The objective of the laws is to make these deals transparent and protect the interest of all shareholders. They are regulated through the provisions of:-

The Companies Act, 1956

The scheme of merger/amalgamation is governed by the provisions of Section 391-394 of Companies Act 1956. The summary of legal procedures for mergers or acquisition laid down in the Companies Act, 1956 is given here below: Permission for merger: - Two or more companies can amalgamate only when the amalgamation is permitted under their memorandum of association. Also, the acquiring company should have the permission in its object clause to carry on the business of the acquired company. In the absence of these provisions in the memorandum of association, it is necessary to seek the permission of the shareholders, board of directors and the Company Law Board before affecting the merger. Information to the stock exchange: - The acquiring and the acquired companies should inform the stock exchanges (where they are listed) about the merger. Approval of board of directors: - The board of directors of the individual companies should approve the draft proposal for amalgamation and authorise the managements of the companies to further pursue the proposal. Application in the High Court: - An application for approving the draft amalgamation proposal duly approved by the board of directors of the individual companies should be made to the High Court. Shareholders' and creditors' meetings: - The individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. At least, 75 per cent of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their approval to the scheme. Sanction by the High Court: - After the approval of the shareholders and creditors, on the petitions of the companies, the High Court will pass an order, sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. The date of the court's hearing will be published in two newspapers, and also, the regional director of the Company Law Board will be intimated. Filing of the Court order: - After the Court order, its certified true copies will be filed with the Registrar of Companies. Transfer of assets and liabilities: - The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date.
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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.

The Competition Act, 2002

The Act regulates the various forms of business combinations through Competition Commission of India. Provisions relating to combinations include Section 5, 6, 20, 29, 30 and 31 of Competition Act, 2002. Section 5 of the Act defines combination by providing threshold limits on assets and turnovers. At present, any acquisition, merger or amalgamation falling within the ambit of the thresholds constitutes a combination. According to Section 6 of the Act no person or enterprise shall enter into a combination, in the form of an acquisition, merger or amalgamation, which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void. A combination is either a merger of two enterprises or the acquisition of the control, shares, voting rights or assets of an enterprise or an enterprise that belongs to a group if it meets the jurisdictional requirements. Although the Act does not expressly so state, the term combination include horizontal, vertical and conglomerate mergers. Further, CCI on May 11, 2011 issued the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations). These Combination Regulations will now govern the manner in which the CCI will regulate combinations which have caused or are likely to cause appreciable adverse effect on competition in India (AAEC). Under the Act, Enterprises intending to enter into a combination have to give notice to the Commission. But, all combinations do not call for scrutiny unless the resulting combination exceeds the threshold limits in terms of assets or turnover as specified by the Competition Commission of India. The Commission while regulating a 'combination' shall consider the following factors: Actual and potential competition through imports; Extent of entry barriers into the market; Level of combination in the market; Degree of countervailing power in the market; Possibility of the combination to significantly and substantially increase prices or profits; Extent of effective competition likely to sustain in a market; Availability of substitutes before and after the combination; Market share of the parties to the combination individually and as a combination; Possibility of the combination to remove the vigorous and effective competitor or competition in the market; Nature and extent of vertical integration in the market; Nature and extent of innovation;
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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.

The Foreign Exchange Management Act, 1999

FEMA is regulating the cross border mergers and acquisitions. The foreign exchange laws relating to issuance and allotment of shares to foreign entities are contained in The Foreign Exchange Management (Transfer or Issue of Security by a person residing outside India) Regulation, 2000 issued by RBI vide Notification No. FEMA 20/2000-RB dated 3rd May, 2000. These regulations contained general provisions for inbound and outbound cross border mergers and acquisitions in India. Under these provisions once the scheme of merger or amalgamation of two or more Indian companies has been approved by a court in India, the transferee company or new company is allowed to issue share to the shareholders of the transferor company resident outside India subject to the condition that: The percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap. The transferor company or the transferee or the new company is not engaged in activities, which are prohibited in terms of FDI policy.

The Securities and Exchange Board of India Act, 1992

The Securities and Exchange Board of India (the SEBI) is the nodal authority regulating entities that are listed on stock exchanges in India. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has been repealed by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Code) with effect from October 23, 2011. The changes introduced in the new regulations are based substantially on the recommendations of Achuthan Committee that the SEBI had set up to review the working of the 1997 Regulations. The Takeover Code restricts and regulates the acquisition of shares, voting rights and control in listed companies. Acquisition of shares or voting rights of a listed company, entitling the acquirer to exercise 25% or more of the voting rights in the target company, obligates the acquirer to make an offer to the remaining shareholders of the target company to further acquire at least 26% of the voting capital of the company. However, this obligation is subject to the exemptions provided under the Takeover Code. Exemptions from open offer requirement under the Takeover Code inter alia include acquisition pursuant to a scheme of arrangement: 1) involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of a court or a competent authority under any law or regulation, Indian or foreign; or
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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.

The Income Tax Act, 1961

Amalgamation defined under Section 2(1B) of the Income Tax Act, 1961 means the merger of one or more companies with another company or the merger of two or more companies to form a new company in such a manner that the following conditions can be satisfied:-

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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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UNDERSTANDING THE PHARMACEUTICAL INDUSTRY

The word pharmaceutical comes from the Greek word Pharmakeia. The modern transliteration of Pharmakeia is Pharmacia. The pharmaceutical industry develops, produces and markets drugs or pharmaceuticals licensed for use as medications. Worldwide, the pharmaceutical industry operates in two categories namely, innovative and generic. Innovative companies are those that create knowledge and spend a lot of money on R&D to develop new medicines. Generic companies are adoptive in name and permit copying of medicines only after the expiry of the patent or for unpatented drugs. They copy the knowledge already created by innovative companies and charge low prices since they do not incur any basic research cost. Based on this categorization, globally, pharmaceutical 2 companies deal in two categories of pharmaceutical products namely generic and/or brand medications and medical devices. They are subject to a variety of laws and regulations regarding the patenting, testing and ensuring safety and efficacy and marketing of drugs. In India, the pharmaceutical products are generally categorised as branded medicines, 4 branded-generics and generic medicines . The basis of distinction between branded medicines, branded-generics and generic medicines categorization is as follows: Branded medicines: contain one or more ingredients marketed under brand names given to them by their manufacturers in India. These are normally promoted to doctors. [In western countries brand-name medicines are defined differently: the term refers to new drugs developed by the innovator patent holding companies]. Branded-generics: is an exclusively Indian terminology and refers to branded products [same as category (a) above] but not promoted to the medical profession but marketed through heavy incentives to retail chemists. Generic medicines: are those which are marketed under their chemical/salt names. [In western countries generic medicines are defined differently i.e. products that
3

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 5 (APIs) 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 6 segments . 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-generation-technology-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 7 Files (DMFs) 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 facilities 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.

SWOT Analysis of Indian Pharmaceutical Industry

The SWOT analysis of the industry reveals the position of the Indian pharmaceutical industry in respect to its internal and external environment.

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 patent to product patent ;
9 10

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 11 9 per cent 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.
11

According to A Brief Report Pharmaceutical Industry in India, published in January 2011.

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Major Pharmaceutical Companies

India based pharmaceutical companies are not only catering to the domestic market and fulfilling the countrys demands, they are also exporting to around 220 countries. They are exporting high quality, low cost drugs to countries such as the US, Kenya, Malaysia, Nigeria, Russia, Singapore, South Africa, Ukraine, Vietnam, and more. Currently, the US is the biggest customer and accounts for 22 per cent of the sectors exports, while Africa accounts for 16 per cent and the Commonwealth of Independent States (CIS) places around eight per cent of orders, as per Research and Market report. For most of the pharma companies, domestic business contributes in the range of 20-50% of the overall revenue. US business contribution stands at 20-30% and remaining comes from 12 the RoW (Rest of the World) markets . Top Companies in India by Net Sales (2011-12)

Company
Ranbaxy Labs Cipla Dr. Reddys Labs Lupin Aurobindo Pharma Cadila Health Jubilant Life Wockhardt IPCA Labs GlaxoSmithKline

Net Sales (Rs. cr.)

7,686.59 6,977.50 6,686.30 5,364.37 4,284.63 3,152.20 2,641.07 2,560.16 2,352.59 2,345.88

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.

Indian Pharma Domestic Growth Expectations13

Company
Cadila Health Cipla Dr. Reddys Labs IPCA Labs Sun Pharma Unichem Lupin Ranbaxy Labs GlaxoSmithKline Pfizer Torrent Glenmark

FY12 Domestic Growth

12% 10% 10% 10% 15% 5% 19% 12% 13% 14% 12% 16%

Earlier growth estimates

15% 15% 15% 17% 18% 9% 19% 12% 13% 14% 12% 16%

Source: Emkay Research Challenges

Every industry has its own sets of advantages and disadvantages under which they have to work; the pharmaceutical industry is no exception to this. Some of the challenges the industry faces are:
13http://www.emkayglobal.com/Uploads/EmkayResearch/Pharma%20Sector_%20Assessing%20key%20Risks.pdf

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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

Regulatory Framework in Pharmaceutical Sector in India

The pharmaceutical industry is heavily regulated. All aspects of the life-cycle of new drugs are regulated, from patent application to marketing approval, commercial exploitation, patent expiration and competition with generics. All the important actors in the pharmaceutical industry the manufacturers, wholesalers, retailers and prescribing physicians are also subject to regulatory controls. Medicines apart from their critical role in alleviating human suffering and saving lives have very sensitive and typical dimensions for a variety of reasons. They are the only commodity for which the consumers have neither a role to play nor are they able to make any informed choices except to buy and consume whatever is prescribed or dispensed to them. While drug regulators decide which medicines can be marketed - pharmaceutical companies either produce or import drugs that they can profitably sell - doctors decide which drugs and brands to prescribe, the consumers are totally dependent on and at the mercy of external entities to protect their interests. It is because of these typical dimensions that the state undertakes to regulate the import, manufacture and sale of medicines so as to ensure that they are both safe, effective and of standard quality. Drug regulation covers many functions, namely, marketing approval of new medicines based on safety and efficacy studies, licensing and monitoring of manufacturing facilities and distribution channels, post-marketing adverse drug reaction (ADR) monitoring, quality control (QC), periodic review and re-evaluation of approved drugs, control of drug promotion Regulation of drug trials. While most functions pertaining to drug regulation come under the jurisdiction of Central Government and are carried out by the Central Drug Standards Control Organization (CDSCO), others viz. licensing and monitoring of manufacturing units and distribution channels; quality control etc. are carried on by state level drugs authorities under the administrative control of state governments. Drugs and Cosmetics Act, 1940 and Rules, 1945, Drugs & Magic Remedies (Objectionable Advertisements) Act, 1954 as amended from time to time are the principal legislations that govern the functioning of CDSCO and state drug authorities.

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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)

2. Some Relevant policies

Draft National Pharmaceutical Pricing Policy, 2011 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

Major Pharmaceutical Regulatory Bodies in India:

Department of Chemicals & Petrochemicals (DCP)14

DCP is responsible for the policy, planning, development, and regulation of the chemical, petrochemical, and pharmaceutical industries in India. This department aims: To provide impartial and prompt services to the public in matters relating to chemical, pharmaceutical and petrochemical industries. To take steps to speedily redressal of grievances received. To formulate policies and initiate consultations with Industry associations and to amend them whenever required.

Central Drugs Standard and Control Organization (CDSCO)15

CDSCO lays down standards and regulatory measures of drugs, cosmetics, diagnostics and devices in the country. It regulates clinical trials and market authorization of new drugs. It
14 http://chemicals.nic.in/ 15 http://cdsco.nic.in/

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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.

National Pharmaceutical Pricing Authority (NPPA)16

NPPA is an organization of the Government of India which was established, to fix/ revise the prices of controlled bulk drugs and formulations and to enforce prices and availability of the medicines in the country, under the Drugs (Prices Control) Order, 1995. The organization is also entrusted with the task of recovering amounts overcharged by manufacturers for the controlled drugs from the consumers. It also monitors the prices of decontrolled drugs in order to keep them at reasonable levels.

FDI Policy in Pharmaceutical Sector17

The issue of FDI in existing Indian pharma companies started attracting government's attention after some foreign firms acquired big Indian companies such as Ranbaxy by Daiichi Sankyo of Japan, Shanta Biotech by Sanofi Aventis of France and Piramal Health Care's health unit by Abbott Laboratories of the US. As per the circular number 56 dated December 9, 2011, RBI has notified the new policy for the foreign investment in Indian pharmaceutical companies. The reviewed policy is as under: FDI, up to 100 per cent, under the automatic route, would continue to be permitted for green field investments in the pharmaceuticals sector. FDI, up to 100 per cent, would be permitted for brown field investment (i.e. investments in existing companies), in the pharmaceutical sector, under the government approval route.

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. 16 http://www.nppaindia.nic.in/index1.html 17 http://dipp.nic.in/English/investor/FDI_Policies/FDI_policy.aspx

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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.

New Pharma Pricing Policy18

A GOM, headed by Agriculture Minister Sharad Pawar on September 27, 2012 finalised a new pharmaceutical pricing policy.19 In simple terms, under this policy 348 essential medicines will come under the government price control. Till now, through the National Pharmaceutical Pricing Authority (NPPA), the government controls prices of 74 bulk drugs and their formulations. The Group of Ministers arrived at a consensus and finalised market based weighted average prices for all the drugs, which have a market share of more than 1%. It includes the 348 drugs but not their combinations. The weighted average price of products having over 1% market share would be taken as the maximum retail price. The government came out with this pricing control policy so that the most essential drugs gets to the proverbial last man in the queue when they need them the most. The aim behind pricing control policy is not about controlling the price of top brands. It is about making affordable. 18 http://economictimes.indiatimes.com/topic/New-pharma-pricing-policy 19 www.pharmaceuticals.gov.in/NPPP2012.pdf
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Indian Pharmaceutical Sector: Future Scenario

The dream of Indian pharmaceutical companies for marking their presence globally and competing with the pharmaceutical companies from the developed countries like Europe, Japan, and United States is now coming true. The new patent regime has led many multinational pharmaceutical companies to look at India as an attractive destination not only for R&D but also for contract manufacturing, conduct of clinical trials and generic drug research. With market value of about US$45 billion in 2005, the generic sector is expected to grow to US$100 billion in the next few years. The Indian companies are using the revenue generated from generic drug sales to promote drug discovery projects and new delivery technologies. Contract research in India is also growing at the rate of 20-25% per year. By revising its R&D policies the government is trying to boost R&D in domestic pharmaceutical industry. It is giving tax exemption for a period of ten years and relieving customs and excise duties of all the drugs and material imported or exported for clinical trials to promote innovative R&D. The future of Indian pharmaceutical sector is very bright because of the following factors: Clinical trials in India cost US$25 million each, whereas in US they cost between US$300-350 million each.

Indian pharmaceutical companies are spending 30-50% less on custom synthesis services as compared to its global costs. In India investigational new drug stage costs around US$10-15 million, which is almost 1/10th of its cost in US (US$100-150 million).

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MERGERS AND ACQUISITIONS IN PHARMACEUTICAL SECTOR

Introduction
The past two decades have effectuated a wave of change in India- liberalization, technological advancements, globalization, and sustainable development to name a few. This includes a major corporate development called Mergers and Acquisitions (M&A). There are several causes of mergers and acquisitions in the pharmaceutical industry.20 Among them are: Absence of proper research and development facilities or High cost of R&D High valuation of Indian firms (Premium Value) Increase in market share Change in mind set of promoters Generic competition Manufacturing prowess and cost competitiveness of Indian companies [highest no. of US FDA (Food & Drug Administration) approved plants outside US] Geographical expansion Emerging markets-future growth driver Overcome barriers to entry Product/Brand extension Growing Indian population Growing middle class with higher purchasing power (Increasing market) Increase in chronic diseases Low growth rate of global pharma High profile product recalls: MNCs now focusing on pharmerging markets Gradual expiry of patents etc.

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:
20 www.diva-portal.org/smash/get/diva2:4101/FULLTEXT01.pdf

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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.

Impact of Mergers and Acquisitions on Indian Pharmaceutical Industry

The healthcare sector in India has experienced a paradigm a shift due to emerging trends in globalization, developing markets, industry dynamics and increasing regulatory and competitive pressures. Companies across the world are reaching out to their counterparts to take mutual advantage of the others core competencies in R&D, Manufacturing, Marketing and the niche opportunities offered by the changing global pharmaceutical environment. 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 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 companies necessary competitive edge for consolidation and growth.

Mergers and Acquisitions Trend in India

Mergers and Acquisitions (M&A) interest in India is currently very high in the pharmaceutical industry. Size and end-to-end connectivity are major detriments in the global markets. To achieve them, Western MNCs have to look to Indian companies. Indias changing therapeutic requirements and patent laws will provide new opportunities for big pharmaceutical for launching their patented molecules. While, Indias strong manufacturing base will stand global generic companies in good stead as a low-cost development and manufacturing destination.

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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.

Mergers and Acquisitions- Challenge

While growth via acquisitions is a sound idea in principle, 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 companys profitability and return ratios for several years post acquisition. In several other cases acquisitions by Indian generic companies are small and have been primarily to expand geographical reach while at the same time, shifting production from the acquired units to their cost-effective Indian plants. A few have been to develop a bouquet of

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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:21

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. 21 http://research.ijcaonline.org/iccia/number4/iccia1026.pdf
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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

Domestic Mergers and Acquisitions:

One of the strategies being followed by the Indian pharmaceutical companies for their growth in the pharmaceutical industry in India are domestic mergers and acquisitions. As stated earlier, the incentives for such mergers and acquisitions by Indian companies include building a critical mass in terms of marketing, manufacturing and research infrastructure, diversification into new areas, expanding into other geographies/ therapeutic segments/ customers to enhance product life cycle and build synergies for new products, enhancing product, technology and intellectual property portfolio and increasing their market share.
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Some examples of the domestic mergers and acquisitions22 that took place in the year 201112 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.

Outbound Cross-Border Mergers and Acquisitions:

In the Indian pharmaceutical market there are a number of companies that have entered into merger and acquisition agreements in the context of the global market scenario. These companies would be selling off the non-core business divisions like Over-the-Counter. This is expected to further the consolidation in the mid-tier as far as the pharmaceutical industry in Europe is concerned. The sheer number of companies acquiring parts of other companies has shown that the Indian pharmaceutical industry is ready to be a dominant force in this scenario. In the recent times Nicholas Piramal has taken the ownership of 17% of Biosyntech that is a major pharmaceutical packing organization in Canada. Torrent has got the ownership of Heumann Pharma, a general drug making company and, formerly, a subsidiary of Pfizer. Matrix has acquired Docpharma, a major pharmaceutical company of Belgium. Sun Pharmaceutical Industries is set to make acquisitions in pharmaceutical companies in the US and has set aside $450 million to execute these plans. In Bengaluru, Strides Arcolab has aimed at acquiring 70 per cent in a pharmaceutical facility in Italy that is worth $10 million.

22 http://research.ijcaonline.org/iccia/number4/iccia1026.pdf
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Some examples of Outbound Mergers and Acquisitions

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

Inbound Cross-Border Mergers and Acquisitions:

Nevertheless, in the last two years, there has been a slowdown in the out-bound M&A and more MNCs are being seen acquiring Indian Pharmaceutical Companies. This is mainly done to gain access to the generic drug market. Earlier the lack of patent protection made the Indian market undesirable to the multi-national companies that had dominated the pharmaceutical market. Since the multinational companies streamed out of the Indian Market, the Indian domestic companies started to take their place and carved a niche in both the Indian and world markets with their expertise in reverse-engineering new processes for manufacturing drugs at low costs. Now the Indian companies face a threat of takeover under the new IPR regime which makes product patents finally available for the Indian Pharmaceutical industry. The advent of pharmaceutical product patent recognition in January 2005 changed the ground rules for Indian companies. In the run up to the new post-patent era and since, the Indian industry has been evolving. R&D departments are moving away from reverse-engineering in favour of developing novel drug delivery systems and discovery research. This has resulted in the need of new investments and R&D. It also provides for compulsory licensing which allows countries to import cheaper generic versions of patented drugs in the interest of public health. This reduces the profitability of the Indian drug
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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.

Some examples of Inbound Mergers and Acquisitions

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

Review of some Major Mergers and Acquisitions: Daiichi-Ranbaxy Acquisition Deal25

Ranbaxy was formed as joint venture with a European Pharmaceutical company in 1961. It was bought over in 1966 by Bhai Mohan Singh. Till 90s the company mainly concentrated on reverse-engineering for its growth.26 The success of the company as a major generic player in the world market is reflective of the policies adopted post-1970 by the Indian government. With the opening up of the Indian economy and changing patent law landscape, including other business factors forced the company to have a re-look at its strategies. The company then started aggressively looking out for tie-ups/joint ventures with foreign pharmaceutical companies and also to take over some good Indian companies in the same line of business. The company has entered into licensing arrangements with international companies for marketing their patented drugs in the country. Ranbaxy Laboratories is one of the top leading pharmaceutical companies in the country. Almost half of its revenues come from antibiotics and antibacterial products. However, of late, the company is slowly shifting its focus to 25http://smartinvestor.business-standard.com/BSCMS/PDF/ranbaxydaiichi_event_updated_210708.pdf 26 http://www.scopeknowledge.com/Downloads.aspx?did=9
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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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Abbott-Piramal Acquisition Deal26

At $3.72 billion, its the second largest pharma deal in India, after the $4.6 billion DaiichiRanbaxy deal in 2008. On May 21, 2010, Piramal Healthcare declared the execution of definitive agreements with Abbott Lab for sale of its Formulation Business to AHPL (Abbott Healthcare Private Limited). It was not an easy catch for Abbott Lab that had to outbid a number of prospective acquirers to win this Formulation Business from the Piramal Healthcare. Piramal is a leader in the branded generics market of India, and the buyout made Abbott the top player in the Indian pharmaceutical market one of the biggest areas of growth potential in the world. What it means for Abbott?27 Rights to 350 brands and trademarks of generics, including Phensedyl cough syrup Market share close to 7% in the Indian generic market Strong presence in India (growth rate 13-17%) Complete product portfolio Access to other emerging market

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.

26 http://www.abbott.sk/App_Publisher/UserFiles/PiramalABTFinal%20Rel.pdf 27 http://www.currentagreements.com/q/3j2rnoEcw8WV0lR7pCIPUI?type=pdf
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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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