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 The domestic business was the most attractive part of the business in Piramal¶s portfolio.
So that part being hived off will definitely reduce the value of the company, but they are been
compensated at a price by Abbott. So we need to see how the earnings will look like and we need to look
for more clarity on what the value of the Piramal ex the domestic formulations would be.

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company regarding that as well.

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 From the valuations perspective, they have got good valuations. Somewhere
around marketcap to sales it¶s around 3.3 times, which is much higher than what the deal happened with
Ranbaxy and Daiichi earlier on. They have got good valuations for the deal but in terms of profitability, it
will definitely have an impact on the overall numbers because domestic formulation was the key driver
and the contributor to the overall profitability.

The residual business will not be that profitable. They will have surplus money in order to expand their
business in the CRAMS, but it needs to be looked at how the CRAMS move in from hereon.

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 More number crunching needs to be done but definitely with 50% of topline getting knocked off
and more than that in terms of profitability getting knocked off from Piramal Healthcare business, the
CRAMS business, because of its overseas business is currently not operating at very high margins. If you
look at the CRAMS business also, domestic is 50% as of now, but it is not contributing significantly as of
now, In terms of profitability and profit contribution, the residual business is not contributing significantly.
So the residual value for the business will be lower.

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 The stock is already at Rs 528 and if you calculate USD 2.5 billion²it¶s roughly comes
to about Rs 500 per share. So Rs 500 per share is already reflecting though the residual business has
been valued at a much lower price. The share should look up because the share has already come to a
much lower level of Rs 528.

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 What has happened is last year they acquired Solvay Pharmaceuticals¶ business and globally
they become quite strong in the pharma space. But in India, Solvay is separately listed, so Abbott and
Solvay merger has to still go through in the domestic market and with Piramal¶s business will definitely go
to number on position leaving Glaxo on number two position in the multinational corporation (MNC)
space.

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) There are two things. If you look at the domestic business²it¶s roughly around Rs 2,000
crore of their last year business of Rs 3600 crore and from a profit perspective my sense is that of the Rs
480 crore the domestic business would have contributed roughly around Rs 310-320 crore. So roughly
what is left is around Rs 150 crore of profit after tax (PAT). It¶s the rough estimate which one could give to
the residual business, which is there in Piramal.

Essentially, most of it comes through CRAMS and a part of it comes through their acquisition US of the
inhalation business of Minrad. Even if you give it a 14-15 times on a trailing multiple, it could roughly
come to a value, which is around Rs 2,000-2,200 crore for this business on a trailing 15 times basis. On
this we must not forget that the company is also going to get USD 2 billion of cash, if I go by what is
coming in the press.

The current stock is roughly valuing the company around Rs 11,000 crore²it¶s the rough estimate, which
I have. We are basically there as far as the fair value is concerned. If you take the cash component and
use that as a proxy for EV, the company also has debt of roughly around Rs 1,300 crore, so you can
reduce that from this number. So you will roughly be where the current price is. That¶s the way I would
look at it.

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like it¶s a cash offer. So I don¶t have additional details to share with.

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) If you see Piramal¶s market share by last published numbers from ORG, they had a market
share of around 4.3% in the domestic market and a number four position and this business is roughly
around Rs 2,000 crore. Cipla, which has the highest market share, has domestic business of roughly
2,500 crore in India.

I don¶t have the Abbott numbers with me but I would think that including Abbott the number should be
very close to where Cipla is currently.


Mumbai, May 21: Seen as one of the the most exciting merger and acquisition deals since
Ranbaxy¶s acquisition by the Japanese major Daiichi Sankyo, the US-based multinational
pharma company Abbott has acquired the domestic formulations business of Piramal Healthcare
Limited.

The deal was signed for $3.72 billion with $2.12 billion to be paid upfront and $400 million
annually for the next four years.

Abbott has paid the equivalent of nine times the sales revenue of Piramal¶s health service
division.

This deal catapults Abbottt to the No. 1 position in the Indian pharmaceutical market edging out
the current leader, Cipla. It also increases Abbott¶s presence in the emerging markets.

³Emerging markets represent one of the greatest opportunities in health care ² not only in
pharmaceuticals ² but across all of our business segments. Today, emerging markets represent
more than 20 per cent of Abbott¶s total business,´ said Mr Miles D. White, chairman and chief
executive officer, Abbott.

³With this deal, the combined Healthcare Solutions and Abbott businesses will become the clear
market leader in India, with a market share of approximately 7 per cent,´ said Mr Ajay Piramal,
chairman, Piramal group.

The Indian pharmaeutical industry is not enthused by the deal. Mr Daara Patel, secretary general
of the Indian drugs manufacturers association said it¶s not a good thing for the Indian industry.

³We won¶t have our own identity. They can stop manufacturing any time and start importing
from wherever they like and there is nothing we will be able to do about it.´

However the brokerage house First Global sees several more deals happening. ³MNCs will be
buying out or taking stake in Indian companies because they see good growth in the Indian
pharma market,´ said Ms Devina Mehra.

The stock markets gave the thumbs down to the Piramal stock which lost almost 12 per cent.

The markets felt that Piramal had given away its cash cow, which accounted for 55 per cent of its
total business. The stock price of Abbott India was up 4 per cent, as it is the US parent that was
signing the deal.

Learn with DC

Q What is Abbott buying?

Abbott will get full ownership of Piramal Healt-hcare¶s branded generics ² prescription drug ²
business. This includes close to 350 brands and 5,000 employees, which includes 4,000 medical
representatives. The turnover of this business is expected to exceed $500 million next year. This
market is expected to grow at 20 per cent per annum.
Q What is Piramal Healthcare left with?
Piramal Healthcare still retains custom manufacturing, over-the-counter products, medical
devices, services such as pathology labs and drug discovery. These businesses account for about
45 per cent of the company¶s current turnover.

Q Is the deal good for shareholders?

Post tax and debt repayment, Piramal Healthcare will get approximately Rs 500 per share from
the transaction. The value of the company¶s residual business is estimated at Rs 120-150 per
share.

The current stock price of the company is Rs 502.4. So the deal adds value to the firm. The
management is planning to give a special one time dividend as well. This should give some of
the benefit to shareholders as well.

bbott May 21 announced a definitive agreement with Piramal Healthcare Limited to acquire full
ownership of Piramal¶s Healthcare Solutions business (Domestic Formulations), a leader in the
Indian branded generics market, for an up-front payment of $2.12 billion, plus $400 million
annually for the next four years, giving Abbott the No. 1 position in the Indian pharmaceutical
market. This further accelerates Abbott¶s emerging markets growth following the recent
acquisition of Solvay Pharmaceuticals and announcements last week of Abbott¶s collaboration
with Zydus Cadila as well as the creation of a new stand-alone Established Products Division to
focus on expanding the global markets for its leading branded generics portfolio.

³This strategic action will advance Abbott into the leading market position in India, one of the
world¶s most attractive and rapidly growing markets,´ said Miles D. White, chairman and chief
executive officer, Abbott. ³Our strong position in branded generics and growing presence in
emerging markets is part of our ongoing diversified pharmaceutical strategy, complementing our
market-leading proprietary pharmaceutical offerings and pipeline in developed markets.´

³Emerging markets represent one of the greatest opportunities in health care not only in
pharmaceuticals but across all of our business segments. Today, emerging markets represent
more than 20 percent of Abbott¶s total business,´ said Mr. White.

³With this deal, the combined Healthcare Solutions and Abbott businesses will become the clear
market leader in India, with a market share of approximately 7 percent,´ said Ajay Piramal,
chairman, Piramal Group. ³This was our collective vision and I am glad that those who are part
of Piramal¶s Healthcare Solutions business will realize this dream.´

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India is one of the world¶s fastest-growing pharmaceutical markets, due in large part to branded
generics. The market will generate nearly $8 billion in pharmaceutical annual sales this year, a
number that is expected to more than double by 2015. Abbott estimates the growth of its Indian
pharmaceutical business with Piramal to approach 20 percent annually, with expected sales of
more than $2.5 billion by 2020.

Branded generics have significant brand equity in many international markets, providing durable,
sustainable franchises for future growth. Piramal markets the products in its Healthcare Solutions
business in India only and does not market traditional generic products. Today, branded generics
account for 25 percent of the global pharmaceutical market, have the majority of market share in
the largest emerging markets, and are expected to outpace growth of patented and generic
products.

The Mumbai-based Piramal Healthcare Solutions business has a comprehensive portfolio of

branded generics with annual sales expected to exceed $500 million next year in India, and
market-leading brands in multiple therapeutic areas, including antibiotics, respiratory,
cardiovascular, pain and neuroscience. This business grew 23 percent in 2010 (fiscal year ended
March 31, 2010), faster than the market in India. Piramal has a strong commercial presence,
including the largest sales force in India with a unique model that includes dedicated sales
personnel in rural areas inhabited by 70 percent of the population. The combined Abbott and
Piramal sales forces will be the industry¶s largest in India.

Piramal¶s Healthcare Solutions business will become part of Abbott¶s newly created, stand-alone
Established Products Division. Piramal¶s Healthcare Solutions business employs more than
5,000 people in India. Abbott, which is celebrating its 100th year in India, has more than 2,500
employees across all of its businesses there.


  

  


Throughout the past decade, Abbott has built a leading portfolio of branded generics, through its
own products as well as those acquired with the 2001 acquisition of Knoll¶s pharmaceutical
business. In 2007, the company established a separate business unit within its international
pharmaceutical division dedicated to established products.

Additionally, a new geographic region focused on Russia, India and China was created, which
resulted in the doubling of Abbott¶s growth rate in those countries.

Most recently, the company acquired Solvay Pharmaceuticals, obtaining a diverse branded
generics portfolio and providing significant critical mass in key emerging markets.

As a result of these combined actions, Abbott is now among the leading multinational health care
companies in numerous emerging markets. Approximately 20 percent of Abbott¶s
pharmaceutical sales today are in emerging markets.

³We have assembled a market-leading branded generics portfolio tailored to the unique needs of
emerging markets, strongly positioning Abbott to meet the current and future geographic and
market dynamics in pharmaceuticals,´ said Olivier Bohuon, executive vice president, global
pharmaceuticals, Abbott. ³Piramal has built a reputation for high-quality, well-known and trusted
pharmaceutical brands. We look forward to welcoming the accomplished staff of Piramal¶s
Healthcare Solutions business to Abbott.´

Pharmaceutical sales in emerging markets are expected to grow at three times the rate of
developed markets and account for 70 percent of pharmaceutical growth over the next several
years. This explosive growth is occurring as demographics, rising incomes, modernization of
health systems and an increase in the treatment of chronic disease create greater demand for
medicines.

  

Under terms of the agreement, Abbott will purchase the assets of Piramal¶s Healthcare Solutions
business for a $2.12 billion up-front payment with payments of $400 million annually for the
next four years, beginning in 2011. The transaction will not impact Abbott¶s ongoing earnings
per share guidance in 2010. Abbott plans to fund the transaction with cash on the balance sheet.

This transaction is subject to shareholder approval of Piramal Healthcare Limited and other
customary closing conditions, and is expected to close in the second half of 2010. This
transaction is being conducted by a wholly-owned subsidiary of Abbott, resulting in full
ownership of the assets of Piramal¶s Healthcare Solutions business (Domestic Formulations).








Abbott will conduct a special conference call today at 7:30 a.m. Central time (8:30 a.m. Eastern
time) to provide an overview of the transaction. The live Web cast will be accessible through
Abbott¶s Investor Relations Web site at www.abbottinvestor.com.

  


The deal, which put India's fourth largest pharma company under Abbott's wing, has kept global
biopharma tongues wagging for months about over-heated valuations in emerging markets, and
in particular, of course, India, as well as Big Pharma's true long-term intentions in Asia versus
their short-term opportunistic motivations. It catapulted Abbott, which until last year could be
diagnosed as emerging-markets deficient, into the number one spot in India. That's a steep climb
from 2009, when it barely cracked the high teens, and puts it ahead of MNC India virtuosos like
GSK and Sanofi. Abbott's move changed not only Abbott, however, but the entire Indian
pharmaceutical landscape forever - surely the kind of transformative event that should be at the
top of any dealmaker's DOTY award list.

So, what did Abbott get for its generosity? A portfolio of 350 branded generics which its newly
formed Established Products Business Unit (haven't we seen similar renditions at Pfizer and
AstraZeneca, among others?) will sell in India and some other emerging markets; a large,
somewhat bloated sales force, with a strong presence in rural districts, and a 4% share of a very
fragmented market - bringing Abbott's new total share to 7%.

Analysts say that with this deal, Abbott can move into the center of the Indian drug market and
play a bigger role in its rapidly unfolding growth story. Piramal has a large number of mass-
consumption products, which Abbott could not easily create from scratch in a fast-moving
market, and Abbott will also be able to sell its own brands, as well as the Piramal products,
which are largely in CNS, cardiovascular, and respiratory diseases. Oh, and the new Abbott's pro
forma growth is projected at 13.2%, which is stunning for Western eyes, although actually below
the overall growth rate of 17.5%.

India is in the midst of an M&A frenzy, which started with Daiichi Sankyo's $4.6 billion
purchase of Ranbaxy generics in 2008. Even that huge effort pales in comparison to what Abbott
has wrought. Before Abbott, three of the top four pharma companies in India were Indian-
owned, but now that number is whittled down to one: Cipla.

If the aim of DOTY is to reward a deal-maker's brashness and recognize a company that puts its
money where its mouth is, vote for Abbott-Piramal.






 
 


 

 
 






BOSTON (MarketWatch) -- Abbott Laboratories reported lower fourth-quarter earnings early
Wednesday, attributable largely to merger costs, and issued a 2011 earnings forecast that fell
below most Wall Street estimates.

Before market open, Abbott /quotes/comstock/13*!abt/quotes/nls/abt (ABT , -0.07, -

0.15%) said it earned $1.44 billion, or 92 cents a share, compared with $1.54 billion, or 98
cents a share, for the same period in 2009.

The 2010 quarter included after-tax charge of 23 cents a share related primarily to restructuring
costs and the acquisitions of Solvay Pharmaceuticals and Piramal Healthcare Solutions.

/quotes/comstock/13*!abt/quotes/nls/abt ABT , -0.07, -0.15%

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Excluding various items, Abbott would have reported adjusted earnings of $1.30 versus $1.18.

Sales for the diversified health care company rose 13% to $9.97 billion, easily topping Wall
Street estimates.

A poll of analysts by FactSet pegged Abbott at earning $1.30 a share, on revenue of $9.87
billion.

Abbott also announced that it plans to eliminate about 1,900 jobs, or about 2% of its work force.
The company employs roughly 90,000 worldwide, according to an Abbott spokeswoman.
Abbott also issued a 2011 earnings forecast that fell below most estimates.

The company said it sees 2011 adjusted earnings coming in between $4.54 and $4.64 a share.
According to Factset, analysts had been looking for adjusted earnings of $4.64.

Reported earnings for 2011, which includes various accounting items, should be between $3.76
and $3.86 a share, Abbott added.

Pharmaceutical sales for the quarter jumped 23% to $5.94 billion, helped by the inclusion of
products from Solvay and Piramal. Abbott acquired Solvay last year for roughly $6 billion.

Worldwide diagnostic sales edged up 4% to $1.02 billion, while sales of vascular products rose
14% to $822 million.

Sales of the company¶s nutritional products were flat at $1.43 billion, hurt by a September 2010
recall of the company¶s most popular baby formulas.

In early October, Abbott yanked its diet drug Meridia from the U.S. market over heightened
concerns that it could trigger a stroke or heart attack in some patients, especially those with
underlying cardiovascular disease. The drug also has been taken off the European, Canadian and
Australian markets.

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In May, U.S.-based Abbott Labs secured the top spot in India's growing pharmaceutical industry
with its US$3.72 billion takeover of Piramal Healthcare's branded generics business. At the same
time, hopes have receded of a wholly Indian pharmaceutical major emerging as a global player.
According to Wharton faculty and industry experts, changing global business models and the
resources needed to develop blockbuster drugs are propelling Indian companies to join forces
with multinationals through strategic alliances or as targets for acquisitions.
The Piramal purchase offers "an incredible strategic platform," according to Michael Warmuth,
senior vice-president, established products, in Abbott's pharmaceutical products group. Based in
Abbott Park, Ill., Warmuth is responsible for growing his company's global branded generics
portfolio. The Abbott-Piramal combine reports to him, but he notes it will be run as a standalone
business unit after the merger takes effect later this year. Abbott will pay US$2.12 billion upfront
and four annual installments of US$400 million from 2011 for Piramal's healthcare solutions
business.

"We want to expand in emerging markets, and you can't be taken seriously without having a
strong or dominating presence in India," Warmuth says. Emerging markets will in the next few
years account for 70% of the growth in the global pharmaceutical industry, and India is "an
important and critical part" of that, he adds. He expects Abbott's Indian revenues to grow to
US$2.5 billion in the next decade, up from the combined company's current revenues of about
US$500 million. Also, India's US$8 billion pharmaceutical industry is poised to double by 2015,
he adds.

Emerging markets will grow by 14% to 17% between now and 2014, compared with 3% to 6%
in developed markets, according to an April 2010 report from IMS Health, a research services
firm in Norwalk, Conn. The global pharmaceutical industry will add US$300 billion in revenues
to reach US$1.1 trillion by 2014, the report stated.

The Abbott-Piramal deal is the latest in a wave of consolidation within the global pharmaceutical
industry over the past few years. It is much smaller than two of 2009's biggest M&A deals --
Pfizer's US$68 billion purchase of Wyeth and Merck's US$41 billion buy of Schering-Plough.
However, Abbott has valued Piramal's formulations business at about eight times sales, which is
almost twice that of what Japan's Daiichi Sankyo paid for its US$4.6 billion purchase of a
controlling stake in India's Ranbaxy Laboratories in June 2008. "If you want the best companies
you will pay a premium; however, we feel it was the right price," says Warmuth of the Piramal
acquisition. Incidentally, Daiichi Sankyo took a US$3.5 billion write-off on its Ranbaxy
acquisition but has maintained it made the right decision.

Wharton management professor Saikat Chaudhuri says the relatively higher valuation makes
sense for Abbott. "Sure, it is on the higher side, but we are also taking about a lot of potential in
these markets and multiple synergies," he says. "There are revenue synergies; the reach of
generic drugs could be expanded globally, and Piramal's sales and distribution network can be
used to more effectively market drugs that are developed elsewhere. On top of that, India is a
growing market."

The valuation is appropriate, says Ajay Piramal, chairman of the group's holding company
Piramal Enterprises. "It is the best business available in India and has been growing at 25%
[annually] in the last two years."

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Globally, Abbott also faces the pressure of playing catch-up with its bigger rivals. It ranks eighth
in the global pharmaceutical rankings with 2009 revenues of $30.7 billion, which is about half of
industry leader Johnson & Johnson's revenues of $61.8 billion for the same year. "Abbott has a
unique challenge," Chaudhuri says. "In terms of size, scale and scope, it is smaller than the other
pharmaceutical players, and it is seeking ways to differentiate itself by gaining a bigger foothold
in an up and coming market like India."

Wharton professor of healthcare management Patricia Danzon agrees. "It's a higher markup on a
smaller base," she says of the Piramal valuation, "and I can see a number of reasons for that.
There are a limited number of Indian generics companies that are attractive, and there might be
considerable competition for them. The U.S. pharmaceutical industry and other multinationals
are looking to get into the branded generics space, and leading Indian companies are attractive --
and Piramal is one of the leaders. So I don't find it that surprising."

Abbott has been operating in India for 100 of its 122 years, and has popular pharmaceutical
brands including the antacid Digene and painkiller Brufen. Piramal's pharmaceutical products
span dermatology, anti-infectives and nutritionals, while Abbott India is focused on
gastroenterology, pain, neurosciences and metabolic disorders, among other categories.

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. It will, however, continue research in drug discovery through an affiliate company.
Piramal Healthcare also retains custom manufacturing, over-the-counter consumer products,
diagnostic medical devices and services and clinical research, among other activities.

Indian companies can hope to become truly global pharmaceutical companies only through drug
discovery, says Piramal. "No Indian company has done that in the last 60 years. Now, Piramal on
its own has that opportunity." Piramal Healthcare focuses on oncology, metabolic disorders,
inflammation and anti-infectives. Increased funding expands the scope for drug research, but that
alone is not enough; other pieces have to fall in place, Piramal notes. "Time is limited. You have
to create a whole organization, and that takes time. [The the Abbott-Piramal deal] puts drug
research on a faster track."

 
 
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According to Warmuth, the Piramal acquisition, at least initially, is purely for Abbott's plans to
grow its Indian business. "Piramal's 350 products [are] clearly our interest, and we could build on
and accelerate that," he says. "We have no plans immediately to export Piramal products [to
third-country markets] but we will evaluate that. You won't be at all surprised that if we evaluate
that."

In fact, 10 days before the Piramal acquisition, Abbott announced a licensing and supply deal
with Indian pharmaceutical company Zydus Cadila. It allows Abbott to commercialize two
dozen Zydus Cadila drugs in 15 emerging markets. The collaboration includes medicines for
pain, cancer and cardiovascular, neurological and respiratory diseases, with product launches
beginning in 2012. The Piramal and Zydus Cadila deals are consistent with Abbott's purchase in
September 2009 of Belgian drug company Solvay for about US$7 billion, Warmuth says. Abbott
bought Solvay in its quest to enter emerging markets in Asia and Eastern Europe, and to add
drugs for hypertension and Parkinson's disease, besides vaccines.

Abbott and other Big Pharma companies face the twin challenges of slow growth in the
developed markets and maturing product pipelines that are getting harder to replenish with
newer, blockbuster drugs, according to Chaudhuri. "Essentially, the global pharmaceutical
industry players have all been trying to diversify their business," he says. "In earlier waves of
M&A deals, they would try and buy major pipelines of blockbuster drugs. In the past few years,
they have realized that those pipelines are running dry, and are trying to diversify."

Unlike other pharmaceutical acquisitions that have been targeted at buying Indian generic
capacity to service Western and emerging markets, the Abbott-Piramal deal is primarily focused
on the domestic market, according to Mumbai-based business magazine D


."The
deal is intended to consolidate Abbott's toehold in India; it is recognition of the fact that growth
in healthcare will come from emerging economies," the magazine said in an editorial. "Big
Pharma will stay big only by selling its wares in India and China."

India certainly offers a large and growing domestic market with rising incomes and increasing
health insurance coverage, says Danzon. However, she cautions that "it is most effective for
drugs that are moderately priced.... The potential to expand with very high priced specialty
products is seriously limited." In fact, she sees a bigger agenda for Abbott. "I don't think these
sorts of mergers are driven primarily by a desire to sell in India," she says. "It's about getting
access to manufacturing capabilities and a portfolio of products that can be sold in other
emerging markets."

Abbott would get Piramal's manufacturing facilities in Baddi in Himachal Pradesh state, and
about 5,000 employees, bringing the combined entity's workforce to about 7,000. Warmuth says
Piramal's manufacturing standards and capabilities meet global regulatory standards. He doesn't
expect to face the kind of problems Daiichi Sankyo found itself in after its Ranbaxy acquisition,
when the U.S. Food and Drug Administration charged the Indian company with numerous
violations on quality and safety fronts, and banned some of its drugs.

"There are risks, but I would expect MNCs doing acquisitions in India to partner with companies
that do have facilities approved by the FDA or the EMEA (European Medicines Agency)," says
Danzon. "Some of the benefits of having those low-cost locations allow them to export their
drugs to the U.S. or other developed countries. That is one reason pharmaceutical multinationals
are doing deals with the relatively small number of well established Indian companies that have
met international standards in manufacturing."

To be sure, Abbott competed with other suitors for Piramal Healthcare's branded generics
business, which according to media reports included Pfizer, Sanofi-Aventis and
GlaxoSmithKline. Several other deals occurred over the past one year. Sanofi-Aventis bought
Shanta Biotechnics, a vaccine maker in Hyderabad, for about US$788 million. Earlier, the Dabur
Group had sold a 74% stake to Fresenius Kabi of Singapore for about US$200 million. The
industry has been buzzing with talk of Big Pharma companies like Pfizer and GlaxoSmithKline
courting Indian companies like Cipla, Dr. Reddy's Laboratories and Torrent Pharmaceuticals.
 !


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All the same, the West continues to dominate pharmaceutical innovation, and companies in India
and other emerging markets could play a supportive role, according to Danzon. "Indian
companies don't have the capital required to go into that area of innovation; biotech and
pharmaceutical innovation is capital intensive."

"It is like a reality check for Indian pharmaceutical companies," says Chaudhuri, referring to the
financial resources and expertise in newer-age drugs based on biologics research. He visualizes
how an Indian pharmaceutical entrepreneur might weigh the pros and cons of growing globally
in today's environment: "If you have the scientific base and the resources, say a few billion
dollars, then maybe we can talk. [Otherwise,] why toil and struggle with this, given how health
care reform is on the anvil in many countries and cost containment pressures will be even
greater?" He adds: "Let's go to something that is booming," referring to Piramal retaining select
portions of its business including diagnostics and contract manufacturing facilities.

Chaudhuri acknowledges those new realities, but with a patriotic tinge. "I am disappointed, and
there is some patriotic sentiment in that," he says. As Ranbaxy, Dr. Reddy's Labs and other
Indian drug makers made inroads into developed markets with generics, he adds that he expected
some of them to become true global pharmaceutical players, much like Infosys and Wipro
Technologies in IT Services.

"Indian firms that had the potential and were leaders in generics have not been able to pull it off,"
says Chaudhuri, adding, "Ranbaxy was the first [to sell out]." But he also sees why that is the
case: "It requires a lot of commitment. I don't see any of these promoters interested in the long
haul, unlike Azim Premji (who heads software services major Wipro Technologies) or Ratan
Tata (head of the Tata Group, whose recent triumphs include several international acquisitions
and the Nano small-car brand). These other players are not even interested in doing that. They
don't seem to have that type of desire."

Along with desire, the rules of the game for Indian companies changed dramatically after India
strengthened its patent laws in 2005 to comply with the World Trade Organization's rules on
intellectual property rights. The earlier regime recognized patents on pharmaceutical processes
but not on pharmaceutical products, allowing companies to reverse-engineer copies of the
branded and patented drugs of western companies.

"Their old model can't work anymore, so if they want to go into the R&D side, they need the
capital and the expertise the MNCs can bring," Danzon says. "At the same time, from the
standpoint of the MNCs, with the drying up of R&D productivity in the U.S. and developed
markets and their search for other sources of innovation, [acquisitions like that of Piramal are] a
cost-effective way to bring in a portfolio of branded generics. It makes a lot of sense if they can
pull off all the integration issues."

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However, companies like Abbott and others getting into new generic drug markets must be
watchful of the changing lay of the land there as well, according to Danzon. "In many countries,
branded generics command relatively high prices and margins, and are really like branded drugs,
sold through sales forces and marketed to physicians." However, in the U.S., unbranded drugs
dominate the generics market, which is intensely price-competitive and one where decisions are
taken by pharmacists, and not physicians. "You have to be very skilled at it to survive and have
very good controls on cost processes," she adds.

The takeaway for Abbott and others eyeing the global generics business is that "other countries
will eventually evolve towards the cheaper, branded generics model," according to Danzon.
Against that backdrop, "it doesn't make sense" to pay high prices for generics companies. Also, a
couple of acquisitions of generics companies in recent years have "turned sour" as regulatory
agencies changed the rules of the game in favor of lower-cost drugs, she adds.

Danzon points to Dr. Reddy's Laboratories' 2006 acquisition for US$570 million of German
generic drug maker Betapharm of Germany as one that was caught in the midst of regulatory
changes. "Right around that time, the German generics market was transforming from a
physician-driven, fairly high priced market to one that was in direct contracts with insurance
companies," she says. A big chunk of Betapharm's valuation was for its sales force, but with
generics companies, "price is a key factor; you don't need a big sales force."

Danzon adds that the emerging business plan for generics companies is essentially around selling
to pharmacists, not physicians. "That transition is the next evolution for generics. For consumers,
the great value in generics is getting it cheaper." In the branded generics model, the prices could
be as much as 30% lower than the originator drug, whereas in the U.S. model, they can be 80%
or 90% lower, she explains. "All countries are trying to control their health care spending, and
one way they try to do that is by expanding the use of generics," Danzon says. "And they get
much more bang for their buck if they get cheap generics."

A key differentiator here is that unlike in the U.S., the regulatory regimes in many countries
including India do not require generic drugs to be bioequivalent to the originator products; they
require them to have roughly the same active ingredients, according to Danzon. But that is also
changing, she says. Mexico, for example, is in the process of changing its regime to require
generics to be bioequivalent, she says. "That means putting a lot of domestic companies out of
business, so politically and economically, it is a tough thing to do in an emerging market."
Abbott may have to confront that if and when the rules change in India.

Warmuth is unfazed by the imponderables he may face in Abbott's India quest. "A lot of things
make me stay up at night; there will always be concerns," he says. "With Piramal, it is about how
we take full advantage of the opportunity. It is not so much a concern about the downside, but
about how we maximize the opportunity."


u


 
  


With the Rs 17,000-crore sale of its domestic formulations business to Abbott being completed
in September, the board of Piramal Healthcare Ltd gave its green signal to buy back up to 20 per
cent of PHL's equity shares.

The buyback at Rs 600 a share represents a premium of 19 per cent over the average share price
for the last three months. The buyback will be done for a maximum of 41.8 million shares, about
20 per cent of the total number of shares, a note from the company said. It will entail a cash
outflow up to Rs 2,510 crore and will be completed by February.

The board of directors, after considering various alternatives, including dividend and or a
buyback of shares, approved the latter as it is a more tax efficient method of maximising value to
shareholders, the note said.

The buyback gives shareholders about Rs 120 more a share, and after long-term capital gain tax,
the investor has Rs 110 more, the Chairman, Mr Ajay Piramal, told analysts. If the company had
chosen the dividend route, it would have given shareholders only Rs 103 more, he said,
explaining the company's decision.

The company has received over Rs 10,000 crore, as an upfront payment on completion of the
Abbott deal. Post buyback, it will have residual cash of between Rs 3,000-3,500 crore, Mr
Piramal said.

Reiterating the company's position that PHL's funds will not go into real estate, he said: ³We
want to build a company for the next 20 years.´ The company will take its time with doing its
due diligence and ³will not be pushed,´ he added. The broad absolute no-nos to invest in would
be cigarettes and the liquor business, he said, responding to a query.

Research merger?

The boards of PHL and its demerged research company will take a decision ³some time´ on
merging the two, Mr Piramal said. The circumstances under which the demerger was done was
different, he said, as research needed more money and PHL did not have that kind of cash. Now,
the research has moved forward and PHL is flush with funds.

One-time boost to Q2 net profit

PHL's net sales for the quarter ended September 31, 2010 were down 26 per cent, at Rs 731
crore, from Rs 992 crore in the corresponding period of the previous year, due to businesses and
people transitioning between PHL and Abbott, among other things.

Its net profit gained from the one-time payment it got from the sale of its domestic formulations
and diagnostics business. PHL clocked a net profit of Rs 12,540 crore in the quarter under
review. It was Rs 106 crore in the corresponding period last year.
Piramal shares closed down 5 per cent on the BSE, at Rs 515 on Friday.


u
    

The sale of Piramal Healthcare's domestic formulations business to Abbott has been completed,
catapulting the multinational company into a leadership position in the Indian pharmaceutical
market.

The acquisition strengthens Abbott's growth strategy in emerging markets, Abbott said, adding
that the business will continue to be led by its current India-based management team.

The transaction has been closed and completed and Piramal Healthcare has received the initial
consideration amount of Rs 10,271 crore after adjustment, a Piramal release said.

The two companies had formalised the Rs 17,000-crore deal in May, paving the way for about
350 branded generics, its plant in Baddi (Himachal Pradesh) and 5,000 employees to move out
into Abbott.

The acquired business would operate as a separate business unit, reporting into Abbott's newly
created Established Products Division (EPD), formed to focus on branded generics, maximising
the opportunity in emerging markets. More than 20 per cent of the company's total sales are
generated in these growing economies, the company said.

Abbott now employs about 10,000 people across all of its businesses in India and expects its
pharmaceutical sales in India to exceed $ 2.5 billion by 2020. Abbott had purchased Piramal's
healthcare solutions business through its wholly-owned subsidiary, with a $2.2 billion up-front
payment and additional payments of $400 million annually for the next four years, beginning
2011. This transaction will not impact Abbott's ongoing earnings per share guidance in 2010,
Abbott added.

Elaborating on the opportunity that the domestic market opens up, Abbott said, India's rapid
pharmaceutical market growth is being driven largely by branded generics. The market will
generate nearly $8 billion in pharmaceutical sales this year, a number that is expected to more
than double by 2015.

Piramal Healthcare now houses businesses worth Rs 1,700 crore. They include custom
manufacturing, critical care, over-the-counter businesses and its de-merged research arm.
Piramal Healthcare shares closed up over 2 per cent, at Rs 521 on the BSE.

©   u


  
After tumbling 12 per cent on Friday, the Piramal Healthcare stock closed at Rs 502, way below
even the cash proceeds of roughly Rs 774 that are set to flow to the company from the sale of the
formulations business.

Why did the stock market mark down the stock to a discount even to the cash likely to come on
the books? What about the intrinsic value of Piramal's remaining businesses?

Value on the table

Part explanation for this lies in that about one-third of the cash that Piramal receives from this
deal would go to pay capital gains tax and settle debt.

Here are the numbers. Piramal Healthcare's total receipts from this deal amount to roughly Rs
16,173 crore (after discounting the staggered future payments to present value), or Rs 774 a
share. Of this, the company will pay Rs 350 crore to Piramal Enterprises and shell out long-term
capital gains tax at 22 per cent, bringing down the residual cash per share to about Rs 585. A
planned debt repayment of Rs 1,300 crore will further trim this cash component per share to Rs
522.

With the cash balance of Rs 522/share still left with the company, the stock markets seemed to
have overreacted with the price plunging even below that, to Rs 502.

So, why did the markets overreact? Well for one, it could be a kneejerk reaction to the µstake
sale' in the company not coming through.

The Piramal Healthcare stock had gained over 13 per cent in five trading sessions before the deal
led by speculation about an MNC buying an equity stake in the business. As is usual, these
reports talked of fancy buyout prices combined with expectations about an open offer (some
even mentioned open offer prices of Rs 650-700). This probably bid up the stock price beyond
its normal fair value. Given this backdrop, the deal announcement probably saw the unwinding
of short-term positions by traders.

Besides this, investors are also unsure about how the cash raised from the sale will be deployed
and whether it will eventually flow to them. Uncertainties about the company's plan to use its
sale proceeds, the inherent risks in its remaining CRAMS business and the small-scale of
operations of its other businesses could also have influenced Friday's kneejerk stock market
reaction to this deal.



  
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The $3.72 billion deal will make the US firm the leading drug maker in India with a 7% share of
the market

India¶s fifth largest drug maker by sales, Piramal Healthcare Ltd, has sold its domestic
formulations division, the most valuable part of the company¶s pharmaceuticals business, to US
drugs and nutrition multinational Abbott Laboratories for a valuation of $3.72 billion (Rs17,484
crore).

The deal will make Abbott India¶s leading pharmaceutical company with a 7% share of the
Rs40,000 crore drug formulations market, Michael J. Warmuth, senior vice-president at the
established products division of Abbott, told M on Friday. ³Abbott has a very long-term plan
for India,´ he said.

he deal comprises an upfront payment of $2.12 billion and $400 million a year for four years.
Announcing the deal on Friday, Ajay Piramal, chairman of Piramal Healthcare, reiterated his
commitment to stay invested in the pharmaceuticals business, albeit in the OTC (over-the-
counter) segment, drug discovery, critical care and diagnostics space. Piramal started the pharma
business in 1988 and has expanded it through organic and inorganic growth.

The deal has been put together in such a way that Piramal Healthcare¶s promoters will retain
their stake in the Indian company while divesting its key business. It marked the second largest
merger and acquisition deal by valuation in the Indian pharmaceuticals sector after the $4.6
billion acquisition of the 38% promoters¶ stake in Ranbaxy Laboratories Ltd by Japan¶s Daiichi
Sankyo Co. Ltd. Ranbaxy is currently the country¶s largest drug maker by sales.

The Abbott deal is the fourth biggest acquisition of an Indian drug business by a foreign drug
maker in the last three years.

Hospira Inc. acquired the key business of Chennai-based Orchid Chemicals and Pharmaceuticals
Ltd and French drug multinational Sanofi-Aventis SA bought a majority stake in the Hyderabad-
based vaccine company Shantha Biotechnics Ltd.

Piramal justified the sale by saying that future value from the branded generics business would
come from business growth outside India. ³It is not a distress sale,´ he said.


*
 
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The stock markets reacted negatively to the deal. Piramal Healthcare, which surged 9% on
Thursday, fell after the deal¶s details were released, shedding 11.81% to close at Rs502.35 on the
Bombay Stock Exchange even as the benchmark Sensex index lost 0.45% to close at 16,445.61
points.
An analyst with a foreign brokerage said investors were concerned about the narrow growth
potential in the firm now as it has lost the key business, which contributed around 70% of
revenue, and was growing at 25% annually.

³The stock could fall further,´ said the analyst, who did not want to be identified. Another
expert²who attended an analyst meet after the deal announcement²alluded to the transaction
being tax inefficient, as the company would have to pay 22% capital gains tax and also a
dividend distribution tax for the special dividend that will be paid after Abbott pays the first
tranche.

The Abbott acquisition includes the entire portfolio of about 350 generic drug brands, 5,500
employees working in the division and a manufacturing plant at Baddi in Himachal Pradesh.
Piramal¶s portfolio of branded generic drugs cover multiple therapeutic areas such as antibiotics
and neuroscience, besides respiratory and cardiovascular diseases.

All the cash from the deal will go into Piramal Healthcare and will be invested in existing
business segments such as consumer healthcare or the OTC unit, the critical care segment and
drug research, chairman Piramal said.

³There will even be new areas of business beyond pharma that the company may enter in
future,´ he said without elaborating.

Analysts say the Indian firm will take time to incubate new businesses and even longer for
returns to accrue. Piramal, however, expressed confidence that existing businesses such as
patented products will make gains in the domestic market in two-three years. ³We¶re still in the
over-the-counter space and we¶re still committed towards drug discovery,´ he said.

The deal valued Piramal Healthcare¶s domestic formulation business, also known as the
healthcare solutions business, at nine times sales. The company¶s sales from this segment was
Rs2,000 crore in the year ended March.

Large foreign drug makers, including Abbott, Pfizer Inc., GlaxoSmithKline Plc. and Sanofi-
Aventis, have been looking for acquisition targets in India as the country is one of the fastest
growing drug markets among emerging regions.

Emerging markets represent one of the greatest growth opportunities in healthcare, with
pharmaceutical sales expected to grow at three times the rate of developed markets and account
for 70% of the industry¶s growth over the next several years, said an Abbott release on Friday.

Abbott estimates the growth of its India pharmaceutical business with the addition of the Piramal
division to approach 20% annually, with expected sales of more than $2.5 billion by 2020. The
combined Abbott and Piramal sales force will be the largest in India, Warmuth said, adding that
the price that it paid for the Indian business was just right.

The upfront payment is scheduled to be made by September, with the annual payments starting
in 2011.
Abbott collaborated with Ahmedabad-based Cadila Healthcare Ltd recently to expand its generic
drugs portfolio for global markets. The US firm¶s nutrition arm last year signed an acquisition
deal in India with troubled drug maker Wockhardt Ltd, but it later withdrew from the transaction
due to issues linked to the Mumbai-based drug maker¶s debt repayment litigations.