Daiichi Sankyo move could spark copycats

Analysis

Daiichi Sankyo’s surprise move yesterday on Ranbaxy sparked not only a flurry of news about the $4.1bn deal, but has also got many in the market wondering who else might be on the shopping list of other big pharma companies looking to snap up an Indian generics firm.

Those excited by the acquisition are pointing to the attractions of these companies, which include the increasing moves by governments to use generics to reduce healthcare costs, and in the case of Indian generic companies, their access to the fast growing, developing markets that big pharma has already expressed an interest in.

With Ranbaxy now out of the picture, according to the EvaluatePharma’s Peer Group Analyzer Glenmark would be one of the most attractive in terms of future growth.

The company may not be in the top three of the biggest Indian generics, but it is forecast to report an impressive 38% compound annual growth in unbranded generic sales in the five years to 2012.

WW Unbranded Generic Sales  WW annual sales ($m)    CAGR (07-12)    Market Rank  
   2007  2012    2007  2012
   Glenmark Pharmaceuticals  244  1,211  38%  30  16
   Wockhardt  357  764  16%  25  20
   Lupin  303  647  16%  27  26
   Aurobindo Pharma  165  334  15%  31  31
   Matrix Laboratories  131  265  15%  34  35
   Cipla  872  1,656  14%  14  11
   Ranbaxy Laboratories  1,496  2,827  14%  9  6
   Torrent Pharmaceuticals  300  543  13%  28  29
   Piramal Healthcare  418  756  13%  20  21
   Zydus Cadila  395  697  12%  22  24
   Sun Pharmaceutical Industries  775  1,332  11%  15  15
   Dr. Reddy's Laboratories  943  1,581  11%  13  13
Sum  6,400  12,612  15%    
  Rest of Market  32,549  52,776  10%    
Total Market  38,948  65,388  11%    

Most of the growth at Glenmark, which has recently spun off its bulk manufacturing business, will be driven by the group’s ambitious plans in the US that have seen it pledge to launch five drugs each quarter into the US as well as filing 25 ANDAs in the country during 2008.

The sheer number of drugs that Glenmark intends pushing both into the US and its own home market is also behind predictions that the group will over the next five years achieve net normalised income growth of 23%, the second highest after Matrix Laboratories, which is poised to grow income by 34% in the same period.

Glenmark, like Ranbaxy, has also started to move into proprietary drug development in both small and large molecules, which could also increase its appeal to a large pharma group looking to cut its cost on drug research, given the large skilled pool of scientists in India, who can produce drugs at a fraction of the cost of western labs.

But the things that make Glenmark attractive are also the reasons behind the group’s market capitalisaton of $4.22bn, which with an expected premium of anything between 30-50% could make it an option for only the larger players in the industry.

For the more bargain conscious, Wockhardt’s unbranded generic prescription growth could make it an ideal and more affordable takeover target, the group is forecast to grow annual compound sales by 16% in the next five years, it also has one of the most impressive free cash flow yields by 2010 of all the Indian generic companies, notching up an impressive 11.8%, a rate that is only beaten by Torrent Pharmaceuticals 12.6% and significantly above Ranbaxy’s 4.2%.

Free Cash Flow Yield % (free cash flow / enterprise value) in 2010
Company FCF (Pre-Div) ($m)  FCF Yield  Enterprise Value ($m)  Net Income Normalised CAGR (2007-12) 
  Torrent Pharmaceuticals  49  12.6%  388  16%
  Wockhardt  107  11.8%  908  18%
  Aurobindo Pharma  75  9.9%  758  18%
  Zydus Cadila  97  9.0%  1,072  16%
  Piramal Healthcare  131  6.2%  2,124  16%
  Jubilant Organosys  90  6.1%  1,463  17%
  Dr. Reddy's Laboratories  189  6.0%  3,181  19%
  Biocon  67  5.6%  1,204  17%
  Glenmark Pharmaceuticals  212  4.8%  4,428  23%
  Sun Pharmaceutical Industries  310  4.2%  7,359  5%
  Lupin  63  4.2%  1,513  15%
  Ranbaxy Laboratories  257  4.2%  6,161  22%
  Cipla  160  3.8%  4,217  14%
  Matrix Laboratories  28  3.1%  904  34%

The group has also done well from the its decision to move away from bulk manufacturing and start to acquire generic companies in both Europe and the US , including its acquisitions of Negma Laboratories in France and Morton Grove Pharmaceuticals in the US, which should start to help Wockhardt push its current market cap of $663m higher very rapidly.

For other investors who also have hundreds of millions of dollars to spend, rather than Daiichi Sankyo’s billions could do worse than look at Aurobindo, which is forecast to have unbranded generic prescription growth rates of 16% over the next five years, and a very modest market capitalisation of $406m, the group also throws off cash and currently has a free cash flow yield of 9.9%.

While Cipla has been talked up as one of the companies that could be next to fall to a large pharma group, in comparison with other companies it looks less of a bargain. With a market capitalisation of $4.24bn, the group is predicted to increase its unbranded generic sales by 14% over the next five years, but it has a disappointing cash flow yield of 3.8%. It also looks expensive, with a forward price to earnings ratio of 20.3 times for 2008, this compares with the cheap-looking Wockhardt at 7.2 times. Admittedly, Glenmark is on 22.3 times but its impressive growth and cash generation justify the rating.

So if more pharma companies are looking to emulate Daiichi Sankyo and get a foothold in the Indian generics market there are plenty of aggressive, fast-moving companies to pick from.

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