Glaxo given the cold shoulder by Piramal

Analysis

A strongly worded response by Piramal Healthcare’s chairman, Ajay Piramal, that rumours over the weekend claiming UK pharma giant GlaxoSmithKline is in early-stage talks to acquire the Indian generics manufacturer were “totally unfounded”, appeared to pour ice-cold water on the prospects of such a tie-up.

Although Piramal’s shares briefly jumped 23% to Rs240 in early trade yesterday, they have over the past two days actually slipped 2% to Rs190.05, a two-year low, suggesting that investors have been persuaded by the strength of Piramal’s rejection of the rumours and believe that a Glaxo takeover is unlikely.

Questionable logic

Although an acquisition of Piramal would certainly be in keeping with Glaxo’s recent M&A strategy of making bolt-on purchases, particularly with the aim of increasing its presence in emerging markets, there is some doubt as to why Glaxo would opt for such a deal in a market where it already has a significant presence.

An equity analyst at a leading investment bank told EP Vantage today that the rumours seemed strange, and with Glaxo currently ranked in the top three pharma companies in India, questioned the strategic logic of such a deal.

Questionable premium

Included in the reports were estimates that the acquisition price could be as much as $1.5bn. With a current market capitalisation of $823m and enterprise value of $1bn, the suggested offer price would represent a significant premium on either valuation; 82% over market cap and 47% over the enterprise value.

One of the reasons such a high-looking premium may be necessary is that control remains firmly in the hands of the Piramal family, with a 50% shareholding. Without agreement from the company’s founding family, any attempted acquisition of Piramal would clearly be doomed, hence the need to make an offer simply too good to refuse.

Nevertheless, a 50% premium looks a bit on the high side considering Daiichi Sankyo acquired the Singh family’s controlling interest in Ranbaxy Laboratories last year for a 31% premium.

Flurry of acquisitions

In its rejection of the Glaxo rumours, Piramal highlighted its determination remain independent and grow the company by both organic and inorganic means. In terms of its inorganic growth the company certainly seems to be true to its word, having made five acquisitions over the past 12 months, in contrast to just three deals in the previous ten years.
 

Piramal Healthcare: M&A History
Deal Date M&A Deal Type Target Company or Business Unit Deal Value ($m) Deal Status Business Type
Jan - 2009 Business Unit Inhalation Anesthetic Gas Distribution Business of RxElite 4 Closed Hospital & Healthcare Supply
Dec - 2008 Company Acquisition Minrad International 40 Open Pharmaceutical
Jul - 2008 Company Acquisition PlasmaSelect 12 Closed Pharmaceutical
Apr - 2008 Company Acquisition Khandelwal Laboratories 29 Closed Pharmaceutical
Jan - 2008 Company Acquisition Healthline 4 Closed Pharmaceutical
Oct - 2005 Company Acquisition Avecia Pharmaceuticals 17 Closed Pharmaceutical
Dec - 2004 Business Unit Rhodia’s Inhalation Anaesthetics business - Closed Pharmaceutical
Dec - 1998 Business Unit Nicholas Laboratories - Closed Pharmaceutical

Although the scale and size of these deals are not huge, this increasingly acquisitive strategy does not give the impression of a company biding its time until a potential suitor walks through the door.

Healthy growth prospects

Piramal’s revenues are currently split between in-market generic sales (50%), bulk pharmaceuticals (39%) and other revenues (11%). According to forecast data from EvaluatePharma, generic sales are set to grow 10% annually, from $379m in 2007 to $755m by 2014.
 

Piramal Healthcare: sales summary WW annual sales ($m) CAGR (07 - 14)
  2007 2010 2014  
 Prescription (Rx) 379 518 755 10%
 OTC - - - -
  Total Rx & OTC Sales 379 518 755 10%
 Bulk Pharmaceuticals 277 303 443 7%
Total Pharmaceutical Sales 656 821 1,198 9%
 Hospital & Healthcare Supply 30 31 38 3%
 Other Sales 24 23 28 2%
Total Group Sales 710 875 1,264 9%

Piramal claims this ranks the company as the fourth largest pharmaceutical company in India.

On a global basis, Piramal is forecast to be the seventh biggest seller of generic drugs by 2014 within its Indian peer group, or just outside the top 20 for all generic manufacturers worldwide.
 

Indian Company Peer Group WW Unbranded Generic Sales ($m) Global Market Share Global Market Rank
  2007 2014 CAGR (07 - 14) 2007 2014 2007 2014
Ranbaxy Laboratories 1,504 2,601 8% 3.9% 4.0% 9 6
Dr. Reddy's Laboratories 823 1,853 12% 2.1% 2.9% 14 10
Cipla 874 1,681 10% 2.3% 2.6% 13 12
Sun Pharmaceutical Industries 775 1,654 11% 2.0% 2.6% 15 14
Lupin 456 922 11% 1.2% 1.4% 21 17
Glenmark Pharmaceuticals 244 882 20% 0.6% 1.4% 30 19
Piramal Healthcare 379 755 10% 1.0% 1.2% 24 21
Zydus Cadila 395 668 8% 1.0% 1.0% 22 23
Wockhardt 259 513 10% 0.7% 0.8% 29 25
Torrent Pharmaceuticals 289 512 9% 0.7% 0.8% 27 26
Aurobindo Pharma 212 338 7% 0.5% 0.5% 31 30


With an impressive average annual growth rate of 11% for this Indian company peer group, significantly ahead of essentially stagnant US, European and Japanese markets, it’s easy to see why large Western and Japanese companies are increasingly interested in Indian companies, not only for the revenue growth prospects but also to access some of the most efficient and cheapest manufacturing platforms in the world.

As such, a move by Glaxo for Piramal, or indeed any of its Indian peers with the exception of Ranbaxy, would not be entirely surprising in the long run, although it appears for now the UK pharma giant has its work cut out to win over the Piramal family.

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