Abbott moves into the emerging market fast lane


Once again the Indian pharma deal rumour mill is in need of maintenance. As frenzied takeover speculation  surrounding Piramal Healthcare increased this week, both Pfizer and Sanofi-Aventis were supposedly about to strike, Abbott Laboratories instead snuck up on the blind side today and snapped up Piramal’s branded generics business for $3.72bn.

Following Abbott’s product licensing deal with another Indian player, Zydus Cadila, earlier this month (No let up in race to capture emerging market growth, May 11, 2010), the US healthcare giant is emerging just as fast as these target markets into a major competitor to the likes of GlaxoSmithKline, Sanofi and Pfizer in the branded generics sector. Meanwhile, Piramal’s investors were clearly disappointed a takeover never materialised as shares fell 12% today to Rs502.35, wiping out gains the stock had made earlier this week.

Top dog, top dollar

The acquisition of Piramal’s so-called Healthcare Solutions business, coupled with Abbott’s existing operations in India, will propel Abbott to the number one spot in the Indian pharmaceutical market, ahead of Cipla and Ranbaxy Laboratories, with a 7% market share.

Sales from the Healthcare Solutions business reached Rs20bn ($420m) last year and are expected to exceed $500m this year, a 20% annual growth rate which Abbott expects will continue for the next five years. By 2020 Abbott predicts its enlarged Indian business will generate revenues of $2.5bn.

But Abbott’s move to capitalise from these impressive growth figures – the $8bn Indian pharma market is expected to double in within five years - has not come cheap. The total price of $3.72bn is almost nine times the sales of Piramal’s business unit, by any standard a hefty purchase premium; Teva purchased Ratiopharm at 2.2 times sales and JP Morgan estimates an historical average for generic M&A deals at 3.2 times sales.

In addition, Abbott cannot actually afford to pay the entire amount upfront. Instead it will hand over $2.12bn now and then annual instalments of $400m over the next four years. In Abbott’s statement and conference call today there was no indication that these additional payments are linked to, or contingent on, any milestones or targets being met.

Despite holding a decent war chest of $9.9bn in cash at the end of 2009, the recently completed acquisitions of Solvay’s pharma business for $6.2bn and Facet Biotech for $450m, leaves current cash at around $3.2bn. Take out the $2.12bn upfront fee for Piramal and Abbott is left with a relatively small cash balance of around $1bn, when compared to its big pharma peers.

As such, Thomas Freyman, Abbott’s chief financial officer, acknowledged on today’s conference call that Abbott’s recent M&A frenzy means deals for the immediate future are now likely to just be of the product licensing nature.

Peace for Piramal

Piramal has been a perennial target in the takeover rumour mill. Just over a year ago there were similar rumours of a bid from either Sanofi or Glaxo (Sanofi joins Piramal takeover rumour mill, February 26, 2009).

The sale of Healthcare Solutions, which accounted for 55% of Piramal Healthcare’s overall revenue of Rs36.7bn ($770m) last year, leaves the company with its Critical Care and Pharma Solutions units, which include contract manufacturing and research.

The entire Piramal Group, which also encompasses drug discovery and research, diagnostics, glass, real estate and financial services units, generated revenues over $1bn last year.

Its chairman, Ajay Piramal, whose family and associates control 49% of the company, stressed today that the sale of Healthcare Solutions to Abbott does not indicate a desire to exit the pharmaceutical business entirely.

But what the sale does do is generate some decent cash for the group and suggest that Piramal’s name will be conspicuous by its absence from future takeover speculation.

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