Why no big-bang Indian pharma mergers?

6 Oct

merger1Yes, this is an obvious question.   I’ve decided to ask it.

The global pharmaceutical market is consolidating rapidly. Indian generics companies are struggling for scale and their new drug discovery ambitions have for the most part run up against a wall.  A good number have ageing promoters with the second (or third) generation having little or no interest in the pharmaceutical business. In parallel, a lot of people mourned the passing of India’s largest generics company Ranbaxy into the hands of the Japanese suggesting at least some interest in sustaining a national pharmaceutical industry.

So why is it that no two Indian companies of size seem anywhere close to talking a deal?

And here are some answers :

1. Indian drug companies – like most others – are promoter-driven.  If a merger means both entrepreneurs will still very much be in the reckoning after such a merger then that’s a likely recipe for disaster. The fact is that for all the claims of corporate governance, noone knows where ownership ends and management begins.  How many boards of directors are not filled with ‘family friends’ and ‘associates’? And when the merger happens who will cede in favour of whom? Clearly, a non-starter. Can’t imagine two Indian promoters sharing power.

2. Assume for a minute that one promoter wants out. Then what? But an outright buyout will mean that the buyer will need lots of cash – which the seller will use to perhaps fuel the ambitions of the second generation, or to fund social initiatives, or even just to retire to wherever it is promoters retire to these days. But herein lies the rub. American, European and Japanese companies are also hungry for deals. Some don’t have a presence in India, others are fairly niche and want to bulk up. Such a buyer will be willing to pay an entry premium that an Indian buyer cannot justify.  After all, Indian companies are all generics-driven and are present in more or less the same markets with similar product portfolios. Recall that for some time investment bankers were talking about a preference for “cherry picking” only brands that are in promising segments like cardiology and neuropsychiatry, and lately even that talk has died down. 

3. What about a middle route then? Think about some companies that have a well-distributed business model – they do branded generics, contract research and manufacturing, clinical trials, generics exports, new drug discovery, the works.  At some point,  given the hands-on management and resources that each of these businesses demands, such a company will have to choose.  When that time comes – if it isn’t already upon us – can two Indian companies actually shake hands?  In such a case, entire companies won’t change hands but standalone units focused on any one activity will and there will still be enough left for the seller to grow and lord over.  Stock could be used as currency since the seller may not necessarily be in immediate need of cash –  he will still have a business with the means to raise its own resources. There could be different iterations of this.

A clever I-banker could pull off such a deal with a promoter who has as his or her goal the creation of a global Indian enterprise of scale – not just an exit at the highest price.

Are there any takers?

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