Acquisition of European Generic Businesses Partially Comforting to Indian Formulators

Acquisitions Carry Risks and May Outweigh Benefits Targeted to Counter Near to Medium term Profitability Concerns

New Delhi, March 13, 2018: India Ratings and Research (Ind-Ra) believes that the sale of European generic assets by global pharmaceutical majors will throw open potential acquisition opportunities for Indian formulators. This would, however, only partially offset the negative impact of operating in the challenging US market. Also, the European region has divergent commercial and regulatory policies which lead to uncertainty in timely integration and subsequent growth in scale and profitability of the acquired generic assets.

Divestments by Global Majors to Spark Interest in Europe: Intensifying pricing pressure, due to increasing competition and structural shifts have led to profitability headwinds for pharmaceutical formulators operating a generic business in the US markets. Operational stress, due to pricing pressures and deleveraging commitments, has led global pharmaceutical majors such as Sanofi S.A. and Teva Pharmaceutical Industries Ltd. (Teva) to announce business restructuring plans and sale of generic assets in Europe and the US. The agency expects more generic assets to come up for sale in Europe over the medium term on account of restructuring activities of other global majors. A muted recovery amid the likelihood of unabated pricing pressures for the medium term is likely to re-kindle the interest of Indian formulators in Europe to tap inorganic growth opportunities to gain scale and/or diversify operating profitability.

Structural Complexities in Europe Could Delay Integration: Indian pharma formulators in the European region operate in a diverse setting, with structurally divergent sub-region dynamics. From an organic growth perspective, this leads to a lower scale for Indian formulators. Furthermore, opportunities for inorganic growth have been low, with historical acquisitions largely driven by anti-trust divesture requirements. The integration of generic business acquired in FY14 has been challenging for Indian formulators and the recent debt-funded acquisitions of generic assets in FY17 are yet to demonstrate operational integration and synergies in operating profitability. Hence, while the acquired assets may provide immediate scale benefits, the growth of the acquired generic portfolios is susceptible to amendments in regulatory and fiscal policies in the acquisition geography, impacting product economics and business strategy. Furthermore, steady state operating profitability of integrated/optimised assets is likely to be in mid-teens which would structurally be lower than those to be earned in the US in the near to medium term, translating to marginal long-term benefits. Additionally, strengthening of the long-term R&D capabilities through the acquired businesses is not likely. Any delay in integration amid sharp headwinds in the US will weaken profitability below the average expected for the medium term.

High Propensity for Debt-funded Acquisitions: Trailing 12 months (end-September 2017) net leverage of Indian formulators has risen marginally from the FY14 levels and the medium-term trajectory of credit profile is likely to be stable for formulators with large US exposures. Indian
formulators have also stepped up the R&D expenditure on select limited competition complex generics and new chemical and biological drugs to create a long-term sustainable US business. Hence, conserving internal accruals to fund R&D spends and committed growth capex may lead to a higher propensity to expedite the closure of proposed acquisitions with debt. Large debt-funded acquisitions are likely to keep the net leverage elevated and return rations depressed for 24-36 months post acquisitions in the current operating environment, thus delaying deleveraging Read more.

Corporate CommIndia(CCI Newswire)