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Drug prices to rise as MNCs increase India play
Published on 23 May. 2010 12:21 AM IST
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Abbott’s buy of Piramal’s formulation business has not only taken valuations to giddy heights but will also push up drug prices in the near term as more multinationals make a play to corner the Indian pharmaceutical market.
Analysts who spoke to Times of India said the Abbott-Piramal deal would clearly be a benchmark for other transactions. “The Abbott-Piramal deal reflects the growing global importance of generics as well as the rise of India’s consumer market for drugs,” said Tarun Shah, chief executive officer of Mehta Partners, an M&A boutique advisory firm.
“However, it will take Abbott about 20-25 years to recover the Rs 16,000-crore buy, unless the growth of pharmaceutical products in India becomes really superlative, in a similar manner to how mobiles and colas have reached every part of the hinterland.” Stating that the Indian pharma market has been growing at 12% for the last 10 years, and if nothing were to add to the momentum from here on, Shah said, Abbott would “easily need 25 years to recover their capital”. “There are only two ways in which Abbott can recover its cost-by making products more expensive or by bringing more products to the market. Patients will not take in more drugs than required, so drug prices are bound to rise strongly. Moreover, the lobby of multinationals has also become stronger in the country,” Shah added.
The deal though has been termed a clear winner in terms of valuations. From the usual two-four times sales bracket, the deal has been clocked at close to about five times the sales. This is also being hailed as a precursor to better times for domestic drug companies looking to bail out. “A big cash cow will be out,” is how Sarabjit Kour Nangra, an analyst with Angel Broking, put it. Adding that Piramal has got good money for the business, the analyst added: “Now their growth will depend on how they scale up the residual business.”
Analysts also spoke about how multinationals (MNCs) are cornering the Indian drug market. Prior to the mergers and acquisition (M&A) flurry i.e. before December 2008, there were nine companies owned by Indian entrepreneurs out of the top 10, with a combined market share of 32.67%. The equation underwent a change subsequently.
After Daiichi-Ranbaxy, Pfizer-Wyeth, Abbott-Solvay, Merck-Schering Plough and Abbott-Piramal deals, the new constitution is that the top 10 command 41.06% of the total market. Moreover, five of the top ten drug firms in the country are MNCs. If one takes a look at the combined market share of the Top 16, it is 56%, of which 23% is controlled by six MNCs.
An analyst at IIFL Capital noted that the good premium would bode well for the Piramal share price, given that there is a $400-million payment staggered over a period of four years.
As for what the domestic major would do with the money, “Piramal has also got a non-compete fee of Rs 350 crore from Abbott. The firm is expected to use the funds for retiring debts and expansion,” said another analyst with a foreign brokerage, requesting anonymity.
According to another analyst at HDFC Securities, the Abbott-Piramal deal is set to increase the significance of Indian assets in the future.

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