A private limited company, incorporated under the Companies Act, 1956 (“Companies Act”) on January 1, 1997. AHPL is a wholly owned direct subsidiary of Abbott Lab and is into manufacture and saleofallopathic pharmaceutical preparations; sale of chemicals, scientific, medical & surgical instruments / equipment / devices, and nutritional products.
Piramal is a 22 year old pharma company, which is one of the earliest players of theindianpharmamarket.Through strategic acquisitions in the early years, Piramal healthcare has developed an enviable position in the Indian pharma sector. It is incorporated under the Companies Act and is currently listed on Bombay Stock Exchange Limited (“BSE”) and National Stock Exchange of India Limited (“NSE”). The promoter holding in Piramal Healthcare is currently around 52.10%.
• Abbott Healthcare Private Limited, IndiaACQUIRER• Piramal Healthcare Limited, IndiaSELLER• Domestic Formulation Business (including mass market) whichmanufactures, markets and sells branded pharmaceutical products in finishedform.ASSETSACQUIRED• BusinessTransfer of the Formulation Business into AHPL as a going concern.MODEOF ACQUISITION• USD 3.72 billion (approx. INR 175 billion). Upfront payment: USD 2.12 billionFuture payment: USD 400 million payable upon each of the subsequent fouranniversaries of the closing commencing in 2011.CONSIDERATION• Cash on the balance sheet of AHPL.MODEOF FUNDING2/18/2012 HAMDARD BUSINESS SCHOOL4
Abbott is following a Emerging marketpenetration strategy. Near saturation of the western market isbringing MNC’s to India. This deal would help them give an edge overtheir competitors. Added attraction: In India, individuals and notgovt pay for a big portion of the healthcarecosts.2/18/2012 HAMDARD BUSINESS SCHOOL5
• TheAbbott-Solvay-Piramal trio would emerge as the undisputed leader in thelucrative Rs 4,350 crore gastrointestinal market with over 11% share.The triowould outperform Cadila Healthcare, Dr Reddy’s and Alkem on its way.Abbott-Solvay-Piramal• Abbott & Piramal together can form a combined market share of over 8%.Theduo would surpass rival MNCs Novartis, Pfizer,GSK, Merck among host of othercompanies.Vitamins & nutrients• Piramal holds 6.5% market share in the dermatology segment and with thisacquisitionAbbott will become among the top 5 players solely riding on thisacquisition.Dermatology Segment• Abbott-Piramal duo would make solid gains and jump straight to the secondposition only trailing Sun PharmaNeurology Space• Abbott would gain significant presence riding on Piramal’s strength. In thesegment, whileAbbott figures nowhere in the top 10, Piramal commands amarket share of 5.6% and the sixth positionCore Anti-infectives2/18/2012 HAMDARD BUSINESS SCHOOL7
price per share = 65105.03167210515= 389.35Hence, undervalued2/18/2012 HAMDARD BUSINESS SCHOOL19
Particulars AmountUp Front Payment (US $mn) 2120NPV of Future Payments 400mn US $ for 4 yearsfrom 2011 (Discounted at 10%) 1268PVTotal Reciepts (US $ mn) 3388PVTotal Payments (cr) 15856Additional PaymentTo PEL(Rs) 350EV/SALESValuation 8.12/18/2012 HAMDARD BUSINESS SCHOOL20 Current valuation of the deal is at 6.6x and 5.5x on basis of FY11e and FY12E sales. We see the valuation of Piramal’s DFB at 7x on basis of FY10 sales.
The CompaniesAct, 1956 Securities and Exchange Board of India(SEBI)Takeover Code Foreign Exchange ManagementAct, 1999. CompetitionAct, 20002/18/2012 HAMDARD BUSINESS SCHOOL21
Big Pharma companies has three bigproblems — Its most important drugs are losing patentprotection, growth in developed markets isslowing to a crawl, and much of its cash istrapped overseas Abbott’s purchase of India’s PiramalHealthcare’s generic drugs business for $3.7billion offers a partial answer to all threevariables. Six of the world’s ten biggest drugs are likelyto lose U.S. patent protection by the end of2012.2/18/2012 HAMDARD BUSINESS SCHOOL22
Other major markets in Europe andAsia areon similar timetables.The value of many bigfranchises will be gutted as cheaper versionsof these compounds are introduced. As a result, growth of drug sales in developedcountries is likely to be between 3 and 6percent over the next severalyears, according to IMS.2/18/2012 HAMDARD BUSINESS SCHOOL23
Of course, big drugs companies can console themselves with the facttheir businesses still generate substantial profits and cashflow.Thetrouble is that much of this comes from foreign subsidiaries, where itremains stashed away. Repatriating the cash to pay investors dividendsor buy back stock would generate a large tax bill. One way to deal with these myriad problems is to move into the genericsbusiness, as Novartis , Sanofi-Aventis andAbbott have. Another is to expand into emerging markets. India, for example, isgrowing about three times as fast as developed markets, and given thestate of medical care there, it is unlikely to slow any time soon. A third response is for drug makers to put their stashed cash to workoverseas buying foreign companies.2/18/2012 HAMDARD BUSINESS SCHOOL24
Unfortunately for Abbott, the answer doesn’t come cheap.Piramal’s sales this year should be above $500 million, accordingto the company.While Abbott’s only paying a chunk of the cashover several years, the net present value is still 6.4 times trailingsales.The typical generic company goes for around 3.5times, according to Credit Suisse.Abbott’s deal has other attractions. The return on the investment appears rather low, but is probablybetter than leaving the funds smoldering in a bank. Moreover, thePiramal business gives Abbott scale in India.With a populationgreater than a billion, and the proportion that can afford medicinerising rapidly, that’s a pretty good place to be.2/18/2012 HAMDARD BUSINESS SCHOOL25
Cross-border mergers place Indiancompanies on the global map. Being a significant part of the globalpharmaceutical sector will help the Indiancompanies to take further steps inmaintaining the global pharmaceuticalstandards Including exports, increased profitability,increase in the R&D laboratories, fundingreceived by the companies, increasednumber of patented products, expansion oftheir market share etc.2/18/2012 HAMDARD BUSINESS SCHOOL26
This in turn will be beneficial to the globalpharmaceuticals as well since the cost effectivetechniques used by Indian companies and the hugemarket India provides to this sector can help enhancethe research and creation of newer and improveddrugs. Although there always remains the risk of losingindividual identity of such companies or exposing theindustry to a threat of rampant takeovers, on thewhole Mergers elevates the economic graph of thecountry.2/18/2012 HAMDARD BUSINESS SCHOOL27