Aurum Equity Partners LLP Aurum Insights Pharmaceuticals October 2014 Indian Pharma companies are aggressively building out a global franchise through increased M&A and the collaboration route Read more of the M&A action in this issue Read online on www.aurumequity.com
Indian Pharma companies are aggressively building out a global franchise through increased M&A and Collaboration route Gautam Dhawan Partner, Aurum Equity Partners LLP Global Generics Market is favorably positioned The global generics market is expected to grow from USD 240 bn in 2011 to USD 400 bn in 2016 representing a CAGR of 11%. This growth is being driven by : Unsustainable Healthcare Costs in Developed Markets Rising Healthcare costs are driving Governments to implement pro-generic policies e.g. US Health Insurance reforms, EU5 to shift usage to Generic and Promotion of generic drugs in Japan Payer-funding models shift towards outcomes and lower costs Increased demand in Emerging Markets > 70% of the growth is expected to be driven by key markets- China, India, Latin America Key drivers are rising income levels, insurance penetration levels and greater Government role in providing healthcare Brand V/s Generic Drug Growth Trajectory 2017 52% 36% 12% Brand Generic 2012 61% 27% 12% Other. Total medicine spending will increase from USD 965 bn in 2012 to 1,200 bn in 2017 representing a CAGR of 4.5%. Generics share will increase from 26% in 2012 to 36% in 2017 led by a progeneric environment, rising generic utilization and patent expiries. Private and Confidential For Limited Circulation Only 2
Indian Domestic Market facing short term headwinds The Indian domestic market is pegged at USD 13 bn (2011) and growing at a CAGR of 15%. While the long term outlook is intact, there are short term headwinds like new drug pricing policy which could impact growth of Indian Companies in the domestic market. 70 65 60 55 15 10 5 0-5 Indian Pharma Industry Revenue (INR bn) Year on Year Change % International Markets represent a large and growing opportunity In order to drive growth, Indian companies are focusing on developed markets (especially the U.S.) and emerging countries wherein the size of the opportunity is much higher. Emerging Markets (EM s) The Next Growth Driver Pharmaceutical spending to increase from US$190bn in 2011 to US$360bn by 2016 representing a CAGR of 15% EM s present an ideal fit given their branded generic characteristic similar to India Many Indian companies have entered these markets through the inorganic route US Market Niche Opportunities Rising generic penetration levels 50% of the expiries are in the limited competition segment - respiratory, transdermal patches, controlled substances etc Large Indian companies have invested heavily in terms of R&D, filings, manufacturing and front- end presence While India continues to be a strategic market, Indian companies are aggressively expanding overseas through a combination of organic, inorganic and collaboration route. A slew of deals announced in the past few months exemplifies this growth strategy. Private and Confidential For Limited Circulation Only 3
Globally the Pharma Generic Market is consolidating Global Pharma companies have been consolidating over the past many years. Mylan, Actavis, Teva, Aspen, Sun Pharma have been growing through a series of acquisitions. The key driver is to build a global franchise through scale in products, R&D, manufacturing and technology. USD 25 bn acquisition of US based Forest Laboratories by Actavis. This deal is partly designed to position the resulting company to deal with the changing health-care landscape in the U.S. The combined company is expected to have more than $15 billion in revenue for 2015, and the deal is expected to immediately add to adjusted earnings, with double-digit accretion in 2015 and 2016 Niche pharmaceutical company Akorn Inc completed its acquisition of Hi Tech Pharmacal Co for USD 640 mn in an all cash transaction. This deal is expected to provide Akorn with additional breadth in the retail OTC market, help diversify its revenue base and strengthen its R&D pipeline. Mylan entered into a definitive agreement with Abbott whereby Mylan will acquire Abbott's non- U.S. developed markets specialty and branded generics business in an all-stock transaction. The all stock deal is valued at USD 5.3 bn. Indian Companies are likely to remain at the M&A forefront given their strong balance sheet, Free cash flow generation and desire to grow internationally Broadly, acquisitions by Indian companies have been focused on the following: Acquiring technological capabilities in some of the complex therapy areas Filling portfolio gaps Strengthening presence in some of the fast-growing emerging markets The above trend is visible in a string of M&A / partnership deals that have taken place in the last 6 to 12 months. Companies including Cipla, Sun Pharma, Aurobindo and Lupin have inked deals to expand their presence globally In the past Indian companies have adopted a more conservative approach towards M&A pursuing smaller companies with reasonable valuations. However, we believe that given huge set of opportunities and the need to build capabilities in areas like biosimilars, OTC, specialty pharma or new market access, larger deals cannot be ruled out. Private and Confidential For Limited Circulation Only 4
Table 1: Select Recent Transactions in the Pharma Sector Date Deal Type Company Target/ Partner Deal Size (USD mn) 29/10/2014 M&A Strides Arcolabs Shasun Pharma 200 15/09/2014 Licensing Cipla Gilead Sciences NA 09/09/2014 Private Equity Apax Partners LLP Strides Acrolab 8 12/06/2014 Acquisition Meiji Seika Medreich 290 14/05/2014 Private Equity KKR Gland Pharma Limited 192 07/04/2014 Merger Sun Pharmaceutical Ranbaxy Laboratories 4,000 01/04/2014 Acquisition Aurobindo Pharma Western European Businesses of Actavis 40 28/03/2014 Acquisition Lupin Limited Grin Laboratorios NA 13/12/2013 Acquisition Torrent Pharmaceuticals Elder Pharma, Formulation Business 333 21/10/2013 Private Equity CX Partners Natco Pharma 17 15/03/2013 Acquisition Fresenius Kabi Parenteral Drugs, Goa Manufacturing Unit 37 01/03/2013 Acquisition Mylan Agila Specialties 1,750 23/01/2013 Private Equity Tata Healthcare Marck Biosciences 40 Private and Confidential For Limited Circulation Only 5
Private and Confidential For Limited Circulation Only 6 The Aurum Perspective on select transactions - In September 2014, Cipla signed a licensing agreement with Gilead Sciences for manufacturing and distribution of Sofosbuvir mono, Ledipasvir mono and the fixed-dose combination of Ledipasvir/Sofosbuvir, for the treatment of Hepatitis C. Cipla will manufacture and market products in 91 countries including home markets India and South Africa under Cipla s own brand names Under the licensing agreements, Cipla will receive technology transfer from Gilead to enable them to scale up production quickly Aurum Perspective The collaboration provides Cipla with Gileads s path breaking technology to serve nearly 100 million people living with Hepatitis C globally, representing 54% of total global infected population. For Cipla this is a unique collaboration a) Agreement provides access to a large target market b) leveraging its vast manufacturing capabilities to sell the drug at competitive prices c) leveraging its front end presence in many markets and d) provides a fillip to Cipla s ongoing commitment to provide innovative medicines to patients This deal will enhance Cipla s revenue and earning potential over the next few years.
The Aurum Perspective on select transactions - In March 2014, Lupin Limited acquired 100% equity stake in Laboratorios Grin, S.A. De C.V.(Grin), the fourth largest pharmaceutical company in Mexico in the eye care segment Grin is a specialty pharmaceutical company engaged in the development, manufacturing & commercialization of branded Ophthalmic products. It is the fourth largest pharma company in Mexico in the high growth eye care segment with revenues close to USD 30 mn. The Mexican ophthalmic market is currently valued at $ 275 Mn and has grown at close to 10% over the last 5 years. It is expected to reach $ 450 Mn by 2017-18 Aurum Perspective This acquisition will help Lupin foray into the large and fast growing Mexican market and subsequently expand in the larger Latin American pharmaceuticals market. The acquisition provides Lupin with a) new market access b) access to the ophthalmology segment and drive synergies through their pipeline and c) leveraging Grin s platform to expand into other high growth segments Private and Confidential For Limited Circulation Only 7
The Aurum Perspective on select transactions - In April 2014, Aurobindo Pharma acquired few key Western European businesses of Actavis Aurobindo Pharma acquired personnel, commercial infrastructure, products, marketing authorizations and dossier license rights of Actavis in seven European countries. The acquisition will enable Aurobindo to achieve critical mass in Western Europe with a top 10 position in several key markets. The acquired business has revenues of USD 435 mn and EBITDA loss of USD 40 mn. For Aurobindo, the acquisition is at virtually zero cash outgo as deal value of USD 40 mn also includes net current assets in excess of USD 40 mn Aurum Perspective Aurobindo's acquisition of commercial operations in 7 European Countries is a good example of leveraging inherent strengths to gain ready access to major geographies. In this deal Aurobindo has also entered into a larger supply agreement with Actavis which will provide enhanced capacity utilization of its manufacturing. This model could be emulated by other mid-sized Indian Players by looking at similar arrangements with top Generic Players. This deal will enhance Aurobindo s revenues in the Europe operations and given the strong India-based manufacturing set-up, it would be able to improve EBITDA margin going forward. However, site-transfer and cost optimization may take a few years before profit visibility. Private and Confidential For Limited Circulation Only 8
The Aurum Perspective on select transactions In April 2014, Sun Pharmaceutical announced an acquisition of Ranbaxy Laboratories for USD 4 bn; Approx 2.2x sales Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each share of Ranbaxy. Daichii Sankyo the parent company of Ranbaxy will now hold a 9% stake in Sun Pharma as a result of its stake in Ranbaxy. Aurum Perspective This transaction is a transformational deal for Sun Pharma as it creates the 5 th largest global specialty company: # 1 pharma company in India # 1 Indian pharma company in the US market with a strong pipeline Bigger presence in emerging and Western European markets This transaction exemplifies Sun Pharma s desire to expand their business globally through M&A route and strong track record of turning around companies. Private and Confidential For Limited Circulation Only 9
). The Aurum Perspective on select transactions In December 2013, Mylan Inc. completed the acquisition of the Agila s injectables business from Strides Arcolab Limited for up to $1.75 billion, which includes $250 million in contingent consideration Agila is a Unique, global pure-play injectables platform operating across liquid injectables, lyophilized injectables, oncology and ophthalmic and other forms (PFS, oral, dry powder). Enterprise Value 7.5x Sales and 22x EBITDA Aurum Perspective The acquisition of Agila will make Mylan a global injectables leader, expanding and strengthening its existing injectables platform and portfolio, and providing it entry into new geographic markets. The combination strengthens Mylan's existing platform in developed markets, such as the U.S., where Mylan can now offer customers an even more comprehensive portfolio of high quality products, The acquisition will also help Mylan accelerate its expansion into key rest-of-world markets, including Brazil, India and Southeast Asia. Agila will bring a broad product portfolio of more than 300 filings approved globally and marketed through a network covering 70 countries, including 61 abbreviated new drug applications (ANDAs) approved by the US Food and Drug Administration (USFDA) Private and Confidential For Limited Circulation Only 10
Concluding notes The prospects of the Global generics market are looking bright over the next few years, given the pro-generic environment in developed markets, rising utilization levels, patent expiries and growing Government role in providing healthcare in emerging markets. As a result, Generics share in total medicine spending will rise to 37% by 2017 and the branded segment will fall to 52% during the same period. This augurs well for the Indian Generic industry which has been growing steadily over the past few years. While the Indian domestic market has grown at a CAGR of 15% over the past 5 years, there are initial signs of a slowdown. However, we believe this is transient in nature and long-term growth drivers remain intact. Most industry participants believe that the long term growth stands at 14-15%. The overseas markets represent a large opportunity and many Indian companies like Sun, Lupin, Cipla, Zydus, Torrent have been expanding their presence over the past few years. While the US is clearly the biggest market the opportunity there is becoming more niche injectables, respiratory, ophthalmics, dermatalogy, transdermal patches etc and companies will have to focus in building a pipeline in these segments. On the other hand, Emerging Markets will double spending over the next few years and offers meaningful opportunities. While Indian companies have sizable scale in terms of revenue, they lag far behind the global generics when it comes to inorganic growth. With low leverage and strong free cash flow generation over the next few years, some of them are likely to turn more aggressive in pursuit of growth. Further, sizable promoter holdings across companies provide another potential source of funds and enhance companies ability to raise debt. Two key factors driving inorganic initiatives would be (1) market access and (2) technology or portfolio enhancements. The recent deals over the past 6-12 months does indicate Indian Pharma companies aggressive plans to build a global pharma franchise and we expect many more Indian companies to emerge as global leaders in the fast growing generic market. For more details, write to Gautam Dhawan at gautamdhawan@aurumequity.com
Aurum was established, as a mid-market focused; transaction oriented; investment banking firm, by a team of professionals with decades of experience in investment banking, private equity and general management. Aurum advises clients on M&A, Divestitures, Fund Raising and Restructuring, focusing on sectors that are in the high-growth trajectory. The Aurum team s experience in handling large and complex transactions helps in accelerating the speed of response that the Client needs to demonstrate, in order to close transactions in a competitive environment. We have the ability to structure deals derived from understanding the client's strengths and constraints, further enabled by understanding of market trends and relevant regulatory environment. www.aurumequity.com For any further queries and information, please write to us at ritikasingh@aurumequity.com Disclaimer: This report is presented solely for the internal use of the recipient to whom it is marked by Aurum Equity Partners LLP ( Aurum ) and does not carry any right of publication or disclosure to any other party. This report has been prepared on the basis of information obtained from publicly available, accessible resources. Aurum has not independently verified all the information given in this report. Neither Aurum nor its affiliates, partners, directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report. 12