Picking up a good deal

Published: 3-May-2012

This month Asia correspondent A Nair looks at why the emerging economies provide so many tempting takeover targets for Big Pharma

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This month Asia correspondent A Nair looks at why the emerging economies provide so many tempting takeover targets for Big Pharma

Mergers and acquisitions (M&A) activity in the pharmaceutical sector seems to be picking up this year, especially deals involving Indian, Brazilian and Chinese (BRIC) companies. Big Pharma has been eager to penetrate the emerging markets of India and China for some time now and its sights are set firmly on the generic pharmaceutical industry in these countries.

India is set to see plenty of M&A activity this year. According to consulting firm Grant Thornton, the high expectations could be explained by factors such as the impending patent cliff in the US, the increasing attractiveness of India as a low-cost research and development destination and the increasing success of Indian firms in getting abbreviated new drug approvals (ANDA).

Srividya C, partner at Grant Thornton India, said business sentiment among corporates had ‘improved significantly as compared with last year and private equity companies were also expected to participate in the M&A drive this year’.

Japanese major Takeda Pharmaceuticals is said to be eyeing M&As in India, even as it has earmarked US$300m (€228m) for investment in China. ‘The Japanese now see M&A as a strategic imperative to survive in a global market,’ said Tarun Shah, ceo of Mehta Partners, an M&A boutique advisory firm. ‘Valuations have become very attractive in India, from the seller’s point of view. Buyers from big drug companies especially from the US and Europe are looking at Indian firms, because entrepreneurs have created world class manufacturing facilities that produce a high quantity of complex formulations at a cost which is very attractive.’

Major pharmaceutical companies are looking to acquire firms in China

With China’s pharmaceutical market projected to grow to $115bn (€87.4m) by 2015, companies are looking to China for takeover targets. Global major AstraZeneca, for example, sees double-digit growth in China in the years ahead. The company more than doubled sales between 2004 and 2009, and revenue jumped to over US$1bn (€760m) in 2010, a 28% increase. The company has decided to expand in China, and cut back in the US.

Last October, AZ invested $200m (€152m) in a new manufacturing facility located in China Medical City, Taizhou, Jiangsu province. In December 2011, it entered into an agreement to acquire Guangdong BeiKang Pharmaceutical, a privately owned generics manufacturing company, based in Conghua City, Guangdong province. The deal gave AZ access to a portfolio of injectable medicines used to treat infections, which AZ would make available to patients in China.

Pfizer, too, signed two deals with a China focus: the first with Shanghai Pharmaceutical for the distribution and marketing of Pfizer products in China, and the second with Daiichi Sankyo for the co-promotion of Daiichi Sankyo’s olmersartan medoxomil in China.

Even as Merck KGaA’s acquisition of Beijing Skywing Technology, a leading provider of cell culture media products and bioreactors for the Chinese biopharmaceutical industry early 2011, allowed Merck quickly to establish a presence in China, Novartis followed it up by acquiring an 85% stake in Zhejiang Tianyuan, a bio-pharmaceutical vaccines company.

China demands local testing of medicines before it licenses them domestically. With the cost of conducting animal research about half that in the US, demand for services of contract research organisations too is surging. WuXi, China’s biggest medical contract researcher, is generating profit margins that surpass its US rivals by almost five times, according to Bloomberg data.

The growth potential is likely to cause a surge in the takeover offers for WuXi and ShangPharma from global rivals including Quintiles Transnational, Pharmaceutical Product Development and Oppenheimer & Company.

The soaring cost of chronic disease is taxing China’s effort to offer basic healthcare to its 1.4 billion people. Looking to overhaul its healthcare system, Chinese leaders have pledged to make medical care more affordable and extend health coverage to the entire population – a move that has rankled with drug manufacturers.

For the majority of Chinese, healthcare is accessible only with the aid of public insurance, so there is no private market to which they can turn. One in eight Chinese households was faced with catastrophic health expenses last year, with the population seeing a rise in chronic diseases – a problem that will only increase as age expectancy goes up.

Compared with just 1% in 1980, diabetes, for instance, now afflicts nearly 10% of Chinese adults, almost the same proportion as in the US, according to a Reuters report. Spending on diabetes reached an estimated $17bn (€13bn) in China last year, representing about 5% of total healthcare spend.

Although the basic medicine to keep diabetes under control is relatively cheap in China, at about CNY2,000 a year (€241), treatment for a patient who has developed advanced symptoms could easily reach CNY18,000 (€2,170) a year, roughly equal to the average yearly income of urban Chinese. And although common diabetes drugs are covered by insurance, equipment for at-home testing and monitoring of blood sugar levels, which is estimated at around CNY400 (€48.22) a month, is not.

China will include a smoking cessation drug in its basic medicines list

China has also decided it will include quit-smoking consultation as a basic healthcare service and include a smoking cessation drug in the basic medicine list. The country has 300 million smokers and about 1.2 million people die from smoking-related diseases each year. The Red Cross Society of China, which launched a three-year ‘Create a Smoke-Free Environment Project’ in co-operation with the Bill and Melinda Gates Foundation in February 2012, is to infuse $9m (€6.8m) into the project over the next three years to promote tobacco control in China.

China also is looking to the UK and its National Institute for Health and Clinical Evidence (NICE). Reports indicate that China has signed an agreement with NICE and is keen to establish a similar structure.

For the Chinese government to convince both its young urban and ageing rural populations to save less it must ensure that higher quality and more efficient healthcare is available. With this in mind, the government has put into place an aggressive cost savings plan to try and control expenses. First among these endeavours has been the National Development Reform Commission’s two rounds of mandatory price decreases on key drugs – primarily antibiotics and cardiovascular – over the past year.

The government has also announced it will be putting $125bn (€95bn) into healthcare in 2012; this means the budget is set to go up by a mere 1%, although consumption will rocket by over 15%. For drug companies that are deriving more of their top-line revenue and bottom-line profits from the Chinese market, these moves are clearly disturbing.

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