Merger and Acquistion Scenerio in Pharmaceutical Industry

Prof Shuchi Gautam Faculty SITRC Mahiravani Nashik shuchi.gautam@sitrc.org 9975914466

and Take over) Regulations, 1994 and 1997, have been notified. The decision of the Government to allow companies to buy back their shares through the promulgation of buy back ordinance, all these developments, have influenced the market for corporate control in India In the Indian pharmaceutical market there are a number of companies that have entered into merger and acquisition agreements in the context of the global market scenario. These companies would be selling off the non-core business divisions like Over-the-Counter. This is expected to further the consolidation in the mid-tier as far as the pharmaceutical industry in Europe is concerned. There are several causes of mergers and acquisitions in the global pharmaceutical industry. Among them are the absence of proper research and development facilities, gradual expiry of patents and competition within specific pharmaceutical genres. The high profile product recalls have also played a major role in the continuing mergers and acquisitions in the

Abstract This Paper is an attempt to study the Phenomena of merger and acquisition deals in Pharmaceutical companies. The Indian Pharmaceutical Industry today is in the front rank of Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world. This paper also focus on the trend of merger and acquisiton deals in the pharmaceutical industry in the past 10 years.This paper also studies the motive behind the merger and acquisition deals and the reason of failures of merger and acquisition deals in pharmaceutical companies. Key Words Restructuring Globalisation Strategy Global competitiveness

industry.
Meaning of Merger and Acquisition A merger may be regarded as the fusion or absorption of one thing or right into another. A merger has been defined as an arrangement whereby the assets, liabilities and businesses of two (or more) companies become vested in, or under the control of one company (which may or may not be the original two companies), which has as its shareholders, all or substantially all the shareholders of the two companies . In merger, one of the two existing companies merges its identity into another existing company or one or more existing companies may form a new company and merge their identities into the new company by transferring their business and undertakings including all other assets and liabilities to the new company (herein after known as the merged company). The process of merger is also alternatively referred to as amalgamation. The amalgamating companies loose their identity and the shareholders of the amalgamating companies become shareholders of the amalgamated company. The term amalgamation has not been defined in the Companies Act, 1956. However, the Income-tax Act, 1961 (Act) defines amalgamation as follows: Amalgamation, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating

The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent. Richard Gerster Introduction to Merger and Acquisition
The process of corporate restructuring through mergers and acquisitions has occupied much relevance in post-liberalization period. The financial characteristics of a firm play a critical role in the merger decision process. The functional importance of M&As is undergoing a sea change since liberalisation in India. The MRTP Act and other legislations have been amended paving way for large business groups and foreign companies to resort to the M&A route for growth. Further The SEBI (Substantial Acquisition of Shares

company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that 1. all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation 2. all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation;

management of another company either directly by acquiring shares carrying voting rights or by participating in the management. Where the shares of the company are closely held by a small number of persons a takeover may be effected by agreement within the shareholders. However, where the shares of a company are widely held by the general public, relevant regulatory aspects, including provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 need to be borne in minds.Takeovers may be broadly classified as follows: Friendly takeover: It is a takeover effected with the consent of the taken over company. In this case there is an agreement between the managements of the two companies through negotiations and the takeover bid may be with the consent of majority shareholders of the target company. Hostile takeover: When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of the existing management, such acts are considered hostile on the management and thus called hostile takeovers. The recently consummated Arcelor Mittal deal is an example of hostile takeover,.

3. Shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company by virtue of the amalgamation, 4.and not as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company Takeover/Acquisition Takeover is a strategy of acquiring control over the

Here are the Top 10 Pharmaceutical Acquisition Deals of All time. Acquirer Pfizer (United States) Target Company Wyeth (United States) Roches Genentech (United States) Novartis (Switzerland) AstraZeneca(United Kingdom) Abbott(IL, USA) Johnson & Johnson (United States) Alcon (United States) MedImmune(United States) Solvay Pharmaceuticals(Belgium) Centocor Ortho Biotech, Inc(United States) Merck & Co.(United States) Piramal Healthcare(India) Stiefel Labs(United States) Procter & Gamble's(P&G)(United States) Deal value $68 billion in cash and stock $47 billion $39.3 billion $15.2 billion $6.2 billion $4.9 billion in stock-for-stock exchange

Sanofi-aventis(Paris, France) Abbott(United States) GlaxoSmithKline(United Kingdom) Warner Chilcott(United States)

$4 billion $3.72 billion for 4 years $3.6 billion. $3.1 billion

Sources(Business -Beacon.Com)

Indian Pharmaceutical Industry The Indian Pharmaceutical Industry today is in the front rank of Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world. India's pharmaceutical sector is currently undergoing unprecedented change. Much of this is due to the country's introduction, on January 1, 2005, of a system of product patents; before that, only patents for processes were permitted to be issued, a fact that has been instrumental in the domestic industry's huge success as a worldwide exporter of highquality generic drugs. The new patent regime has also led to the return of the pharmaceutical multinationals, many of which had left India during the 1970s. Now they are back, and looking at India not only for its traditional strengths in contract manufacturing but also as a highly attractive location for research and development (R&D), particularly in the conduct of clinical trials and other services. Growth Scenario in 2010 India's pharmaceutical industry is now the third largest in the world in terms of volume. Its rank is 14th in terms of value. Between September 2008 and September 2009, the total turnover of India's pharmaceuticals industry was US$ 21.04 billion. The domestic market was worth US$ 12.26 billion. This was reported by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers. As per a report by IMS Health India, the Indian pharmaceutical market reached US$ 10.04 billion in size in July 2010. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. Know more out this in our article on Indian Pharmaceutical Industry- Future Trends Also check out Pharmaceutical Market Trends 2010 Leading Pharmaceutical Companies In the domestic market, Cipla retained its leadership position with 5.27 per cent share. Ranbaxy followed next. The highest growth was for Mankind Pharma (37.2%). Other leading companies in the Indian pharma market in 2010 are: Sun Pharma (25.7%)

Abbott (25%) Zydus Cadila (24.1%) Alkem Laboratories (23.3%) Pfizer (23.6 %) GSK India (19%) Piramal Healthcare (18.6 %) Lupin (18.8 %)

Merger and Acquisition Strategy Before any strategy is formulated, a company needs have a clear-cut policy regarding merger and acquisition.This policy must be complimentary to its vision and mission.Once a policy decision to expand business through merger and acquisition has been taken, the first step is to establish a Merger and Acquisition Cell. The roll of the cell would be to identify the potential companies, which would depend on macro level issues discussed above and the broad guidelines laid down by the company for such a move i.e. to diversify the business or expand the existing business or for upgrading the technology. This cell should be assisted by business analyst, representative of financial institution/investment bankers, technical experts, valuators and lawyers specializing in this field. For faster decision making, which is vital in such cases, the cell must have direct axis to the business leader/decision making authority.Sophisticated software that can handle financial analysis, projections, valuation, and so on is available in the market and help of these can be taken. Once the targeted company has been identified, option of finalizing deal through negotiation must be considered.However, if it is not feasible due to any reason and takeover is vital for the organization, a hostile takeover should be considered.For hostile takeover, the stock of targeted company should be bought quietly through third party. The whole process must be managed confidentially.

Creating Global Organization Through Merger and Consolidation

It is inherent desire and need for every business to grow both vertically and horizontally.Development within is slow and at times difficult. Best way to have fast growth is to adopt a course of takeover and merger. This gives an organization an instant growth. Considering its advantages the Indian companies seem to be in a great hurry to achieve rapid growth through merger & acquisition. However all takeovers do not meet the required expectations. Sahara-Jet Airways is a living example of the same. Such a failure only leads to confusion and pain to management and to its employees. Reasons for such failure are due to poor homework for acquisition and at times the negotiators are excited and wish to conclude the deal in a hurry. Although, no two acquisitions or mergers are same. Each situation is unique and presents its own set of problems and potential solutions. Hence every deal requires individual approach. However, there are some macro level aspects, which must be kept in mind while considering a targeting company for acquisition or merger. These are economical environment, Geopolitical environment, impact of terrorism on that region, economical health of the company, availability of resources at appropriate cost including manpower etc. These are discussed as under:

pharmaceutical markets in the United States and Europe would be the main areas of operation. Mergers and Acquisitions in Indian Pharmaceutical Sector The sheer number of companies acquiring parts of other companies has shown that the Indian pharmaceutical industry is ready to be a dominant force in this scenario. In the recent times Nicholas Piramal has taken the ownership of 17% of Biosyntech that is a major pharmaceutical packing organization in Canada. Torrent has got the ownership of Heumann Pharma, a general drug making company and, formerly, a subsidiary of Pfizer. Matrix has acquired Docpharma, a major pharmaceutical company of Belgium. Sun Pharmaceutical Industries is set to make acquisitions in pharmaceutical companies in the US and has set aside $450 million to execute these plans. In Bengaluru, Strides Arcolab has aimed at acquiring 70 percent in a pharmaceutical facility in Italy that is worth $10 million. In the recent years the Indian pharmaceutical companies have been venturing into mergers and acquisitions so that they can gain access to the big names of the international pharmaceutical scenario. Patterns of Mergers and Acquisitions in Pharmaceutical Sector One of the major features of the mergers and acquisitions in the pharmaceutical sector of the Asia-Pacific region has been the integration of the local pharmaceutical companies. This has happened especially in India and China. Acquisition has made it convenient for a number of companies to do business in various pharmaceutical markets. Previously the pharmaceutical markets of Europe were closed to the companies of other countries due to the difference in language. There were also other problems for companies like the trade barriers for instance. Figures of Mergers and Acquisitions in Pharmaceutical Sector As per the figures of mergers and acquisitions in pharmaceutical sector, from the year 2004, there have been more mergers and acquisitions in the pharmaceutical sector in the Asia-Pacific region compared to North America. The combined financial value of the mergers and acquisitions in Asia-Pacific region has been greater than North America. One of the major merger and acquisition deals in the AsiaPacific region in the recent years has been the merger of Fujisawa and Yamanouchi in Japan. This deal was worth $7.9 billion. In the same period the Asia-Pacific region has experienced the highest percentage of growth in the mergers and acquisitions in pharmaceutical sector. In the same period the rate of growth in the Asia-Pacific region has been 37%. In Western Europe the rate of growth has been 11% and in North America it has been 20%. The pharmaceutical market in Eastern Europe has not experienced any increase in the rate of mergers and acquisitions.

The sheer number of companies acquiring parts of other companies has shown that the Indian pharmaceutical industry is ready to be a dominant force in this scenario. In the recent times Nicholas Piramal has taken the ownership of 17% of Biosyntech that is a major pharmaceutical packing organization in Canada. Torrent has got the ownership of Heumann Pharma, a general drug making company and, formerly, a subsidiary of Pfizer. Matrix has acquired Docpharma, a major pharmaceutical company of Belgium. Sun Pharmaceutical Industries is set to make acquisitions in pharmaceutical companies in the US and has set aside $450 million to execute these plans. In Bengaluru, Strides Arcolab has aimed at acquiring 70 percent in a pharmaceutical facility in Italy that is worth $10 million. Mergers and Acquisitions in Global Pharmaceutical Sector Since the year 2004 there has been an increase in the mergers and acquisitions in the global pharmaceutical sector. This was reflective of the increase in the mergers and acquisitions in other industries at the same period. There was 20% increase in the number of deals, which stood at 1,808. There were eight deals with the value of more than $1 billion. This was three more than 2003. The total financial value of the deals was $112 billion and this was an increase of 53%. However, these figures do not include the acquisition of Aventis by Sanofi-Synthelabo that was worth $60 billion. This is the biggest acquisition in the pharmaceutical industry after the merger of Pharmacia and Pfizer in 2002.

Opportunities for Pharmaceutical Companies There are a number of opportunities for the major pharmaceutical products and services providers in the Indian pharmaceutical sector as the price controls have been relaxed and there have been significant changes in the medicinal requirements of the Indians. The manufacturing base in India is also strong enough to support the major international pharmaceutical companies from the performance perspective. This may be said as the Indian pharmaceutical market is varied as well as economical. It is expected that in the coming years the Indian pharmaceutical companies would be executing more mergers and acquisitions. It is expected that the regulated

Trends of Merger and Acquisition Deals in Pharmaceutical Industry in India

Table No :1 Showing Number of Merger and Acquisition Deals in India Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 No of Deals* 83 51 86 65 82 103 93 44 48 78 (upto month of October) Source of Data (CMIE Prowass)

Counts includes only the deals of companies which are listed on BSE Health Care Index

Analysis & Interpretation In 2007 the merger and acquisition deals in pharmaceutical industry has touched the highest number of 103 deals.At that time the sensex was on the highest the Indian economy was performing well and due to FDI investment and our strong fundamentals the indian industry has become the best investment hub for the world.Due to new money fused in the market the industries want to expand ,this become a reson for the highest deals in the year 2007.The year 2009 and 2010 were the corrective years for the Indian economy.This has slow down the number of merger and acquistion deals in the pharmaceutical industry.This shows the relationship between the Merger and acquisition phenomena and performance of markets as at the end market reflects the financial health of the companies. MERGER AND ACQUISITION MOTIVES There have been many debates about whether the goal of maximizing shareholder wealth intervenes with the aim of developing new medicines. One thought is whether the acquisitions are made to expand and develop their business and improve research or to maximize shareholder wealth. Some investigations imply that large mergers or acquisitions in the past have not resulted in any or few new drugs, since a consolidation may disrupt ongoing research, and only resulted in reducing costs (Chemical & Engineering news,2002). Another factor is that Pharmaceutical company has limited profit due to restriction in product pricing , so they have to think for other strategies .At present the Merger and

acquisitions are used as strategic tool for success. As the whole world is moving towards globalization and liberalization is spreading its wings then in future after 10 or 15 years merger and acquisition will become a tool to survive. Pharmaceutical Industry are currently the most aggressive overseas investors of all Indian industries. They are pursuing foreign acquisitions due to their need to: Improve global competitiveness

share from the target to the bidder The market share of a firm corresponds to the proportion of production volume or the turnover the firm possess in a given sector of a global market in relation to the rest of competitive companies concerned. The growth concept is relative to a quantitative increase of its turnover or its production. If the company growth is higher than the competitors one, the growth concept means that the company has a market share growth, but if all the competitors increase their turnover, there is not an increase of the market share. Thus, an entity expands its market share when their turnover volume (sales) increases compared to its competitors Compensate for continued sluggishness in their home market.

All the economies above created through a combination and exploitation of common resources can also be called structural economies (Shepherd, 1985). By reorganization we mean a dynamic process reappraising, or even destroying the last structure for a new one. The organized sector of India's pharmaceutical industry consists of 250 to 300 companies,which account for 70 percent of products on the market, with the top 10 firms representing 30 percent. However, the total sector is estimated at nearly 20,000 businesses, some of which are extremely small. Approximately 75 percent of India's demand for medicines ismet by local manufacturing.Global competitiveness has increased.To survive on the world platform the pharmaceutical companies are using merger and acquisition as a strategic tool. Move up the value chain

The strategic decision of acquiring a firm is thus based on the strong will to create value. Facing such a matter, company's managers and board members need to understand the distinct concept of the value when judging a proposed acquisition. Mergers Acquisitions are motivated generally by two kinds of incomes : the cost savings (or economy of cost) and the increased revenues Create and enter new markets

India currently represents just U.S. $6 billion of the $550 billion global pharmaceuticalindustry but its share is increasing at 10 percent a year, compared to 7 percent annualgrowth for the world market overall.1 Also, while the Indian sector represents just 8 percentof the global industry total by volume, putting it in fourth place worldwide, it accounts for13 percent by value,2 and its drug exports have been growing 30 percent annually.3The organized sector of India's pharmaceutical industry consists of 250 to 300 companies,which account for 70 percent of products on the market, with the top 10 firms representing30 percent. However, the total sector is estimated at nearly 20,000 businesses, some ofwhich are extremely small. Approximately 75 percent of India's demand for medicines is met by local manufacturing. Obtaining a Good Buy

Both multinational companies (MNCs) and domestic players are also examining the prospects offered by the local market as the government moves forward with initiatives aimed at providing India's more than one billion inhabitants, for the first time, with access to the life-saving drugs they need. A further huge boost to the local market is coming fromthe rise of India's new affluent consumers, who lead more Western-style lives and are demanding innovative drugs to treat the chronic illnesses that these changing lifestyles may produce. India's leading drug manufacturers are becoming global players, utilizing both organic growth, through the gradual development of their business, and mergers and acquisitions

While acquiring firm "obtaining a good buy" as a reason for their acquisitions, the underlying implication that markets may consistently undervalue corporate assets, is questionable.If all potential acquirers have similar perceptions about the value of potential targets and the market for corporate control is competitive, then the potential acquirers would bid up the price of targets which appeared to be bargains until the acquiring firms would, at the margin, expect to receive only To Improve the Efficiencies

Firms may combine their operations through mergers and acquisitions of corporate assets to reduce production costs, increase output, improve product quality, obtain new technologies, or provide entirely new products. The potential efficiency benefits from mergers and acquisitions include both operating and managerial efficiencies Financial and Tax Benefits The pharmaceutical companies as limited profit margins due to its governing legal framework .Mergers and acquisitions may lead to financial efficiencies. firms may diversify their earnings by acquiring other firms or their assets with dissimilar earnings streams. Earning diversification within firms may lessen the variation in their profitability, reducing the risk ofbankruptcy and its attendant costs.A lot of tax benifits are available and companies are taking the advantage of that.. Reasons for failure of merger and Acquisition It is very difficult to estimate how many mergers and acquisitions in the pharmaceutical industry have succeeded. It is even more difficult to define what

Increase their product offering

As already explained, the R&D function is extremely expensive and the company's size will determine the possible amount of investment. Likewise the marketing, R&D is a supporting function, but is able to create a long term competitive advantage. The merging of R&D will concerns particularly the means at disposal and the resources in term of competencies. Thus they can increase their product offering by utilising the various synergies. Consolidate their market shares

The market share growth results on the transfer of the market

success means. Some estimate, however, that close to 80 percent of mergers do not meet their pre-merger financial goals and that almost 50 percent are failures. The common measure of stock market reactions one day or even few months after the merger is undoubtedly inadequate. In lot of merger and acquisitions the shareholders value are created for the short term only but the more important is that positive synergy should be retained for the long term. On the anlaysis of available literature spite of theories that the stock market, in evaluating and valuing a merger, takes into account all the managerial and human factors, they clearly do not reflect the human and cultural costs of mergers particularly in light of the fact that the managers and leaders involved in a merger often voice their inability to predict its exact outcome. The paradox of Manager vs. Shareholder The strategic investments of the firm should aim to create value for the owners of the firms, especially the shareholders . Nevertheless, most of the acquisitions in last decades seem to generate poor performance concerning the acquiring firms, and even when the results appear to be positive, they are lower for bidders' shareholder than targets' one and the value which is generated in the process retain for the very short period of time. Different studies therefore prove that the acquisition strategies would benefit the targets' shareholders by creating them value .But this doesnt hold true in every scenerio.There is hence a misunderstanding of the stake of the acquisition game from both sides. Such a discrepancy can only lead to bad acquisition strategy and planning. This gives a clash between the management of the company and the shareholders of the company No planned integration cost

feeling linked to asymmetric advantages, autonomy loss, and different cultures. Non integeration of human resource

The main reason for failure of merger is non-integration of human resources of both the transferor and transferee company. Difference in working culture

It is also not successful because the merger of two organizations is actually a merger of individual and groups working in company which had a great impact on individuals working in a company such as it creates ego clashes among individuals working in a company. Miscommunciation regarding strategies

There is also failure of M&A when purchasers plans & strategies are not clear to the employees of the acquired firm.Merger & Acquisition helps a Company to grow in a better way but it has a great impact on the employees working in a company & on working conditions. The employees of the companies merging and acquiring are mostly affected by M&A. Due to this reason, there is mostly failure of M&A. . When 2 companies who have different style of functioning merge, there is a clash between the companies which pulls them together into different direction apart from their aims. Company enters into M& A activity without recognizing the impact on the organization and the overall affect on the human element within the two merging company. When M&A activity do not meet corporate objectives it results in lost revenue, custumor dissatisfaction. Many personnel issues such as salaries, benefits, pension of employees are also affected due to M&A. Since the organizational structures are different, differences in compensation packages and designation can take place normally. Bibliography 1. (Lt. Col) Rattan Raina Paper Tittle "Indias Global Competitiveness Through Mergers and Acquisitions: Trends and Strategies" Marc & Dirk research paper Tittle"Determinants of M&A Success in the Pharmaceutical and Biotechnological industry" Vol VIII March 2011 Anand Manoj & Singh Jagandeep,Impact of Merger Announcement on shareholders wealth,Vikalpa 2008 .The Journal for Decision makers Kishore Ravi Book Title: Financial Management,7th edition ,Chapter Mergers and acquistions.

The peculiarities of external horizontal growth are based on the combination of two entities, and especially of tangible, financial and above all human resources. The bidding company and the target, whatever are their activities, are composed of men and women living within the firms community. The rules, the behaviours, the customs, it means the culture is specific to each entity. The cultures of both entities may be mixed, and their combination may result in efficient synergies, but they can also be incompatible and lead to failure. There is also lot of reorganization & restructuring in the company during the days when M&A process is going on .The process of M&A by which company is bought or sold can prove difficult, slow and expensive The problem of social compatibility

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The risk of demotivating is very high in case of horizontal mergers. In fact, in such a type of acquisition, there are numerous duplications, which lead to mergers of several business units, therefore to large employees cutbacks. Such an assumption is even more verified when the bidder and the target used to be direct competitors. Such a situation entails an anxiety

Webliography 1.www.Business Beacon .com (Internet websites) 2.www.Indian Economy watch.com