The Industry The Indian Pharmaceutical Sector is currently the largest amongst the developing nations.

Given its current momentum of growth the Indian pharmaceuticals market is expected to expand to US$ 25 billion by 2010. There is a worldwide structural trend evolving in pharmaceuticals and Indian companies play a key role in this framework, driven by their superior biotech and drug synthesis skills, high quality and vertically integrated manufacturing assets, differentiated business models and significant cost advantages. Indian pharmaceutical companies reign supreme compared to their multinational counterparts in India. Profit margins of Indian companies are on the rise and the recent trend of mergers and acquisitions by Indian pharmaceuticals are likely to provide an upside to the growth numbers. The total Indian Pharmaceutical Market is valued at US$ 8790 million with a growth rate of 8%. The market is predominantly a branded generic market with more 20,000 domestic manufacturers of end-use pharmaceuticals, making the industry highly fragmented. In the organized sector of the Indian Pharmaceutical industry there are about 250-300 companies, controlling about 70% of the total output in value terms, with top 10 players accounting for one third of the total market. The healthcare sector in India has experienced a paradigm a shift due emerging trends in globalization, developing markets, industry dynamics and increasing regulatory and competitive pressures. Companies across the world are reaching out to their counterparts to take mutual advantage of the others core competencies in R&D, Manufacturing, Marketing and the niche opportunities offered by the changing global pharmaceutical environment. The pharmaceutical sector offers an array of growth opportunities. This sector has always been dynamic in nature and the pace of change has never been as rapid as it is now. To adapt to these changing trends, the Indian pharmaceutical and biotechnology companies have evolved distinctive business models to take advantage of their inherent strengths and the "Borderless" nature of this sector. These differentiated business models provide the pharmaceutical and biotechnology companies the necessary competitive edge for consolidation and growth.

Mergers and Acquisitions Today, there is a global trend towards consolidation and going forward, as pressures on the pharmaceutical industry increase, this trend will continue. The lack of research and development (R&D) productivity, expiring patents, generic competition and high profile product recalls are driving the mergers and acquisition (M&A) activity in the global pharmaceutical and biotech sector. This sector is unique in the sense that it traverses across geographies, as health has no boundaries, and this very boundary-less nature supports consolidation in this Industry. With the easy availability of capital and increased global interest in the pharmaceutical and biotech industry, the sector has become quite a `mergers-and-acquisitions' favorite. Apart from the patented pharmaceutical and biotech companies scouting for newer geographies to launch their patented molecules, the global generics market also has undergone an unprecedented consolidation wave in the past two years. Last year, Teva acquired US generics major IVAX for $7.4 bn, to become the worlds largest generics company. In 2004, Teva paid $3.4 bn for Sicor of the US. Teva and Sandoz, generics arm of the Swiss pharma group, Novartis, have been buying small generics companies to grow in size. Sandoz bought Hexal and Eon Laboratories in Germany, as well as Croatias Lek, Canadas Sabex and Denmarks Durascan in 2004 and 2005. Deflation in the generic industry would lead to displacement of weaker players leading to consolidation. The trend has gathered momentum with the $1.9bn buyout of Andrx by Watson to create the 3rd largest specialty pharma company There are three levels of integration that are currently being sought in the generics industry
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Back-end manufacturing capability (API/formulation) Product integration (ANDA pipeline), and Front-end (marketing and distribution) in the developed world

The US and European generics companies are scouting for alliances/buyouts at the back end of the chain, which would allow them to offset any manufacturing cost advantage held by companies in the developing markets. The Indian companies are looking at the front-end integration as building a front-end distribution set-up from scratch could take significant time. The product side integration is common to both sides, with weaker US/European generics companies looking at anyone that could offer a basket of products. This is because the US/European pipeline is weak while Indian companies are aspiring to grow rapidly, want to achieve critical mass quickly, and are looking for geographic expansion. Mergers and Acquisitions Trend in India Mergers and Acquisitions (M&A) interest in India is currently very high in the pharma industry. Size and end-to-end connectivity are major detriments in the global markets. To achieve them, Western MNCs have to look to Indian companies. Indias changing

therapeutic requirements and patent laws will provide new opportunities for big pharma for launching their patented molecules. While, Indias strong manufacturing base will stand global generic companies in good stead as a low-cost development and manufacturing destination. Besides consolidation in the domestic industry and investments by the US and European firms, the spate of mergers and acquisitions by Indian companies has ushered an era of the "Indian Pharmaceutical MNC". After traversing the learning curve through partnerships and alliances with international pharmaceutical firms, Indian pharmaceutical companies have now moved up a step in the value chain and are looking at inorganic route to growth through acquisitions. Many top and mid tier Indian companies have gone on a global "shopping spree" to build up critical mass in International markets. Also, given the easy access to global finance the Indian companies are finding it easier to fund their acquisitions. Incentives for Mergers and Acquisitions by Indian companies
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Build critical mass in terms of marketing, manufacturing and research infrastructure Establish front end presence Diversification into new areas: Tap other geographies / therapeutic segments / customers to enhance product life cycle and build synergies for new products Enhance product, technology and intellectual property portfolio Catapulting market share

The Indian companies excel as far as the back end of the pharmaceutical value chain is concerned i.e manufacturing APIs and formulations. Over the past few years the Indian pharmaceutical companies have also stepped up their efforts in product development for the global generic market and this is visible with the DMF filings at the US FDA. About 30% of the new DMF filings at the US FDA are being filed by Indian companies. What the Indian companies are short of is the front-end distribution and marketing infrastructure in the developed world. The current stress is on bridging this gap through any / or all of the following strategies. The type of tactic employed would depend on the companies existing capabilities, available resources, nature and scale of expansion planned and on the targeted geographical market.

Acquisitions are the quickest way to front end access. What is interesting is the fact that apart from market access i.e marketing and distribution infrastructure, the acquiring company also gets an established customer base as well as some amount of product integration (the acquired entities generally have a basket of products) without the accompanying regulatory hurdles. There are also entry barriers for companies from the developing countries and acquisitions make it easy for these organizations to find a foothold in the developed markets. For instance, there is a cultural and language barrier in Europe and Europe is high on the radar of Indian pharmaceutical companies. The sheer heterogeneity of Europe and the fragmented nature of its pharmaceutical market make acquisitions an easy route for entry into this region and the US being the largest pharmaceutical market in the world will always interest the Indian pharma companies for its sheer size. Over the last two years, several Indian companies have targeted the developed markets in their pursuit of growth, especially via the inorganic route. Companies such as Ranbaxy, Wockhardt, Cadila, Matrix, and Jubilant have made one or more European acquisitions, while others such as Torrent are also scouting for potential targets. Besides gaining a faster entry into the target market, one of the basic strategies behind the acquisitions remains that of leveraging Indias low cost advantage by shifting the manufacturing base to India. At the same time, the acquired companies also serve as an effective front end for Indian companies in these markets. Acquisitions by Indian Companies

Mergers and Acquisitions - Challenges While growth via acquisitions is a sound idea in principle, there are challenges as well, which relate mainly to the stretched valuations of acquisition targets and the ability to turn them around within a reasonable period of time. The acquisitions of RPG Aventis (by Ranbaxy) and Alpharma (by Cadila) in France are clear examples of acquisitions proving to be a drain on the companys profitability and return ratios for several years post acquisition. In several other cases acquisitions by Indian generic companies are small and have been primarily to expand geographical reach while at the same time, shifting production from the acquired units to their cost-effective Indian plants. A few have been to develop a bouquet of products. Other than Wockhardts acquisition of CP Pharma and Esparma, it has taken at least three years for the other global acquisitions to see break-even. Most of the acquiring companies have to pay greater attention to post merger integration as this is a key for success of an acquisition and Indian companies have to wake up to this fact. Also, with the increasing spate of acquisitions, target valuations have substantially increased making it harder for Indian companies to fund the acquisition Making an Acquisition Work As M&A practitioners know, effective post-deal management can mean the difference between success and failure. No matter how well structured a deal is, conditions can change to upset the value equation. In the subsequent 2-3 years following an acquisition, very few companies grow more quickly than they had before. The loss of revenue momentum is one reason why so many mergers and acquisitions fail to create value for shareholders. And coming up short on revenue targets has far more serious effects on the bottom line than failing to meet planned cost savings. Since nearly half of all mergers and acquisitions fail to achieve even their planned cost savings, it is imperative to maintain revenue growth. In any merger, acquisition, or joint venture, the sooner managers integrate their companies the faster they capture the expected synergies. It is imperative to keep the following points in mind while planning for an acquisition
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Clarify deal strategy from the beginning Confirm the business rationale Check for the right strategic fit Assemble the right team Focus on value, not cost Create transparency Manage the risks Plan for effective post-acquisition integration

Case Study Wockhardt Ltd Wockhardt is a global, pharmaceutical and biotechnology company that has grown by leveraging two powerful trends in the world healthcare market - globalization and biotechnology. The Company has a market capitalization of US$ 1.3 billion and an annual turnover of US$ 285 million (Rs. 12.39 billion). Wockhardt has a strong and growing presence in the worlds leading markets, with half of its revenue coming from Europe and the United States. Wockhardts market presence covers formulations, biopharmaceuticals, nutrition products, vaccines and active pharmaceutical ingredients (APIs). The key strengths of Wockhardt are: Manufacturing Capabilities
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Wockhardts manufacturing facilities in India and UK have the approval of major regulatory bodies, including US FDA and UK's MHRA, with capabilities for both Finished Dosage Formulations and APIs

Biotechnology
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Wockhardt has developed comprehensive concept-to-market strengths in all facets of recombinant biotechnology. These include gene-cloning, development of production strains, expertise in all three major expression systems, purification, downstream processing and testing The company has set up the Wockhardt Biotech Park, amongst Indias largest biopharmaceuticals complex, with six dedicated plants built to international standards with capacities to meet 10-15% of global demand for important biopharmaceuticals A sound regulatory infrastructure has been set up for its biogenerics pipeline with registrations in developing markets. The company has also set up front-end offices in the identified markets - either owned organizations, strategic joint ventures or distribution arrangements Wockhardts pioneering efforts in biotechnology have led to the launch of three successful products in the Indian market - Biovac-B (hepatitis B vaccine), Wepox (erythropoietin), and Wosulin (recombinant insulin). The company has also made a breakthrough with Interferon alpha 2b and Glargine. Growth stimulating factors (GSF) are also in the development pipeline.

Acquisition Management The company has a strong track record in acquisition management, with three successful acquisitions in the European market and two in the domestic space.

The acquisitions in Europe and the subsequent integration of their operations have strengthened Wockhardts position in the high-potential markets of UK and Germany, and have expanded the global reach of the organization. The growth drivers for Wockhardts European business include exports, new product launches, penetration in the European Union through mutual recognition, and strategic acquisitions. Wockhardt UK Limited
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Wockhardt UK Limited (Erstwhile CP pharmaceuticals) is amongst the 10 largest generics companies in UK and the second largest hospital generics supplier. The Company has a comprehensive, FDA-approved manufacturing facility for injectables that plays a strategic role in driving the companys growth through partnerships in contract manufacturing Wockhardt UK has built up a critical mass in the segments of Retail Generics, Hospital Generics, Private Label GSL / OTC Pharmaceuticals, Dental Care (denture cleaning tablets, powders and fixative creams)

Esparma GmbH
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The acquisition of Esparma GmbH in 2004, has given Wockhardt a strategic entry point into Germany, the largest generics market in Europe Esparma has a strong presence in the high-potential segments of urology, neurology and diabetology, assisted by a dedicated sales & marketing infrastructure

The key to Wockhardts successful acquisition management is the managements ability to turnaround the acquired company in record time and thus create value out of the acquisition. The company believes in value buys that would have a tactical fit with its core competencies and key strategic objectives. The acquisitions are mainly driven by market access since Wockhardt has an extensive pipeline of generics and biogenerics and needs a strategic front-end for the same. The company has plans for further acquisitions in the developed markets of Europe and US to further consolidate and strengthen their positions in these geographies. Future Trends

Given the increasing spate of mergers and acquisitions in the global pharmaceutical sector, the valuations are at an all time peak, there is too much money chasing too few targets. Going forward this trend would slow down as valuations are cyclical in nature. The consolidation trend will continue with Indian pharmaceutical players playing a major role. Indian pharmaceutical companies have spent close to $1.4 bn in acquiring companies globally in the past 18 months. With access to capital, higher staying power because of low costs, and managements willing to globalize, this trend will continue.