Wednesday, March 18, 2009

>Pharmaceuticals Sector (NOMURA)

MNC focus on emerging markets (including India) provides rationale for an acquisition Besides lower product overlap, we note that there is also a strong focus from MNC pharma companies to expand their operations in emerging markets, including India. We observe an increasing trend of big pharma companies identifying emerging markets as a potential key growth driver. Emerging markets offer higher growth rates that are sustainable over a long term compared with the
traditional strongholds – the US and Western Europe, for the innovator companies, in our view. The US and Western Europe have been witnessing single-digit growth rates over the past few years, owing to: 1) increased patent expiries and generic penetration, 2) declining R&D productivity, and 3) increased regulatory hurdles. This is in stark contrast to emerging markets, which have been witnessing double-digit growth rates on back of: 1) rising disposable incomes, and 2) increased access to medical care with growing economies. Further, with more emerging markets complying with intellectual property (IP) protection, the lucrative segment of high-value patented products is now accessible to innovator large pharma companies. In addition to the organic growth efforts, big pharma companies have lately resorted to the inorganic route to establish themselves in emerging markets. As the majority of the emerging markets are branded generic markets, companies would require relatively longer gestation periods to gain traction, in the absence of acquisitions. Some instances of large-pharma M&A include:

GlaxoSmithKline (GSK LN, not rated): GSK took significant steps in 2008 to enhance its emerging markets presence. It entered into a tie-up with Aspen (APN SJ, not rated), Strides (STR IN, not rated), and Onco Therapeutics Ltd (50:50 JV between Strides and Aspen) to gain access to over 1,200 branded generic products portfolio across 95 emerging markets (excluding Sub-Saharan regions and India). GSK has also acquired BMS Pakistan (not listed) and BMS’s matured products portfolio in Egypt.

Sanofi Aventis (SAN FP, not rated): Sanofi Aventis has announced that it is to acquire Zentiva, a prominent generic operator in the Central Eastern European (CEE) markets. The acquisition would make Sanofi Aventis the 11th largest global generic operator.

Daiichi Sankyo (4568 JP, JPY1605, BUY): Daiichi Sankyo acquired Ranbaxy (RBXY IN, INR135, NEUTRAL), the largest Indian generic company, in 2008. Ranbaxy derives over 50% of its sales from emerging markets.

To see full report: PHARMACEUTICALS SECTOR

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