Why Lupin’s Gavis acquisition is a big deal for India Inc
On Thursday, Lupin Limited, India’s fourth largest pharmaceutical company, said it has agreed to buy US-based Gavis Pharmaceuticals LLC and its affiliate Novel Laboratories Inc for $800 million (over Rs 5,600 crore). What does this deal mean for India Inc?
1. The deal is the biggest outbound acquisition in the Indian pharma space, overshadowing the $572 million buy of Betapharm by Dr Reddy’s Laboratories in 2006. In fact, there were fewer big outbound buys in the pharma space by Indian companies post the Betapharm deal, with the exception of Sun Pharma, which did two US buys (URL and Dusa), one in Israel (Taro) and one in Australia (GSK). The reason for this has been the bitter experience which Dr Reddy’s had to go through in Germany, following the Betapharm buy. Much to the disappointment of Dr Reddy’s, Germany changed its policy regarding procurement of drugs, and moved to tender-based system for several drugs, leading to a drop in prices of medicines which Dr Reddy’s planned to sell through Betapharm. Even as Betapharm’s contribution to Dr Reddy’s revenues fell, other big pharma companies stayed away from such large buys.
2. The Lupin-Gavis deal ends the drought of overall mergers and acquisitions (M&A) deals in India, across the corporate spectrum. The value of strategic M&A deal in the first half of 2015 dropped for the first time since 2012 to $15.8 billion (277 deals), from $17.1 billion (269 deals) in the first half of 2014, implying reduction in the ticket size of M&A deals. Outbound deals have not witnessed too many big ticket deals, as volumes have increased by 33 per cent while deal values have decreased by 16 per cent, tax and advisory firm Grant Thronton said in a recent report. The top three sectors for M&A deals this year were energy and natural resources, IT & ITeS and manufacturing. The Vedanta-Cairn merger and Reliance’s stake sale in Eagle Ford Shale drove M&A values in the energy sector.
3. The deal demonstrates the big strides taken by Lupin to transform itself from a maker of primarily TB drugs into one of India’s largest pharma companies. The company, under the leadership of former MD Kamal Sharma, and now Vinita Gupta and Nilesh Gupta, children of founder DB Gupta, has shown tremendous growth in the past eight years. Revenues, which were to the tune of just Rs 2,195 crore in fiscal 2007, were around Rs 12,600 crore in 2014-15. This was mostly achieved by a focus on the $35 billion (for generics) US market, where it derives nearly half its revenues, and on niche segments in dermatology and oral contraception. The idea was to launch a new therapy area every year in the US, where there would be limited competition.
4. Notwithstanding its successes to organically develop and market products, Lupin was shy of executing big acquisitions, which it has, now. It was an audacious deal, according to experts, and some say it may have been risky, too. Broking firm Nomura feels that the offer doesn’t bring much value for Lupin as it could have developed the products that Gavis has in its pipeline - derma, controlled substances and other high-value niche generics – on its own, at a much lower cost. But the strategy here seems to be to tap into Gavin’s 66 products that are awaiting imminent approval from the US FDA. With Indian companies finding it increasingly tough to get approvals in the US market – only 56 drug approvals were given by the USFDA in fiscal 2015 compared to 102 a year ago – it is imperative for companies to look at alternative ways of quickening the pace of approvals.
5. Last but not the least, the deal brings to the fore how entrepreneurship in life sciences can be as rewarding as in IT, telecom and e-commerce, that seem to be in vogue across the globe. Gavis founder Veerappan Subramanian, a person of Indian origin, who has over 30 years of experience in the pharmaceutical industry, first founded Kali Laboratories, Inc. in 1997, and grew it from a developmental company to a full-service pharmaceutical company, which he sold to Par Pharmaceutical, Inc. in 2004. He had worked at Johnson & Johnson as a Senior Scientist from 1978 to 1980 and as a Senior Scientist for Richard Vicks from 1981 to 1984, and in India with a division of Squibb from 1973 to 1975. Subramanian is a PhD in Pharmacy from Rutgers University in New Jersey. He must be a highly satisfied man with this transaction, after he sold his firm at nine times its sales to an Indian company.