The economic slowdown isn't helping matters as countries in Europe are increasingly pushing price caps, rebates and procurement of drugs through public tendering as policy prescriptions.
At least four Indian drug makers including Aurobindo Pharma, Cadila Healthcare, Torrent Pharma and Intas are said to be eyeing the generic business put on block by French pharmaceutical group Sanofi, according to a report in Economic Times.
The report mentions about the drug makers being backed by global PE firms and financial institutions to fund acquisition.
Sanofi in January last year said it intends to finalize the sale of the generic drugs business by the end of 2018.
The unit reported about 800 million euros in sales in 2016 and employs about 3,000 staff. The Europe generic business is dominated by sales in Romania and Czech Republic - the two Eastern European countries where Sanofi also has major manufacturing sites.
French newspaper Le Figaro reported in October that investment funds including Blackstone, CVC, BC Partners, Carlyle, Cinven and Advent have evinced interest.
JPMorgan, Morgan Stanley and Rothschild have been mandated to run a formal sale process.
If either Aurobindo or Intas acquire the assets, it will be the largest outbound pharma deal by an Indian company. The largest so far is Lupin's acquisition of Gavis Pharmaceuticals Llc. and Novel Laboratories Inc. for USD 880 million in 2015.
Intas and Aurobindo declined to comment. Intas said it would not like to comment at the moment. Torrent Pharma and Cadila Healthcare spokespersons didn’t respond to phone calls.
Intas and Aurobindo Pharma have been on shopping spree in Europe for a while.
Aurobindo Pharma in November hinted it's scouting for acquisitions in Eastern Europe. The Sanofi generics business sits well with that strategy.
"Our acquisition strategy will be largely around two platforms. One is to penetrate markets deeper and the other to secure newer technologies and platforms," said N Govindrajan, Aurobindo Pharma's Managing Director N Govindarajan said in an earnings presentation.
"We always maintain that anything that can come across in Eastern Europe will be prioritised," Govindrajan added.
The closely-held Intas in October 2016 outbid Aurobindo Pharma to acquire assets of Teva Pharmaceuticals in UK and Ireland for an enterprise value of around USD 764 million or Rs 5,085 crore.
Intas had sales of Rs 8,384.2 crore in FY17, of which Europe is said to have contributed around a quarter.
For Aurobindo Pharma – India’s third largest drug maker by revenues, Europe formulation sales contributed about Rs 3,250 crore out total sales of Rs 15,090 crore in FY17.
Aurobindo Pharma also gobbled up Portuguese drug maker Generis Farmaceutica from Magnum Capital Partners in early last year for 135 million euros (Rs 969.3 crore).
Aurobindo Pharma’s Europe sales saw 10-fold jump in last five years – on back of successful acquisition and turnaround of the money-losing Western European commercial operations of Irish drug maker Actavis Plc, which it bought for 30 million euros in 2014.
Analysts are mixed about the success of Europe M&A push of Indian drug makers.
“The Europe acquisition provides diversification opportunity at a time when the US generics industry is facing pricing pressures, competition and heightened regulatory scrutiny,” said Runjhun Jain, Senior Research Analyst at Nirmal Bang.
Jain said raising capital isn’t going to be problem as the balance sheets of Indian drug makers are strong and business they are aiming are cash generating.
“Indian companies will use their low cost domestic manufacturing arbitrage to turn around or improve profitability of acquired businesses,” Jain added.
But Amey Chalke of HDFC Securities isn’t excited.
“Generics isn’t a profitable business in Europe,” said Amey Chalke, pharma analyst at HDFC Securites.
Chalke cautioned companies against over leveraging their balance sheets.
While data on Intas is not available, both Aurobindo and Torrent Pharma balance sheets carry significant debts among their peers in Indian pharma with net debt exceeding Rs 4,000 crore.
Analysts are quick to warn about acquisition risks in Europe citing the example of Dr Reddy’s buyout of Betapharm.
Dr Reddy’s bought Betapharm, the fourth largest German generic drug marketing firm, for €480 million (Rs.3,750 crore) in February 2006 but a dramatic shift of policy in Germany to source medicines from the lowest-cost vendor through a tender-based model has hurt the company.
The opportunity in Europe is large with aging population, by 2020, generic medicines are expected to make up 70-80 percent of the medicines used in Europe as several European Union member states push copycat drugs to contain healthcare costs.
The generic drugs in the European Union (EU) on a volume basis, account for 56 percent of dispensed medicines at only 22 percent of pharmaceutical expenditure, according to data from Medicines for Europe, the industry association representing generic drug manufacturers in Europe.
The economic slowdown isn't helping matters as countries in Europe are increasingly pushing price caps, rebates and procurement of drugs through public tendering as policy prescriptions.According to BCC Research the market size for generic drugs in Europe is USD 35 billion in 2016, and is expected to grow at CAGR of 6.1 percent till 2021, much below the anticipated world growth rate of 8.7 percent.