How the Speck in the Multi-Billion Dollar Universe is done?

Back in the 1980s, MNCs dominated the Indian pharmaceutical market. They controlled an 80% stake, while domestic companies accounted for the rest. This has reversed starting in the early 2000s, with Indian companies accounting for 79% of the Rs 1,21,833 crore ($16.80 billion)-market, as of FY18.

The demoralizing decrease at every stage

The market grew 6.3% over the last year, a demoralizing decrease from the heady 13-14% growth rate between 2010-16. But if there was a steady multinational club to count on in these times of policy and regulatory turbulence, it’d be the one comprising Abbott, GSK India, Pfizer, MSD and Sanofi—the long-term believers.

In 2010, when Abbott bought the formulations business of Piramal Healthcare for a jaw-dropping price of $3.7 billion, the American company said it’d get to $2.5 billion in revenues in 10 years. Back then, it seemed like a realistic goal.

Lucrative businesses offered

But eight years later, both Abbott India, the older, listed entity, and Abbott Healthcare, the privately held company which houses Piramal’s assets and other lucrative businesses like stents, together with don’t stand a chance of achieving this.

In FY18, Abbott India, mostly comprising me-too volume products, grew 14% to Rs 3307 crore ($456.13 million), while Abbott Healthcare grew 5% to Rs 4,881 crore ($673.24 million).

Abbott has invested in new plants and a spanking new office in Mumbai, but its top-line and bottom-line are far from what it had planned for. “Abbott paid too high a price for the Piramal asset especially because the Indian market had ground to a glacial growth,” says a senior pharma executive who has spent 32 years with MNCs, including Abbott.

Credibility to the rumors

Which is why there’s some credibility to the rumor that Piramal Enterprises promoter Ajay Piramal, whose non-compete period ended in September, could buy back the assets from Abbott.

“MNCs have realized that India is a very different cup of tea. I won’t be surprised and it’d make sense if Ajay looks at it from a financial point of view,“ says Kaul. “Ajay deployed his money well, but today he wants to come back to pharmaceuticals. What a great deal it was at 8-9X of sales multiples; if he buys [it back] today at 2-3X sales multiples, it makes great sense.”

France’s Sanofi had high hopes for India in 2009 when Sanofi India bought Shantha Biotechnics for $784 million in the hope of getting access to the $1.5 billion Global Alliance for Vaccines and Immunisations (GAVI) market. But despite what looked like a good hand, Sanofi lost a few valuable chips after quality slip-ups at its India plants lost it some global contracts.

Today, globally, Sanofi is moving away from pharma and towards biotech drugs and vaccines because they are hard to copy and not subject to severe price control. “More outsourcing will happen to India because as a market, especially with depreciating rupee, India business numbers look unimpressive,” says a former Sanofi India senior executive.

For another European parent, GSK Plc, as new CEO Emma Walmsley pays more attention to consumer health, it’s amply clear the Indian consumer health portfolio, with 72.5% parent ownership, will be sold entirely or, at least, significantly revamped. Samara Capital-owned Oaknet bought a few brands of GSK Consumer Health last month.

Doubts, doubts, and doubts everywhere

Will that money is redeployed in India? Analysts doubt it. “Elsewhere when assets are divested, the money flows back to the company, but where the money is not being deployed in India,” says an analyst in Mumbai in reference to Merck and GSK selling their consumer business. “Belgium’s UCB sold its assets to Dr. Reddy’s two years ago, but it never reinvested that money in India.”

How GSK has paid dividends in the last two years is indicative of this sentiment. It paid dividends of Rs 306 crore ($42.2 million) on profits of Rs 351 crore ($48.41 million) in FY18. (In the previous year, the pay-out was Rs 510 crore ($70.34 million) on profits of Rs 337 crore ($46.48 million).) Conspicuous? Maybe not, if you consider that the GSK promoter group owns 75% of the pharma company GSK India. Is it a case of cash round-tripping, you ask.

But here’s the thing. Consistently high dividends, a mostly debt-free balance sheet, and no dangling sword of foreign regulatory inspections—which has shaved billions of dollars off the Indian pharma market cap—has humored the investors of these listed multinationals. The share prices are sky-high. (Abbott closed at Rs 7,556 ($104.2), Sanofi at Rs 6,119 ($84.4), and Pfizer at Rs 2,845 ($39.2) on Friday.)

 

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