M&A deals in the pharmaceutical industry: Russia and worldwide

11 March 2013

Alexey Volostnov, pharmaphorum.com

Traditionally M&A deals present a large opportunity for pharmaceutical and biotechnology companies to expand their business operations significantly and enter new markets. It’s also one way to increase the declining revenues due to the expiration of a large number of product patents.

We’re unlikely to see a second boom with the pharma M&A market in the next several years, but it’s gradually returning to life and slowly reaching previous levels shown before the global economic crisis.

Despite the relatively small number of multi-billion USD M&A deals, which were closed in 2011 and 2012, the market volume is yet to reach the pre-crisis period.

A total of 129 M&A deals were signed and closed in 2011, while in 2010 the number closed was 117. The amount of transactions in 2011 was about 224 billion USD. Thus, the amount of transactions reached in 2011 was nearly 40 billion USD or 18% more than in 2010, although it has not reached the record set in 2006, when the total value of agreements, mergers and acquisitions amounted to about 303 billion dollars.

2012 wasn’t so successful and the market declined by 35% overall and reached only 146 bn USD. Much of what is getting invested is targeted at emerging markets, but the US remained the most active country in the number and amount of M&A deals in the pharmaceutical sector achieving more than 50% of investments.

“Much of what is getting invested is targeted at emerging markets…

At the same time developing countries with emerging economies showed relatively high dynamics, especially in Brazil, Russia, India, China and South Africa (BRICS countries). During the last five years, growth rates of the M&A market in the BRICS group, which is considered to be a leader in mergers and acquisitions activity, is higher than in other parts of the world. Thus, the total amount of M&A agreements in the pharmaceutical sector of emerging countries in 2012 is calculated as 20 billion USD, showing 65% growth. Their share in the total volume of mergers and acquisitions, carried out in the pharmaceutical sector is already 14%, and it has shown stable and significant growth over the last 10 years: in 2006, their share in such transactions was 2.5%

It’s obvious that the fast-growing pharmaceutical markets are a logical and clear target for Big Pharma companies. Stable dynamics of increasing population, enhancing welfare, public and private investment to the healthcare sector, as well as a constant annual increase in the incidence of chronic diseases –are all factors that contribute to the increasing demand for medicines. One of the area of special focus is the manufacturing of over-the-counter (OTC) drugs and generic medicines.

For most companies, M&A is a preferred scenario for business expansion. When it is impossible to evaluate the risks, the procedure of absorption could be postponed to a later stage. By signing an agreement partners get access to each other’s assets, which allows them to evaluate the feasibility of further cooperation. This collaborative model is also applicable to the purchase of products or portfolio of the products.

Russia is one of the most attractive markets for pharmaceutical products in the world. Increase in purchasing power, aging population and the gradual growth of lifespan, directly affects the level of drug consumption. The growth potential is still high – the cost of drugs in Russia is several times lower than in Europe and the US. Experts believe that the Russian pharmaceutical M&A market will reach 30 billion USD by 2016.

The product quality is still relatively low. Estimates show that counterfeits account for at least around 12% of drugs in Russia (300 million USD per year). A recent opinion poll also showed that roughly 40 per cent of Russian citizens were concerned that they were being exposed to such drugs.

…the total amount of M&A agreements in the pharmaceutical sector of emerging countries in 2012 is calculated as 20 billion USD, showing 65% growth.

One of the recent trends is the growth of investment in the organization and development of production in Russia. Leading pharmaceutical companies started to launch localization projects in different regions of Russia as an immediate response to the government initiative aimed at developing their internal markets and forcing producers to establish their facilities and R&D centers in Russia. It won’t be fair to say that it was done completely under pressure, as many companies had started to develop their own production long before the officially announced localization rate. . Meanwhile, it is a mistake to assume that investments in the pharmaceutical industry are limited by financing construction or purchase production facilities. Companies invest into the development of the product portfolio, clinical research, marketing and other areas of business, which, sometimes seems to be intangible and presume long-term strategy and results.

There are no “blank” and underdeveloped medicine categories – almost every new drug competes with existing ones. Pharmaceutical companies always feel strong pressure from regulators, competitors and patients. But developing markets like Russia represent big opportunities for business growth: increasing number of patients with chronic diseases accompanied by the population’s welfare is a perfect combination for Big Pharma players. Increasing volume of investments in the Russian pharmaceutical industry from foreign companies, as well as federal and regional government bodies in the next several years is likely to continue. These investments will be used for the establishment of production facilities and launch of the research projects. Some companies will limit their activities by release specialties, packaging and marketing. Other companies will invest in promising research and development projects and technologies.

At the same time, the M&A transaction is not a panacea. Companies are forced to invest significant funds and ROI is not always compared with the cost and risk. Such transactions are mostly considered an impulse for the next stage of business development, but not as a full-fledged business strategy, so the leading players in the market successfully combine M&A with strategic partnerships and alliances.

About the author:

Alexey Volostnov is a Consultant within Russia and CIS Growth Consulting business unit. He conducts research activities across various industries with a focus on Russia and CIS markets, and assists in the execution of consulting projects. Alexey possesses diverse consulting experience, having lived and worked in Russia as well as in Central and Latin America region. He is fluent in Russian, English and Spanish. Alexey has a Master degree in Scientific-technology International relations by Moscow physics-engineering institute.

Frost & Sullivan – Russia

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