Daiichi Sankyo Move Could Spark Copycats

June 12, 2008 Daiichi Sankyo move could spark copycats

Lisa Urquhart

Daiichi Sankyo’s surprise move yesterday on Ranbaxy sparked not only a flurry of news about the $4.1bn deal, but has also got many in the market wondering who else might be on the shopping list of other big pharma companies looking to snap up an Indian generics firm.

Those excited by the acquisition are pointing to the attractions of these companies, which include the increasing moves by governments to use generics to reduce healthcare costs, and in the case of Indian generic companies, their access to the fast growing, developing markets that big pharma has already expressed an interest in.

With Ranbaxy now out of the picture, according to the EvaluatePharma’s Peer Group Analyzer Glenmark would be one of the most attractive in terms of future growth.

The company may not be in the top three of the biggest Indian generics, but it is forecast to report an impressive 38% compound annual growth in unbranded generic sales in the five years to 2012.

WW Unbranded Generic Sales WW annual sales ($m) CAGR (07-12) Market Rank

2007 2012 2007 2012

Glenmark Pharmaceuticals 244 1,211 38% 30 16

Wockhardt 357 764 16% 25 20

Lupin 303 647 16% 27 26

Aurobindo Pharma 165 334 15% 31 31

Matrix Laboratories 131 265 15% 34 35

Cipla 872 1,656 14% 14 11

Ranbaxy Laboratories 1,496 2,827 14% 9 6

Torrent Pharmaceuticals 300 543 13% 28 29

Piramal Healthcare 418 756 13% 20 21

Zydus Cadila 395 697 12% 22 24

Sun Pharmaceutical Industries 775 1,332 11% 15 15

Dr. Reddy's Laboratories 943 1,581 11% 13 13

Sum 6,400 12,612 15%

Rest of Market 32,549 52,776 10%

Total Market 38,948 65,388 11%

Most of the growth at Glenmark, which has recently spun off its bulk manufacturing business, will be driven by the group’s ambitious plans in the US that have seen it pledge to launch five drugs each quarter into the US as well as filing 25 ANDAs in the country during 2008.

The sheer number of drugs that Glenmark intends pushing both into the US and its own home market is also behind predictions that the group will over the next five years achieve net normalised income growth of 23%, the second highest after Matrix Laboratories, which is poised to grow income by 34% in the same period. Glenmark, like Ranbaxy, has also started to move into proprietary drug development in both small and large molecules, which could also increase its appeal to a large pharma group looking to cut its cost on drug research, given the large skilled pool of scientists in India, who can produce drugs at a fraction of the cost of western labs.

But the things that make Glenmark attractive are also the reasons behind the group’s market capitalisaton of $4.22bn, which with an expected premium of anything between 30-50% could make it an option for only the larger players in the industry.

For the more bargain conscious, Wockhardt’s unbranded generic prescription growth could make it an ideal and more affordable takeover target, the group is forecast to grow annual compound sales by 16% in the next five years, it also has one of the most impressive free cash flow yields by 2010 of all the Indian generic companies, notching up an impressive 11.8%, a rate that is only beaten by Torrent Pharmaceuticals 12.6% and significantly above Ranbaxy’s 4.2%.

Free Cash Flow Yield % (free cash flow / enterprise value) in 2010

FCF (Pre-Div) FCF Enterprise Value Net Income Normalised CAGR Company ($m) Yield ($m) (2007-12)

Torrent 49 12.6% 388 16% Pharmaceuticals

Wockhardt 107 11.8% 908 18%

Aurobindo Pharma 75 9.9% 758 18%

Zydus Cadila 97 9.0% 1,072 16%

Piramal Healthcare 131 6.2% 2,124 16%

Jubilant Organosys 90 6.1% 1,463 17%

Dr. Reddy's 189 6.0% 3,181 19% Laboratories

Biocon 67 5.6% 1,204 17%

Glenmark 212 4.8% 4,428 23% Pharmaceuticals

Sun Pharmaceutical 310 4.2% 7,359 5% Industries

Lupin 63 4.2% 1,513 15%

Ranbaxy Laboratories 257 4.2% 6,161 22%

Cipla 160 3.8% 4,217 14%

Matrix Laboratories 28 3.1% 904 34%

The group has also done well from the its decision to move away from bulk manufacturing and start to acquire generic companies in both Europe and the US , including its acquisitions of Negma Laboratories in France and Morton Grove Pharmaceuticals in the US, which should start to help Wockhardt push its current market cap of $663m higher very rapidly.

For other investors who also have hundreds of millions of dollars to spend, rather than Daiichi Sankyo’s billions could do worse than look at Aurobindo, which is forecast to have unbranded generic prescription growth rates of 16% over the next five years, and a very modest market capitalisation of $406m, the group also throws off cash and currently has a free cash flow yield of 9.9%.

While Cipla has been talked up as one of the companies that could be next to fall to a large pharma group, in comparison with other companies it looks less of a bargain. With a market capitalisation of $4.24bn, the group is predicted to increase its unbranded generic sales by 14% over the next five years, but it has a disappointing cash flow yield of 3.8%. It also looks expensive, with a forward price to earnings ratio of 20.3 times for 2008, this compares with the cheap-looking Wockhardt at 7.2 times. Admittedly, Glenmark is on 22.3 times but its impressive growth and cash generation justify the rating. So if more pharma companies are looking to emulate Daiichi Sankyo and get a foothold in the Indian generics market there are plenty of aggressive, fast-moving companies to pick from.