the “conditional scrapping” of the non-compete clause.
The domestic industry fears that removing this clause would reduce its negotiating powers to get a high valuation, while foreign players are concerned that they (as buyers) would not be able to limit competition. Under a non-compete clause, existing promoters who sell out cannot re-enter the same line of business for a substantial number of years – or never in certain cases – limiting competition for the buyer.
“The industry needs non-discretionary and clear rules for investment. They (government) have granted discretionary powers to the FIPB which, for a fee, could be overridden,” said DG Shah, general secretary, Indian Pharmaceutical Alliance.
However, Ranjana Smetacek, director general of the Organisation of Pharma Producers of India, which represent foreign drug makers said a case-by-case review of the non-compete clause would encourage future deals.
Shah added that the move could also remove the leverage that Indian companies had to negotiate premium valuations. Abbott’s agreement to buy Piramal Healthcare’s domestic formulations business for $3.7 billion in 2010 prevents promoter Ajay Piramal from entering a similar business for eight years. Abbott had valued the Piramal unit at nine times annual sales.
Analysts say similar high-value deals in the pharma sector may take a beating due to the conditional use of non-compete clause. In 2008, Japan’s drug major Daiichi-Sankyo paid $4.9 billion for a majority stake in Ranbaxy, valuing the company at over five times its annual sales of 2007. Last year, Nasdaq-listed Mylan Inc valued Agila Specialties at $1.6 billion or about 6.2 times annual sales.