API segment hot target despite market vagaries

Mumbai, Aug 29 | Updated: Aug 30 2006, 05:30am hrs
The Matrix-Mylan deal on Monday reveals that the API (active pharmaceutical ingredients) segment in India is the hottest when it comes to cross border acquisitions, with overseas companies looking for back-end operations.

While promoters in Indian formulations companies are unwilling to dilute their stake owing to the recent downturn in the stock markets, it is the API segment that will witness all the action. According to sources, more European companies and US are targeting API acquisitions in India.

In countries like India and China, MNCs are looking at acquisitions in the back-end of the pharmaceutical value chain, says Shivani Shukla, an analyst with Frost & Sullivan.

With the acquisition of Matrix, which is one of the largest producers of APIs in the world, Mylan gains access to world class manufacturing facilities, which will enable it to cut down manufacturing costs by more than half. Labour cost, on the other hand, will be cut down by as much as 1/7 when compared to the US, Shukla explains.

There are several Indian API manufacturers who are already active in the $100 billion global contract research and manufacturing (CRAM) segment. Cadila Healthcare of the Zydus group, Lupin, Dishman, Ipca Labs and Orchid are some of them.

Another analyst with a leading consultancy firm says that US and European API manufacturers with revenues in the region of $400-500 million are targeting smaller buys in India. This activity will continue to happen despite the recent vagaries in the Indian stock market, he says. After the recent stock market crash, the rise that ensued has not been spectacular. "The PEs of pharma companies are 30-40% lower now when compared to the time when the stock markets were at their peak," he added. "Promoters interested in M&A deals would wait till the September quarter results are announced, which is likely to move the markets up once again," he added. This, however, does not affect MNCs' cross border acquisitions in India especially in the APIs segment, since these are long drawn out processes and do not depend on immediate market circumstances," the analyst explained.