Abbott Laboratories has agreed to buy the domestic healthcare business of India's Piramal Healthcare Ltd., a leading branded generics company, for $3.72 billion, the companies said Friday.
The deal is part of Abbott's drive to establish itself as a leading emerging market pharmaceutical player and reflects the growing global importance of generics as well as the rise of India's consumer market for drugs.
Abbott, based in North Chicago, Ill., will pay $2.12 billion up front, plus $400 million annually for four years.
The deal will vault Abbott past market leaders Cipla and Ranbaxy to number one in India's fast growing market, with a 7 percent market share.
"They achieve leadership across all the product categories. Take the two companies together, they're number one now," said Sujay Shetty, who leads PricewaterhouseCoopers' pharma practice in India.
Abbott expects pharma sales in India, which are on track to hit $8 billion this year, to more than double by 2015.
Abbott, which also sells medical devices and nutritional supplements, spent much of the past year acquiring small to medium-size medical companies in an effort to diversify its revenue base. The company's best-selling drug Humira currently accounts for more than 30 percent of sales and is due to lose U.S. patent protection in 2017.
Credit Suisse analyst Catherine Arnold said the Piramal deal helps Abbott increase its emerging market presence and roster of established drugs.
"Today's deal is a reasonable next step for Abbott to continue its growth in both areas where Abbott had been lagging behind some of its pharma peers," Arnold said in a research note.
Piramal has India's largest sales force, with a strong network across fast-growing rural areas. Together, the companies will have over 7,500 employees in India.
Abbott said it expects its Indian pharma business with Piramal, which will be incorporated into a new Abbott division created to boost sales outside the U.S., to grow by 20 percent a year, with sales topping $2.5 billion by 2020.
Abbott said it plans to fund the Piramal acquisition with cash from its balance sheet and does not expect it to impact earnings guidance.
"Emerging markets represent one of the greatest opportunities in health care," Abbott chief executive Miles White said in a statement.
Emerging markets now account for over 20 percent of Abbott's business.
Last week, Abbott said it would license at least 24 products from India's Zydus Cadila to sell in emerging markets.
In February, Abbott closed its $6.2 billion acquisition of Belgium's Solvay Pharmaceuticals, which brings it about $850 million a year in emerging markets sales across Eastern Europe, Latin America, the Middle East and Asia.
Abbott is not alone in pushing into places multinational pharmaceutical companies once feared to tread.
"Almost all big pharma companies have decided emerging markets will constitute 30 to 40 percent of growth in the coming decade," Shetty said.
Japan's Daiichi Sankyo paid $4 billion for a majority stake in India's Ranbaxy Laboratories in 2008 and GlaxoSmithKline has acquired exclusive rights to the pipeline of India's Dr. Reddy's Laboratories, which has over 100 generics for sale in emerging markets.
The cross-border friendship between such traditional foes — big pharma and generics makers — has bloomed as cost-conscious markets like India grow and a new appreciation for affordable drugs sweeps cash-strapped Western capitals, analysts say.
Big pharma's main markets — North America, Europe and Japan — are under serious pressure from slowing growth, a raft of patent expirations, and pending policy changes that would promote the use of more affordable generics.
India became a generics powerhouse because of a 1972 decision by then Prime Minister Indira Gandhi not to recognize patents on drug products. That allowed Indian companies to legally copy expensive branded drugs as soon as they came to market, provided they manufactured the drugs in a novel way.
India ended its copycat generics edge in all but exceptional cases in 2005, when it implemented a World Trade Organization guarantee of 20-year patents on new drugs. But the nation's drugmakers still produce roughly one-fifth of the world's generics, according to PricewaterhouseCoopers.
The deal with Abbott, which is still subject to shareholder approval, leaves Piramal Healthcare to reimagine its future.
Piramel will give up the most valuable parts of its healthcare business, leaving an assortment of services including custom manufacturing, over-the-counter consumer products and an affiliated drug discovery company called Piramal Life Sciences Ltd.
Ajay Piramal, head of the Piramal group, sought to reassure shareholders as his stock tanked in Mumbai trading Friday.
Piramal Healthcare closed down 11.8 percent in an otherwise flat market.
He said the company planned to use Abbott's money, after paying 22 percent capital gains tax, to invest in existing and new businesses and would consider a special shareholder dividend.
Abbott shares gained 16 cents to $46.64 in afternoon trading in New York.
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