Pharma M&As set to gather more steam in 2013: report

The activities on the M&A (mergers and acquisitions) street in the pharma space in the recent past are likely to gather more steam through 2013, says a research report. "M&A momentum in pharma is gathering pace, as domestic companies tap acquisitions of brands, niche technologies and front-end marketing set-ups in overseas markets."

"Besides inorganic initiatives, the industry is also stepping up its organic investments, as it moves to create building blocks for the future," Avendus Securities analyst Monica Joshi said in a report.

It can be noted that the last three years, before the flurry of M&As  started during second half FY13, the pharma sector did not see any deals of considerable size. The optimism comes from the fact that the five frontline companies- Cadila Healthcare  , Cipla , Dr Reddy's , Lupin and Sun have on an average proposed to deploy 2.2 percent of their  combined average m-cap in FY13 on acquisitions. The estimated value of new acquisitions by five frontline companies is estimated at 2.2 per cent of the total market capitalisation, the report said.

Along with organic investments, capital deployment is at its highest level, as the industry builds blocks for future growth, Joshi said. Investors' reactions to M&A announcements have been mixed, but not overtly so as the reward to grow inorganically has probably been tempered down, to an extent, by the costly failures of the past, says the report.

Nevertheless, the industry's net cash position, along with scope for fund raising, supports an M&A theme through 2013, she said. Currently, the industry stays net cash positive, however, the situation could alter if the announced acquisitions in the pipeline are concluded. But as a proportion of m-cap, the net debt position stays firmly comfortable, she cautioned. 
For the more leveraged organisations, an easing position on debt can go further to support the trend of highlighted investment activity, as the scope for fund-raising widens, the report said.

Proposed fund-raising with a view to pursue inorganic investments suggests that cash-rich companies are not shying away from tapping financial markets, with the likely intention of pursuing big-ticket acquisitions. Besides acquisitions, the domestic pharma industry has also stepped up its organic investments.

While the capex cycle slowed during FY12 in comparison to the preceding year, the industry continues to be in an investment mode. Along with organic investments, capital deployment by the industry is at its highest level (between FY07 and FY13) at 6 percent to the m-cap, as companies increasingly pursue investments, both organic and inorganic.