Ranbaxy will slow down acquisition pace

With nine acquisitions made in 2006, Ranbaxy Laboratories, has told analysts at a company meeting it would slow down its purchasing activities over the next two years.

Amit Desai, vice-president of mergers and acquisitions at Ranbaxy, said that one of the major concerns for the company and other large export-oriented Indian pharmaceutical companies was the spread of price wars caused by US off-patent drugs marketed to Europe.

Tightening profit margins, analysts have said, will push the repayment period back by a few years on the company's previous acquisitions, while new purchases will take longer to add to Ranbaxy's profits when merger costs are added.

A spokesperson for Ranbaxy said that it would ease back on the aggressive acquisition strategy, unless the deal made sense in terms of synergies, product fit and benefits to shareholders.

Malvinder Singh, Ranbaxy's CEO, who reiterated the company's aims is to be one of the world's top-five generic drug firms with USD 5bn in annual sales by 2012, said the company had been was evaluating several acquisition opportunities, but declined to give any details.

The nine acquisitions made in 2006 have cost Ranbaxy over INR 20bn (USD 493.8m) and included Terapia (Romania), Allen (Italy), Ethimed (Belgium), the Mundogen generic business of GlaxoSmithKline (Spain) and BE-Tabs Pharmaceuticals (South Africa). For 2007, Ranbaxy said it had bought 13 dermatology brands from Bristol-Myers Squibb for USD 26m in May.

Emkay Research analysts have said that a margin pressure in the EU generics market would raise the pay-back period for Ranbaxy's acquired businesses there. Other analysts said the rising interest cost would stop the company from being aggressive on debt-funded acquisitions, as was borne out by its failed bid for Merck KGaA's generic arm, which was eventually bought by Mylan for USD 6.6bn. Ranbaxy's debt equity ratio is already 1.4 per cent, compared with the pharmaceutical industry average of 0.8 per cent.

In April 2007, Ranbaxy raised its forecast for sales growth in 2007 to 20 per cent from the earlier quote of 15 per cent. Should the company continue with its aggressive acquisition strategies in the EU and the US, it may have to wait longer for profits to make an impact. The current industry trend of intensified generic competition and more aggressive healthcare cost cutting by governments could also see Ranbaxy having to wait for its acquisition strategy to bear fruit.

Ranbaxy is not the only Indian pharma giant flexing its muscles in the EU. Dr Reddy's Laboratories' USD 570m acquisition of Germany-based Betapharm, which is still the biggest ever buyout by an Indian drug-maker, suffered after the German government undertook two rounds of price cuts for generic drugs.

On 15 June, Ranbaxy's shares closed at INR 373.80 (USD 9.23), which was mid-way between its one-year low of INR 305.50 and 52-week high of INR 445.