Indian pharma majors look to loans to fund US acquisitions

Acquisition-related loans from India are finally picking up — a welcome change from the refinancings that have dominated the market so far this year. Leading the pack are Cipla and Lupin, two of the biggest drug firms in the country by sales. They are seeking loans worth as much as $1.25bn to back recent acquisitions in the US.

“This is one of the most up and coming sectors in the world,” said a banker who specialises in South Asian loans. “Globally, the population is getting older, so this industry is going to do well. Money is cheap right now and valuations are lowish, so acquisitions are happening across the board.”

Pharmaceutical companies, by virtue of operating in an industry that needs constant investment into research and development and where new facilities have to be set up frequently, are always on the lookout for suitable acquisition targets, reckon bankers.

But recently, Indian firms are leading the charge. A big reason for this is the expiration of generic drug patents in the US. Patents for drugs worth $92bn are expected to expire between 2014-2016, up from $65bn during 2010-2012, according to CARE Ratings, an Indian credit rating agency. A large portion is expiring this year and next, but the numbers are predicted to fall after 2016. This has opened up room for companies to swoop into the market sooner rather than later.

Under US law, the first company to file an Abbreviated New Drug Application (ANDA) with the US Food and Drug Administration has the exclusive right to market the generic drug for 180 days, provided certain conditions are met. This is also known as ‘‘first-to-file”.

Indian pharma names have been active in filing ANDAs and are eager to expand their business in the US. For example, Cipla, which is buying US based InvaGen Pharmaceuticals, will gain access to a market size of about $8bn in revenue by 2018. This is because InvaGen has five “first-to-file products”, analysts at India Ratings & Research, part of Fitch, wrote in a report on September 9.

Cipla is seeking a loan of around $500m to finance the acquisition of InvaGen and Exelan Pharmaceuticals. The purchase consideration is $550m.

Its move reflects its plan to bolster its front-end presence in the US, considered a high-margin geography. “The acquisition is also likely to provide Cipla access to large wholesalers and retailers in the US,” added India Ratings.

“In the generic market, after the patent is over, it’s an open regime,” said a Hong Kong-based banker, who is looking at Cipla’s transaction. “The faster you move, the better it is, and Indian companies want to take advantage of that.

It’s not the only one seeking riches abroad. Lupin, another heavyweight in India’s drug industry, is looking to refinance a roughly $800m bridge loan obtained from JP Morgan with a term loan. The bridge was to support its July acquisition of Gavis Pharmaceuticals and Novel Laboratories ( Gavis ), a transaction that valued Gavis at $880m on a cash free and debt free basis.

Bankers who are involved in negotiations with Lupin reckon the refinancing will be for around $750m. The deals for both Cipla and Lupin are expected to hit the wider syndicated market early next quarter, say sources.

Meanwhile, sole arranger Axis Bank is sounding out lenders for a $247m triple-tranche fundraising for Strides Arcolab that is also for an acquisition — this time in Australia. The company is acquiring the Australian assets of South African pharmaceutical company Aspen for a purchase consideration of A$380m ($300m). The transaction has been completed, and the target was integrated with Strides from September 1.

“There is a likelihood of M&A from the Indian pharma and information technology sectors,” said a banker at an Indian lender. “Pharmaceutical companies need to keep investing so it is one sector that keeps doing capex . But as they are cash rich, generally, if it’s not for the purpose of acquisition, most capex is done through internal accruals and equity.”

With capex under control through internal means, pharma companies are increasingly growing confident enough to take on debt for their acquisitions as they don’t want to deplete their cash reserves.

One reason for the confidence is because a number of Indian pharmaceutical companies derive a significant portion of their revenue in US dollars while expenses are in local currency. This means that the strength of the greenback, when compared to the rupee, has worked in their favour, say bankers.

Not just that, the strong credentials of many of the pharmaceutical businesses mean they will be able to get away with relatively cheap pricing on loans. Five year liquidity for top names like Lupin is likely to price well inside an all-in of 200bp and three year inside 150bp, according to a Mumbai-based loans banker.

But that kind of thin pricing will only be the preserve of top names. The Strides loan, where the tranches have average lives between 4-5.9 years, is believed to be offering all-ins of 300bp-400bp.