Matrix Laboratories' Prasad : Leap-frogging to the industry Top 10

Strides Arcolab's Kumar: Leveraging a long relationship

The pieces fell in place beautifully and, perhaps, inevitably. Just 18 months after turning profitable and raising $40 million or Rs 1,760 crore in foreign currency convertible bonds (FCCBs), Bangalore-based Strides Arcolab's Arun Kumar moved into higher gear. The up and coming formulations manufacturer had been a customer for the bigger, Hyderabad-based Matrix Laboratories for five years, and Kumar, Strides' hard-charging CEO, felt it was time to propel the relationship to a higher orbit. Over two rounds of meetings this year, Kumar and Matrix's Chairman & CEO N. Prasad agreed that it made sense to merge.

On June 1, just a few days after they finally agreed to combine forces, the two made a formal announcement, although none of the merger details like swap ratios, management restructuring, etc. had been worked out. "The fit was perfect. Our coming together will create a vertically-integrated player that will have a better chance of emerging as a major player on the global stage," says Kumar. Adds Prasad: "This industry is entering a consolidation phase and this is a proactive move."

While the deal is yet to be sealed, it's hard to deny that this merger is possibly the best in the industry so far. The pieces, like Kumar says, fit perfectly. Matrix, where Newbridge and Temasek are investors, is strong in active pharmaceutical ingredients (APIs), or bulk drugs, while Strides is focussed on formulations, or finished dosages. The immediate impact is that the new entity will be vertically integrated. Again, Matrix is strong in the US and Europe (besides India), whereas Strides has beachheads in Latin America, Africa and Asia, besides the US and Europe (see What's Hot About The Two?). Then there are other benefits: an ability to shave common costs, better leverage R&D expenses and manufacture products at lower prices (hence, better margins). "We couldn't have asked for a better synergy," says a beaming Prasad. The glee could also be because the merger will put the Matrix-Strides combine amongst the top 10 pharma companies in India. Actually, with a market cap of Rs 3,753 crore, it comes in as the ninth most valuable company in the industry.

In terms of facilities, the merged company will have six bulk drug units, five intermediate plants, nine formulations sites and operations in 70 countries, including plants in India, the us and Latin America. By the end of the current year, it hopes to file 70 drug master files or DMFs (for bulk drug approvals by the USFDA) and 20 ANDAs (abbreviated new drug applications, or generic copies). Bulk of the ANDAs will be from Strides, but will also include a few from Matrix. In other words, the global markets will see the emergence of another strong generics player from India, in addition to existing majors such as Ranbaxy, Dr Reddy's, Cipla and Sun.

To Matrix watchers, the deal doesn't come as a surprise. In its four years of existence (the company was originally incorporated as Herren Drugs & Pharmaceuticals in November 1994, but Prasad and two other partners bought it in May 2000 and less than a year later gave it the present name), Matrix has grown through acquisitions. It started by acquiring and merging with itself a Rs 40-crore company called Medicorp Technologies, the attraction being that it had a USFDA-approved manufacturing unit near Hyderabad. Since then it has acquired more such companies (see Hungry For Growth) with the aim of either expanding its manufacturing capacity or gaining a toehold in regulated markets. This deal, of course, is Matrix's way of telling the world that it has arrived. That the bigger players had better watch out. Says Ajay G. Piramal, Chairman, Nicholas Piramal India: "This could be the start of a new trend. Indian promoters are no longer shy to merge, which wasn't the case earlier."

The Way To Go

In other words, the Matrix-Strides deal is a sign of things to come. Soaring R&D costs, stricter regulations and growing competition in the pharma industry have put tremendous pressure on the manufacturers. This is more so in the case of companies that make generic drugs that are copies of branded drugs. The window of opportunity for a generics manufacturer is typically limited (ranging from a few days to a few months, depending on the products) because as more imitators enter the market, price of the drug falls rapidly. To withstand such competition, the players will need to squeeze more and more out of their R&D, manufacturing and marketing rupee. Says Venkat Jasti, former President of the Bulk Drugs Manufacturers Association (BDMA) and Vice Chairman & CEO of Hyderabad-based Suven Life Sciences: "Going forward, the key drivers will be size and movement up the value chain. We will see more companies merging and the number of players could, therefore, halve in the next three years (to around 500 pharma players)."

That consolidation is in the air is not in doubt. Even before the Matrix-Strides merger announcement was made, there was talk of Strides merging with the Chennai-based Orchid Chemicals & Pharmaceuticals, a big manufacturer of cephalosporins. The common factor being Schroders, an international investment banking and asset management group, which holds more than 30 per cent in each of the two companies. That did not happen and Strides itself got into the cephalosporins space. Besides, Orchid's promoter K. Raghavendra Rao says timing is not right for Orchid to think of either acquiring any company or getting merged. "We still have to unlock the value from our entry into the regulated markets and the investments made into dosage facilities and R&D," he says. However, he admits that 18 or 24 months down the line, the company could consider looking at mergers or acquisitions.

Mergers in the industry will be driven not just by Indian players, but also by Big Pharma and other global generics giants. There are rumours that world leader Pfizer is eyeing home-grown giant Ranbaxy (although given the Singh family's 35 per cent stake, it's not clear how much elbow room Pfizer has; on its part, Ranbaxy "categorically denies" any possibility of being acquired). There have also been persistent rumours that Aurobindo Pharma, a Hyderabad-based bulk drugs manufacturer, is in play and that it could be on the radar of a generics major like Teva of Israel. Aurobindo's Chairman P.V. Rama Prasad Reddy, however, denies that his company is up for sale. "These are baseless rumours and I don't know why they are being spread," he says. "There is no point in being a contract manufacturer to a big foreign or Indian company and losing one's identity."

Maybe not, but big is getting more beautiful in pharma. Take Matrix and Strides for example. Instead of scrambling individually to raise, say, Rs 45 crore every year to invest, the two can now raise Rs 150 crore on the strength of their merged balance sheet. Besides, they will not need to duplicate investments. All that, of course, is in theory. In the days to come, the two companies will have to resolve a number of issues, ranging from swap ratios for the merger to division of responsibility between Prasad and Kumar to integrating the two cultures. "Of course, integration is going to be our biggest challenge and since the size is bigger in this case, the challenge would be that much bigger," admits Prasad.

He must be hoping that his impressive track record at mergers will help him this time around too. If he pulls it off, Prasad would have vastly improved Matrix's odds of making it big in the global generics market.