Abbott Purchase Of Veropharm Highlights Consolidation Trend

BMI View : Abbott's purchase of Veropharm highlights our expectations for consolidation within the Russian pharmaceutical sector. The purchase is also strategic, enabling Abbott to comply with upcoming import-restricting measures through immediate access to local manufacturing capacity. We see M&A activity increasing in Russia as local companies consolidate to achieve scale and MNCs secure local manufacturing capacity to see off future import-restricting rules.

We have highlighted consolidation as an overarching global theme playing out within the pharmaceutical sector. In Russia, this theme holds true, as multinational companies (MNCs) have acquired a number of Russian pharmaceutical companies over the past 2-3 years, catalysed by industry trends and the veil of market access barriers on the horizon. We established that these would force multinationals in Russia to acquire and/or partner with local Russian companies or set up domestic manufacturing capacity. As the Russian pharmaceutical sector has become one of the largest and fastest growing in first-tier emerging markets, the importance of managing market access has become a priority. The acquisition of Veropharm by Abbott Laboratories fits into these overarching trends.

Russian M&A Targets Getting Smaller In Number

BMI View : Abbott's purchase of Veropharm highlights our expectations for consolidation within the Russian pharmaceutical sector. The purchase is also strategic, enabling Abbott to comply with upcoming import-restricting measures through immediate access to local manufacturing capacity. We see M&A activity increasing in Russia as local companies consolidate to achieve scale and MNCs secure local manufacturing capacity to see off future import-restricting rules.

We have highlighted consolidation as an overarching global theme playing out within the pharmaceutical sector. In Russia, this theme holds true, as multinational companies (MNCs) have acquired a number of Russian pharmaceutical companies over the past 2-3 years, catalysed by industry trends and the veil of market access barriers on the horizon. We established that these would force multinationals in Russia to acquire and/or partner with local Russian companies or set up domestic manufacturing capacity. As the Russian pharmaceutical sector has become one of the largest and fastest growing in first-tier emerging markets, the importance of managing market access has become a priority. The acquisition of Veropharm by Abbott Laboratories fits into these overarching trends.

Russian M&A Targets Getting Smaller In Number

The nature of Abbott's acquisition indicates that MNCs see value in Russian drugmakers. However, the pool of companies with the scale and operations to provide a running start in the Russian market is getting smaller, and therefore we believe the premiums attracted to Russian pharmaceutical companies will rise. There are few publicly listed companies available for purchasing including Pharmstandard, Protek and Pharmsynthez. A number of companies are privately held, such as R-Pharm, Microgen and Biocad. We see further M&A activity in the Russian pharmaceutical sector as local players consolidate to achieve scale and MNCs acquire companies to gain market access. We expect the value (and the premiums) of the deals to increase as the Abbott deal sets a large precedent.

Acquisition Comes At A Premium

Abbott's announcement of an agreement to acquire Veropharm validates our view that joint ventures and acquisitions between MNCs and Russian drugmakers will accelerate over the coming year. The acquisition is also part of a trend within the sector whereby US-based pharmaceutical companies are utilising their large overseas cash positions to acquire strategic assets rather than repatriate them and face significant tax charges.

We see GardenHills decision to take Veropharm private earlier in August 2013 as a prudent move, considering that GardenHills purchased the company from distressed pharmacy chain 36.6 at a considerable discount of RUB5bn (USD151mn). GardenHills then moved to sell the profitable unit to Abbott at a premium of almost 300-350% of RUB13.6-17bn (USD395-495mn). While GardenHills made handsomely out of the trade, Abbott gained access to three manufacturing sites in Pokrov, Belgorod and Voronezh, as well as a state-of-the-art facility under construction. Abbott will leverage its expertise to expand Veropharm's capacity and enhance the existing infrastructure. Abbott will potentially shift its own branded product lines to be manufactured at Veropharm's facilities, capitalising on Russian consumers' brand awareness. More importantly, it enables Abbott to comply with upcoming regulations on market access and local manufacturing.

Market Access Barriers On Horizon

In the wake of the Ukraine crisis, relations between Russia and the West have cooled. Following the Russian annexation of Crimea, the US has enacted limited economic sanctions that were widely felt amongst Russian citizens. Banking transaction services such as Visa or MasterCard were denied for specific banks linked to the state. This persuaded officials in Moscow to accelerate a policy of domestic development in key sectors in order to reduce domestic reliance on US companies. We see the pharmaceutical sector witnessing the same push from above. Over the past 5 years, the Russian government has introduced protectionist legislation and incentives for pharmaceutical companies to localise their drug production in the country. We outline the

  • Requiring local clinical trials before drugs can be approved; this is expensive for MNCs and duplicates work elsewhere

  • Preferential treatment for locally-produced medicines in government tenders; threat of market barriers are strong push factors

  • Tax incentives for establish manufacturing capacity in industrial clusters; ease of establishing business will be key to seeing Pharma2020 vision out

  • A degree of pricing flexibility; pricing restrictions will be waived on locally manufactured medicines in government tenders

In a Presidential Council meeting in May, self-sufficiency in pharmaceutical production was further reiterated as a strategic priority, although the meeting called for unreasonable objectives (80% of pharmaceutical demand met by local production capacity by 2018). A large number of manufacturing sites from MNCs are expected to come online by 2015, having broken ground in 2010/11.

Russia's market access restrictions apply to pharmaceutical products sold to the state healthcare system; the consumer pharmacy market is driven primarily by private consumption by Russian citizens. This portion of the Russian pharmaceutical sector constitutes almost 70% of the markets value and is dominated by imported medicines. However, the Russian government is introducing pilot schemes that reimburse patients for purchases of medicines. The choice of medicines and indications is limited currently, but over the next ten years, a national programme will be instituted that will expand the commercial opportunity within Russia. The import restrictions will therefore be cast on a sub-sector that is expected to rapidly grow.

Joint Ventures And Acquisitions In Russia
Company Country of Origin Investment Type Value (US$ mn) Date
Abbott USA Acquisition of PetroVax 196-294 Oct-12
Merck USA Joint-Venture with Akhrikhin - Apr-12
Valeant Pharmaceuticals Canada Acquisition of NaturProdukt 180 Mar-12
EBRD United Kingdom Partial Acquisition (15%) of Katren n/a Jan-12
Johnson & Johnson USA Investment in Skolkovo Foundation 30 Jun-11
Johnson & Johnson USA Acquisition of OTC business from JBCPL 260 May-11
Polpharma Poland Acquisition of Akhrikin n/a
Source: BMI research

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