Abbott announced today that it will pay $3.72bn to acquire the domestic formulations business of the Indian company Nicolas Piramel (Piramel Health Solutions). According to Abbott, this deal will make it the number one supplier to the Indian market, with a market share of around 7%, but it comes at a heavy price. Piramel Health Solutions has a turnover of around $500m and its EBITDA is believed to be approximately $125m, which means that Abbott is paying a massive 7.4x sales and close to 30x EBITDA to reach the number one slot. Admittedly, the payments are staged ($2.12bn up front and then $400m pa for four years) but they are not dependent on the performance of the business. It is therefore not surprising that Abbott isn’t really trying to justify the deal using financial metrics, but simply on the basis that there is a ‘land-grab’ going on in the emerging markets and that it has decided that it wants to be one of the winners. Abbott’s CEO also has a touching faith that India will not only remain a fully branded market (which it probably will) but that the government will refrain from interfering with pricing (which it probably won’t). One can only hope for his sake that the Indians don’t look to closely at what is going on in some other branded emerging markets, such as Russia.
Following Piramel’s stunning success in auctioning off its local operations, we suspect that other Indian companies will try to follow suit. It will surely be harder for the smaller ones to attract such impressive multiples, but as long as big pharma remains keen to buy market share in India, valuations are likely to remain high.