India pharma: The pills are popping

As global private equity targets Indian pharmaceuticals with increasing regularity, so has a sneaking suspicion that the influx signals an inflection point. The theory is that the platform-style consolidations will raise the profile of the sector and attract further foreign and domestic capital as a range of long-term macro factors continue to unfold. 

In the past two months alone, a flurry of activity has brought this idea into focus. KKR acquired a 54% stake in JB Chemicals & Pharmaceuticals for INR31.1 billion ($416 million) and made an open offer for an additional 26% of the generics, or “formulations,” drug maker. Meanwhile, The Carlyle Group invested $490 million in a 20% stake in Piramal Pharma, and Advent International has taken a controlling stake in RA Chem Pharma. The latter two supply rudimentary chemicals known as active pharmaceutical ingredients (API).

For KKR, this follows a protracted exit from injectables maker Gland Pharma to a Chinese counterpart in a deal worth about $1.2 billion. For Advent, it marks two Indian pharma acquisitions in a matter of months, following an investment in Bharat Serums & Vaccines late last year at a reported valuation of $500 million. The feeling is that an industry with some 5,000 manufacturers, none of which crack a 10% market share, is finally starting to see some noteworthy consolidation.

“I’m seeing more interest in control transactions because there is potential to professionalize family-run businesses,” says Nitin Deshmukh, a founding partner at Kotak Private Equity, which has backed 50 pharma companies since 2005 and exited Bharat when Advent invested. “In the last two years, we’ve increasingly invested in biotech and other kinds of and health tech. At the same time, we’ve exited pretty much all of our formulations and API companies because there has been so much investor interest, and the valuations have been so attractive.”

American friends

Indian formulation and API companies are now said be transacting at valuations of 15-20x and 7-10x EBITDA, respectively, significantly up from the commonly single-digit ranges of only 3-4 years ago. Much of the confidence has been attributed to the US Food & Drug Administration (FDA) setting up an Indian office in 2008 and subsequently diving deeper into compliance issues. The agency has issued around 6,000 approvals in India during the past 10 years. The country now has the most FDA-approved drug factories outside the US. 

As a result, India is now the world’s largest exporter of formulations and the top supplier to the US. This is a space largely controlled by a clutch of major players but not without its private equity inroads, especially as competition drives specialization. True North, for example, has carved out the orthopedics, pain relief, and gynecology divisions of Glenmark Pharmaceuticals over two transactions since 2018. Earlier this year, Ascent Capital bought a stake in Naari Pharma, a women’s drugs specialist associated with Strides Pharma. 

Most of the action will be in APIs, however, given the industry’s greater need for capital and a mix of macro drivers. For the past decade, the biggest factor here has been China’s various pollution control legislation measures chipping away at the country’s API export dominance by shuttering non-compliant plants. More recently, this effect has been amplified by supply chain diversification agendas both within India, which has been navigating increasingly tense bilateral relations with China, and globally.  

APIs represent only about 25% of India’s INR3.7 trillion pharma market, but its relatively stronger upside versus generics is well defined by the trade imbalance. India currently imports about 70% of its APIs by value from Greater China, including key components for high-burden drug categories such as cardiovascular disease, diabetes, and tuberculosis. Healthcare-focused Motilal Oswal Private Equity (MOPE) made one of its key plays in this theme with Symbiotec Pharmalab, a steroids and hormones specialist it recently sold to Actis Capital.

‘We liked Symbiotec because it had differentiated complex products, not just plain vanilla commoditized APIs. Its manufacturing process is not a 2-3 step process – in a few products, it’s up to a 50-step process that is fully backward integrated,” says Rohit Mantri, a principal at MOPE focused on pharmaceuticals. “China has more than 50% market share in fermentation-based APIs, but this is a first-generation entrepreneur-led company that was able to crack that code and create an entire franchise with a vision of farm-to-pharmacy.”

The COVID-19 angle

In both formulations and APIs, the most immediate influence on M&A, competition, valuations, company-level strategy, and general sentiment is COVID-19. Hospital offtake slowed in the early months with a decline in doctor visits and prescriptions, but this is said to have started turning around in the past few weeks, framing pharma as more resilient than India’s other main economic engines. “No one is running after industrials now, or even consumer,” says one industry participant. “But pharma is getting very competitive.”

Much of this story is playing out at the company level. There is a sense that drug makers struggling with the COVID-19 downturn have realized where they’re wasting money and tuned up their budgets accordingly. This is believed to be attractive to investors not only because it shores up immediate financial metrics but because such moves have tended to be more supportive of farsighted R&D spending versus dubious marketing efforts. Biotech programs targeting coronavirus have been part of this theme. 

There has also been more room for entrepreneurialism in over-the-counter formulations. Domestically, dozens of immunity support supplement brands have launched on Amazon Prime since the local onset of the outbreak. Fullife Healthcare, a vitamins maker backed by Kotak, has launched five products in this vein in the past four months. In the export market, a supply gap implied by higher demand globally and at home has set the stage for new manufacturers of a range of products from APIs to common pain relievers.

The longer-term impacts of COVID-19 will be in the uptake of more digital models and the simplification of multi-tiered distribution structures. This is not a uniquely Indian impact, but it could accelerate disproportionately here given the central role of digitization in most M&A strategies and the still fragmented nature of the market. If India sees a bigger hike in pharma M&A than other global markets, greater online opportunities appear likely to come with it.

“There is a far higher sensitivity to health and wellness, which has led to changes in how consumer approach pharmaceuticals,” says Parijat Ghosh, a partner at Bain & Company. “That will be a great tailwind for companies thinking about building out consumer businesses such as e-pharmacies and new distribution channels. If you already have pharma products that have potential to be consumer brands, COVID-19 has created a great opportunity to significantly scale them.”

Talent matters

Private equity firms will need to up-skill their teams to address this opportunity set. Most global GPs have industry veterans on their advisory boards; the question will be which middle-market players prepping their deal flow will be able to court the available talent and demonstrate sufficient value-add capacity.

“Pharma companies are all looking to bring in new molecules and partner with global players on marketing or manufacturing,” says Kotak’s Deshmukh. “They want to bring in these external skillsets, but many of the private equity funds don’t even understand the business. We’ve seen more deals in the last 2-3 years, so they are slowly getting that skillset, but pharma is not an easy subject to understand across the various drugs and therapies and everything that’s happening globally.”

Investors large and small will need to be wary of the difficulties of realizing platform plays in a market still largely characterized by families with little incentive to sell and a growing number of competing buyers. “You have one or two deals a year, and you have to win those,” says Vikram Hosangady, a partner at KPMG India. “Then you have to be aggressive on pricing because multiples today for pharma have gone through the roof. Everybody is expecting the moon.”

An Indian pharma boom is likely to see post-deal pitfalls with the inevitable influx of relatively inexperienced players. The most common of these will be in the difficulties of getting FDA approvals, which can take 18-24 months. These delays are often exacerbated by trial runs and commercialization complications, which can stretch the gestation period from capital expenditure to revenue generation to the 50-month mark on a 60-month PE game plan.

“PE investors need to be careful about how pharma companies fit in their horizon, and a lot of them have actually extended their terms of investment on these assets from 4-5 years to 7-8 years,” says Hosangady. “You’ve got to be a bit flexible because it’s not always going to be predictable in terms of getting the timing right. You won’t really have the benefit of 2-3 years of massive sales on the back of your capex.”

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• Topics
• South Asia
• Healthcare
• Buyouts
• Expansion
• India
• Pharmaceuticals
• Kotak Private Equity Group
• Motilal Oswal Private Equity