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Private equity (PE) firms seem to be bullish on selected opportunities in the Indian pharmaceutical industry. Adopting Big Pharma strategies may take it to new heights. Arshiya Khan analyses
Corporatisation of the healthcare sector ushered in private equity (PE) investments in India. However, in the pharmaceutical sector, it was the high margins in Contract Research and Manufacturing Services (CRAMS) that triggered PE investments. Even though the segment has not shown results as per expectations, it has still been attracting investments primarily because it fetches more stable returns, as the deals that happen are long term, and on contractual basis, avers Vikram Gupta, Chief Operating Officer, IndiaVenture Advisors.
The numbers game
Speaking in terms of numbers, estimates by Datamonitor Financial Deals database from January 2007 to October 2008, the Indian healthcare and pharma sector has recorded 23 PE transactions in 2008 so far (till October), an increase of 9.5 percent when compared to the total number of transactions recorded in 2007. In value terms, PE players invested $473.6 million in 2008 (till October 2008), which was an increase of 14.45 percent over the aggregate value of PE investments from India in 2007. However, after Q1 08 PE investment in value terms has declined rapidly, a trend which is likely to continue in short term.
Out of this, the healthcare sector has attracted majority PE investments followed by the pharma sector.
And the key drivers for the same include strong economic growth, huge population, raising income levels and standard of living, and commitment to increase government spending on healthcare, which has tripled now.
Speaking in terms of the pharma sector, eight transactions worth $142.1 million were recorded in 2008 (till October) against seven transactions worth $96.7 million in 2007. And the PE interest in the pharma sector was driven by the attractive compounded annual growth rate (CAGR) of 12.3 percent against the global CAGR of nine percent (Nectar Life Sciences Annual report 2007-2008). Given the above growth rate the pharma segment is likely to reach $20 billion by 2015 from the current $8 billion. In addition, given the current crisis in the global economy, defensive sectors such as pharma in an emerging market would provide good investment opportunity. Dr Amit Rangenekar, Centaur Pharmaceuticals, highlights, "The meltdown will be an opportunity for PE funding, as going to the market will not give companies the desired premium, and hence, PE would be a good option."
PE investment in the pharma sector has focused on small companies which have own brands/products and/or contract manufacturing capabilities. Besides, they also favoured bulk drug and active pharmaceutical ingredients (APIs) manufacturers as they are low risk. Also the interest in this segment has been driven by diverse business models, diversified revenue streams (own product sales and contract manufacturing), exposure to international markets (contract manufacturing for MNCs), ability to cater the increasing demand in the domestic market (CAGR of 12.3 percent), to benefit from the increased government spending (commitment to increase spending on healthcare to two-three percent against the current 0.9-1 percent), low gestation period, low risk and investment as research and development (R&D) is limited and lesser marketing expenditure (which is a significant costs element for pharma companies).
Shy no more
"The need of the hour is to have our own innovation engine. Had India built up its innovation pipeline in the last decade it would have had that competitive advantage today to leverage and position itself in the global market"
- Vikram GuptaChief Operating OfficerIndiaVenture Advisors
"The key difference in the mature markets of US and EU is that they are more focused on biotechnology and are mostly venture capital (VC) funded, whereas in India the case is otherwise, they don't focus much on biotech, but on the pharma side"
- Naveen Reddy Kalluri Project ManagerFinancial DealsDatamonitor India
"In the current bull run, the attention of most PE players has been on exponential growth sectors such as capital goods, construction, telecom etc, so they kept away from pharma, however, this would change as markets become more favourably disposed to sectors such as consumer and pharma"
- Navroz Mahudawala Associate DirectorHealthsciences PracticeErnst & Young
Of late PE players have kept away from Indian pharma companies due to various reasons. Firstly, results in the drug discovery space are yet to be proven by some companies and until those results are out, probably, the investments till then will come in bits and pieces. PE players, being quite selective and choosy about investing in a company due to high risks involved in the R&D model, will pick up success areas. PE firms typically work on minimising the risks and maximising returns. The high risk in the R&D model and perhaps the limited choice kept PE players away from pharma. Now they have different strategies before deciding upon investments in pharma. "They either do it by working on a pro drug, viz a similar drug that has already been tested and marketed. Secondly, they may outsource molecules to a partner in India, thereby minimising the risks. This has already been done by companies like Pfizer, Merck, Lilly, GSK etc," informs Gupta.
But the current financial crisis seems to be an opportunity for PE players. Speaking on the current scenario, Nitin Deshmukh, Head-Private Equity, Kotak Mahindra, adds, "Pharma in the healthcare space is totally down and out. It has become a commodity all over the world. Observing the performance of pharma companies, except for the last few months wherein it seems to be slightly above average vis a vis the other sectors, as pharma on the stock market has been the core performing sectors."
Secondly, as drug discovery is yet to be proven, the valuations have to be materialised in the true sense, once certain progress happens in the drug discovery space, PE would automatically scale up, he feels.
However, Navroz Mahudawala, Associate Director, Healthsciences Practice, Ernst & Young, cites another reason, "In the current bull run, the attention of most PE players has been on exponential growth sectors such as capital goods, construction, telecom etc, so they kept away from pharma. However, this would change as markets become more favourably disposed to sectors such as consumer and pharma." Also, a portion of the business plans of Indian pharma (i.e. regulated market generics) was perceived as risky. But, majority of PE investments have been either in domestic business plans or CRAMS, he highlights. Going forward, this will change, avers Rajeev Raju, Vice President and Sales Leader, Corporate Finance, Healthcare Financial Services, GE Healthcare, "Pharma companies have significantly de-risked their business models by segregating R&D from core manufacturing. Also, with more order flows into India across products and across various business segments in both large/mid-cap companies, risks are better spread with managements, understanding the need to be better governed in their business operations."
However, Rangenekar offers a different view. He states, "Only those PE players that were not focused on pharma were shying away. There were a few who were bullish on pharma who have stayed back." And this is evident from the recent deals in the pharma space—Citi Venture Capital International (CVCI), a PE firm, and Everest Capital, a hedge fund, have invested $23.6 million in Nectar Lifesciences; Kotak Private Equity Group, a PE arm of Kotak Mahindra Bank, agreed to invest $10 million in Intas Biopharmaceuticals. Century Pharmaceuticals secured $12.7 million from Gujarat Biotech Venture Fund managed by Gujarat Venture Finance; and SME Growth Fund, a fund managed by SIDBI Venture Capital, has invested $7 million in Centaur Group, a pharmaceutical and speciality chemicals company to name a few.
Indian business models vs US and EU
Fundamentally, the market structure in India is completely different from that of US and Europe. In US and EU, most companies are mature and publicly listed, so PE investments are mostly in the private sector. However, this is not the case in India. Hence, if Indian companies build competencies in different sectors and increase their focus more on things which they are good at, for example, API manufacturing, contract manufacturing, etc, the scene may change. Speaking on the key differentiation in the Indian market Naveen Reddy Kalluri, Project Manager-Financial Deals, Datamonitor India, highlights, "The key difference in the mature markets of US and EU is that they are more focused on biotechnology and are mostly venture capital (VC) funded, whereas in India the case is otherwise, they don't focus much on biotech, but on the pharma side." Besides, there is limited or negligible VC investment witnessed in this sector unlike in the US wherein early stage funding has prospered. Low buyout activity witnessed in India and limited number of Private Investment in Public Equity (PIPE) deals in larger companies are some other differences in the pharma PE scenario in India when compared with the US or EU. Raju cites another reason. "The US and EU are highly regulated markets, whereas India is still evolving slowly across business segments and operational dynamics. PE deals in pharma tend to be largely passive than strategic in the developed markets. It is only in emerging markets like India where PE players look for a more active role in the pharma/life sciences space by seemingly adding value to the business in terms of market/product expansion and/or enabling growth ideas."
With changing dynamics and fluctuations in the market, PE investment in pharma companies will primarily be driven by the changing business models of Indian pharma companies. And this is evident from the fact that pharma companies in India are reducing the risk in their businesses by hiving off business units, unless they have sufficient resources/capabilities to manage them (Eg Piramal and Sun Pharmaceuticals hived off R&D divisions); diversifying revenues streams; and optimising manufacturing capacity by entering into contract manufacturing deals. In addition, the fact that a significant number of drugs are to go off-patent in the next five years it will offer a sizeable market for the players involved.
Therefore, the need of the hour is to have our own innovation engine. Had India built up its innovation pipeline in the last decade it would have had that competitive advantage today to be able to leverage and position itself in the global market, remarks Gupta. It is only now that companies like Sun Pharma (SPAARC) and the Piramal Group have hived of their R&D business, and the primary reason for doing that was the risk return profile of an investor. They have understood the difference between an R&D kind of investor and an investor in pharma and healthcare or a custom manufacturing space where certainty of success is more as compared to the former, and now they feel that the model of de-merging R&D will attract investors.
On the other hand, in PE models that exist in US and EU, in companies like Pfizer, Merck, Lilly, GSK etc, growth has been through their research engine and their model has been that of targeting a blockbuster drug. Even if these companies have X number of drugs in their pipeline and one of them scales up the ladder, then it will be a billion dollar drug and that is how these companies have made money. Also, as there are quite a few molecules in the pipeline of these big pharma companies that typically need investments to take them forward, due to limited resources they prefer PE funding or joining hands with other pharma companies and take up out-licensing and in-licensing arrangements, which has been a success model in the global markets, explains Gupta.
This is now being witnessed in India. Companies like Sun, the Piramal Group and Glenmark Pharmaceuticals have also tied up with global companies to work collaboratively on molecules, where they will be working on these molecules in their own R&D engines, thus sharing the risks and rewards. Also, a third partner in this model could be a PE investor, who provides funding to set up a different subsidiary or a different entity. But this largely depends on the confidence of the investor in a company, a particular molecule or the therapeutic area. This is what PE firms have been doing globally. However, according to Gupta, in India the concept is relatively new and not many companies understand the same in terms of how to structure such deals.
Secondly, there are not many molecules in the pipeline from Indian pharma companies. Its just a few companies like Glenmark which have about 35 molecules in the pipeline, Piramal with 13 molecules etc. But as these molecules enter into the pre-clinical phase there will be many PE firms who will want to pick and choose and structure deals around that, in the next three four years, he adds. But Deshmukh contradicts this business model. He avers, "If you look at the market caps of companies who have hived off their business, they are performing ridiculously low. So why would anybody want to invest in these companies. People still do not believe in the drug discovery model." According to him, business models that will work out are—one is pure business pharma formulations (domestic and international) in which India has proven itself. The moment they went into generics, the margins reduced and they became unattractive. He elaborates with the help of an example—Sun Pharma has a very attractive business model; focused significantly on formulations, and has attracted one of the best market caps in the industry. Glenmark, which is focused on formulations with a separate drug discovery model, has shown progress, and therefore is attracting significant valuations in spite of the size of the company.
Besides business model, technology plays an important role in motivating PE players to invest in pharma companies, which acts as a differentiator. Adding to it, US Food and Drug Administration (FDA) pproved facilities may also attract PE, because there may be quite a few companies performing well in the less regulated markets and are looking for funding and seeking an opportunity to explore the US markets, thereby minimising the risks. Funding US FDA approved plants will help these players market their products in the US and EU.
Besides this, business models which have a low spend on R&D, marketing etc will work, thereby, making the CRAMS segment more visible in particular. There is a global shift which has happened of late in PE investments; they are not looking at investing in hard core R&D and there will be long periods which will burn more cash without returns, highlights Kalluri.
Strategies of Indian companies
Most owners/promoters of pharma companies now recognise the critical attributes required for attracting PE ie. professional management, good accounting practices and high standards of corporate governance. As pharma companies in India have excellent management, an attribute which most funds value and appreciate, they may be able to attract PE.
However, witnessing the current market turmoil, PE transactions have slowed down because of the uncertainty and valuation issues resulting in a delay in the promoters' plans. Piramal Lifesciences is a case in point. However as the market conditions improve there will be domestic and international players looking for various possible transactions. The only challenge in India is the limited choice so people who understand the domain and know how to structure and exit the deal will exist. "The irony being in US, they understand the concept of structuring deals but are facing turmoil in their own country, so they may not have the liquidity to bring to this country," highlights Kalluri.
Looking at the impact of the slowdown, pharma will not be affected largely as it is not a cyclical industry, it is completely recession proof. And therefore, the industry will continue to do well, feels Deshmukh.
Witnessing the nature of stocks, pharma stocks are hardly affected over all other industries today. So pharma and healthcare will continue to attract investments. It's a large domestic play in India and people will continue to spend money, rather, have to spend money, therefore, it will continue to do well, he adds.
Rising above all challenges and hurdles, Indian pharma segment according to various estimates and projections is likely to fetch PE funding worth $500 million. And analysts believe this is reasonable, given the marked potential for Indian businesses to tap more export markets, grow domestic market and diversify into other allied operations like distribution, etc. Besides, as pharma remains insulated from the market turmoil it will enable PE investments in a very challenging environment. Avers Gupta, "It is akin to pharma companies trying to justify to their shareholders the need to expand aggressively in this scenario. A temporary dip is expected just as with several other sectors of the economy. However, we are witnessing far more funds interested in the sector than a year back." He says that in the long run, Indian pharma would only benefit from cost rationalisation exercises in the Western world.
Going ahead
"I think it will move into drug discovery, and it will have to move at some point of time. What has happened in US and EU will eventually happen in India," believes Deshmukh. And this holds true considering the fact that there is limited choice because unless Indian pharma companies innovate, they have a very poor future. So there is no option but to invest and innovate in drug discovery, and eventually, as one or two companies show results, significant investments will start pouring into drug discovery in India.
Focus will be on companies offering APIs and CRAMS. And preference will be given to companies with home products. Going ahead, it will become more and more specialised, because of the diverse nature of the industry. There will also be division based on therapeutic areas like diabetes, Cardiovascular diseases (CVD) etc. As companies now consider R&D in pharma as one business, they have also figured out that there are two diverse set of investors. And this gives them a reason to de-merge their business and make them two entities. This points to the fact that gradually Indian pharma companies will follow the global trends ie US and EU.
So, three to five years down the line there will be a lot of standardisation, integration and consolidation that will drive this sector.
arshiya.khan@expressindia.com
Corporatisation of the healthcare sector ushered in private equity (PE) investments in India. However, in the pharmaceutical sector, it was the high margins in Contract Research and Manufacturing Services (CRAMS) that triggered PE investments. Even though the segment has not shown results as per expectations, it has still been attracting investments primarily because it fetches more stable returns, as the deals that happen are long term, and on contractual basis, avers Vikram Gupta, Chief Operating Officer, IndiaVenture Advisors.
The numbers game
Speaking in terms of numbers, estimates by Datamonitor Financial Deals database from January 2007 to October 2008, the Indian healthcare and pharma sector has recorded 23 PE transactions in 2008 so far (till October), an increase of 9.5 percent when compared to the total number of transactions recorded in 2007. In value terms, PE players invested $473.6 million in 2008 (till October 2008), which was an increase of 14.45 percent over the aggregate value of PE investments from India in 2007. However, after Q1 08 PE investment in value terms has declined rapidly, a trend which is likely to continue in short term.
Out of this, the healthcare sector has attracted majority PE investments followed by the pharma sector.
And the key drivers for the same include strong economic growth, huge population, raising income levels and standard of living, and commitment to increase government spending on healthcare, which has tripled now.
Speaking in terms of the pharma sector, eight transactions worth $142.1 million were recorded in 2008 (till October) against seven transactions worth $96.7 million in 2007. And the PE interest in the pharma sector was driven by the attractive compounded annual growth rate (CAGR) of 12.3 percent against the global CAGR of nine percent (Nectar Life Sciences Annual report 2007-2008). Given the above growth rate the pharma segment is likely to reach $20 billion by 2015 from the current $8 billion. In addition, given the current crisis in the global economy, defensive sectors such as pharma in an emerging market would provide good investment opportunity. Dr Amit Rangenekar, Centaur Pharmaceuticals, highlights, "The meltdown will be an opportunity for PE funding, as going to the market will not give companies the desired premium, and hence, PE would be a good option."
PE investment in the pharma sector has focused on small companies which have own brands/products and/or contract manufacturing capabilities. Besides, they also favoured bulk drug and active pharmaceutical ingredients (APIs) manufacturers as they are low risk. Also the interest in this segment has been driven by diverse business models, diversified revenue streams (own product sales and contract manufacturing), exposure to international markets (contract manufacturing for MNCs), ability to cater the increasing demand in the domestic market (CAGR of 12.3 percent), to benefit from the increased government spending (commitment to increase spending on healthcare to two-three percent against the current 0.9-1 percent), low gestation period, low risk and investment as research and development (R&D) is limited and lesser marketing expenditure (which is a significant costs element for pharma companies).
Shy no more
"The need of the hour is to have our own innovation engine. Had India built up its innovation pipeline in the last decade it would have had that competitive advantage today to leverage and position itself in the global market"
- Vikram GuptaChief Operating OfficerIndiaVenture Advisors
"The key difference in the mature markets of US and EU is that they are more focused on biotechnology and are mostly venture capital (VC) funded, whereas in India the case is otherwise, they don't focus much on biotech, but on the pharma side"
- Naveen Reddy Kalluri Project ManagerFinancial DealsDatamonitor India
"In the current bull run, the attention of most PE players has been on exponential growth sectors such as capital goods, construction, telecom etc, so they kept away from pharma, however, this would change as markets become more favourably disposed to sectors such as consumer and pharma"
- Navroz Mahudawala Associate DirectorHealthsciences PracticeErnst & Young
Of late PE players have kept away from Indian pharma companies due to various reasons. Firstly, results in the drug discovery space are yet to be proven by some companies and until those results are out, probably, the investments till then will come in bits and pieces. PE players, being quite selective and choosy about investing in a company due to high risks involved in the R&D model, will pick up success areas. PE firms typically work on minimising the risks and maximising returns. The high risk in the R&D model and perhaps the limited choice kept PE players away from pharma. Now they have different strategies before deciding upon investments in pharma. "They either do it by working on a pro drug, viz a similar drug that has already been tested and marketed. Secondly, they may outsource molecules to a partner in India, thereby minimising the risks. This has already been done by companies like Pfizer, Merck, Lilly, GSK etc," informs Gupta.
But the current financial crisis seems to be an opportunity for PE players. Speaking on the current scenario, Nitin Deshmukh, Head-Private Equity, Kotak Mahindra, adds, "Pharma in the healthcare space is totally down and out. It has become a commodity all over the world. Observing the performance of pharma companies, except for the last few months wherein it seems to be slightly above average vis a vis the other sectors, as pharma on the stock market has been the core performing sectors."
Secondly, as drug discovery is yet to be proven, the valuations have to be materialised in the true sense, once certain progress happens in the drug discovery space, PE would automatically scale up, he feels.
However, Navroz Mahudawala, Associate Director, Healthsciences Practice, Ernst & Young, cites another reason, "In the current bull run, the attention of most PE players has been on exponential growth sectors such as capital goods, construction, telecom etc, so they kept away from pharma. However, this would change as markets become more favourably disposed to sectors such as consumer and pharma." Also, a portion of the business plans of Indian pharma (i.e. regulated market generics) was perceived as risky. But, majority of PE investments have been either in domestic business plans or CRAMS, he highlights. Going forward, this will change, avers Rajeev Raju, Vice President and Sales Leader, Corporate Finance, Healthcare Financial Services, GE Healthcare, "Pharma companies have significantly de-risked their business models by segregating R&D from core manufacturing. Also, with more order flows into India across products and across various business segments in both large/mid-cap companies, risks are better spread with managements, understanding the need to be better governed in their business operations."
However, Rangenekar offers a different view. He states, "Only those PE players that were not focused on pharma were shying away. There were a few who were bullish on pharma who have stayed back." And this is evident from the recent deals in the pharma space—Citi Venture Capital International (CVCI), a PE firm, and Everest Capital, a hedge fund, have invested $23.6 million in Nectar Lifesciences; Kotak Private Equity Group, a PE arm of Kotak Mahindra Bank, agreed to invest $10 million in Intas Biopharmaceuticals. Century Pharmaceuticals secured $12.7 million from Gujarat Biotech Venture Fund managed by Gujarat Venture Finance; and SME Growth Fund, a fund managed by SIDBI Venture Capital, has invested $7 million in Centaur Group, a pharmaceutical and speciality chemicals company to name a few.
Indian business models vs US and EU
Fundamentally, the market structure in India is completely different from that of US and Europe. In US and EU, most companies are mature and publicly listed, so PE investments are mostly in the private sector. However, this is not the case in India. Hence, if Indian companies build competencies in different sectors and increase their focus more on things which they are good at, for example, API manufacturing, contract manufacturing, etc, the scene may change. Speaking on the key differentiation in the Indian market Naveen Reddy Kalluri, Project Manager-Financial Deals, Datamonitor India, highlights, "The key difference in the mature markets of US and EU is that they are more focused on biotechnology and are mostly venture capital (VC) funded, whereas in India the case is otherwise, they don't focus much on biotech, but on the pharma side." Besides, there is limited or negligible VC investment witnessed in this sector unlike in the US wherein early stage funding has prospered. Low buyout activity witnessed in India and limited number of Private Investment in Public Equity (PIPE) deals in larger companies are some other differences in the pharma PE scenario in India when compared with the US or EU. Raju cites another reason. "The US and EU are highly regulated markets, whereas India is still evolving slowly across business segments and operational dynamics. PE deals in pharma tend to be largely passive than strategic in the developed markets. It is only in emerging markets like India where PE players look for a more active role in the pharma/life sciences space by seemingly adding value to the business in terms of market/product expansion and/or enabling growth ideas."
With changing dynamics and fluctuations in the market, PE investment in pharma companies will primarily be driven by the changing business models of Indian pharma companies. And this is evident from the fact that pharma companies in India are reducing the risk in their businesses by hiving off business units, unless they have sufficient resources/capabilities to manage them (Eg Piramal and Sun Pharmaceuticals hived off R&D divisions); diversifying revenues streams; and optimising manufacturing capacity by entering into contract manufacturing deals. In addition, the fact that a significant number of drugs are to go off-patent in the next five years it will offer a sizeable market for the players involved.
Therefore, the need of the hour is to have our own innovation engine. Had India built up its innovation pipeline in the last decade it would have had that competitive advantage today to be able to leverage and position itself in the global market, remarks Gupta. It is only now that companies like Sun Pharma (SPAARC) and the Piramal Group have hived of their R&D business, and the primary reason for doing that was the risk return profile of an investor. They have understood the difference between an R&D kind of investor and an investor in pharma and healthcare or a custom manufacturing space where certainty of success is more as compared to the former, and now they feel that the model of de-merging R&D will attract investors.
On the other hand, in PE models that exist in US and EU, in companies like Pfizer, Merck, Lilly, GSK etc, growth has been through their research engine and their model has been that of targeting a blockbuster drug. Even if these companies have X number of drugs in their pipeline and one of them scales up the ladder, then it will be a billion dollar drug and that is how these companies have made money. Also, as there are quite a few molecules in the pipeline of these big pharma companies that typically need investments to take them forward, due to limited resources they prefer PE funding or joining hands with other pharma companies and take up out-licensing and in-licensing arrangements, which has been a success model in the global markets, explains Gupta.
This is now being witnessed in India. Companies like Sun, the Piramal Group and Glenmark Pharmaceuticals have also tied up with global companies to work collaboratively on molecules, where they will be working on these molecules in their own R&D engines, thus sharing the risks and rewards. Also, a third partner in this model could be a PE investor, who provides funding to set up a different subsidiary or a different entity. But this largely depends on the confidence of the investor in a company, a particular molecule or the therapeutic area. This is what PE firms have been doing globally. However, according to Gupta, in India the concept is relatively new and not many companies understand the same in terms of how to structure such deals.
Secondly, there are not many molecules in the pipeline from Indian pharma companies. Its just a few companies like Glenmark which have about 35 molecules in the pipeline, Piramal with 13 molecules etc. But as these molecules enter into the pre-clinical phase there will be many PE firms who will want to pick and choose and structure deals around that, in the next three four years, he adds. But Deshmukh contradicts this business model. He avers, "If you look at the market caps of companies who have hived off their business, they are performing ridiculously low. So why would anybody want to invest in these companies. People still do not believe in the drug discovery model." According to him, business models that will work out are—one is pure business pharma formulations (domestic and international) in which India has proven itself. The moment they went into generics, the margins reduced and they became unattractive. He elaborates with the help of an example—Sun Pharma has a very attractive business model; focused significantly on formulations, and has attracted one of the best market caps in the industry. Glenmark, which is focused on formulations with a separate drug discovery model, has shown progress, and therefore is attracting significant valuations in spite of the size of the company.
Besides business model, technology plays an important role in motivating PE players to invest in pharma companies, which acts as a differentiator. Adding to it, US Food and Drug Administration (FDA) pproved facilities may also attract PE, because there may be quite a few companies performing well in the less regulated markets and are looking for funding and seeking an opportunity to explore the US markets, thereby minimising the risks. Funding US FDA approved plants will help these players market their products in the US and EU.
Besides this, business models which have a low spend on R&D, marketing etc will work, thereby, making the CRAMS segment more visible in particular. There is a global shift which has happened of late in PE investments; they are not looking at investing in hard core R&D and there will be long periods which will burn more cash without returns, highlights Kalluri.
Strategies of Indian companies
Most owners/promoters of pharma companies now recognise the critical attributes required for attracting PE ie. professional management, good accounting practices and high standards of corporate governance. As pharma companies in India have excellent management, an attribute which most funds value and appreciate, they may be able to attract PE.
However, witnessing the current market turmoil, PE transactions have slowed down because of the uncertainty and valuation issues resulting in a delay in the promoters' plans. Piramal Lifesciences is a case in point. However as the market conditions improve there will be domestic and international players looking for various possible transactions. The only challenge in India is the limited choice so people who understand the domain and know how to structure and exit the deal will exist. "The irony being in US, they understand the concept of structuring deals but are facing turmoil in their own country, so they may not have the liquidity to bring to this country," highlights Kalluri.
Looking at the impact of the slowdown, pharma will not be affected largely as it is not a cyclical industry, it is completely recession proof. And therefore, the industry will continue to do well, feels Deshmukh.
Witnessing the nature of stocks, pharma stocks are hardly affected over all other industries today. So pharma and healthcare will continue to attract investments. It's a large domestic play in India and people will continue to spend money, rather, have to spend money, therefore, it will continue to do well, he adds.
Rising above all challenges and hurdles, Indian pharma segment according to various estimates and projections is likely to fetch PE funding worth $500 million. And analysts believe this is reasonable, given the marked potential for Indian businesses to tap more export markets, grow domestic market and diversify into other allied operations like distribution, etc. Besides, as pharma remains insulated from the market turmoil it will enable PE investments in a very challenging environment. Avers Gupta, "It is akin to pharma companies trying to justify to their shareholders the need to expand aggressively in this scenario. A temporary dip is expected just as with several other sectors of the economy. However, we are witnessing far more funds interested in the sector than a year back." He says that in the long run, Indian pharma would only benefit from cost rationalisation exercises in the Western world.
Going ahead
"I think it will move into drug discovery, and it will have to move at some point of time. What has happened in US and EU will eventually happen in India," believes Deshmukh. And this holds true considering the fact that there is limited choice because unless Indian pharma companies innovate, they have a very poor future. So there is no option but to invest and innovate in drug discovery, and eventually, as one or two companies show results, significant investments will start pouring into drug discovery in India.
Focus will be on companies offering APIs and CRAMS. And preference will be given to companies with home products. Going ahead, it will become more and more specialised, because of the diverse nature of the industry. There will also be division based on therapeutic areas like diabetes, Cardiovascular diseases (CVD) etc. As companies now consider R&D in pharma as one business, they have also figured out that there are two diverse set of investors. And this gives them a reason to de-merge their business and make them two entities. This points to the fact that gradually Indian pharma companies will follow the global trends ie US and EU.
So, three to five years down the line there will be a lot of standardisation, integration and consolidation that will drive this sector.
arshiya.khan@expressindia.com
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