It is not just the mergers and acquisitions (M&As) followed by the Daiichi-Ranbaxy or the Abbott-Piramal deal that are seeing an uptake in the pharmaceutical industry. Fat private equity (PE) and venture capital (VC) firms are also betting big on small and midsized pharmaceutical companies to put their bucks on. The average PE deal value which was $6 million in 2009, today stands at almost $140 million, according to VCCEdge. Even the deal volume has increased from 2 to 7.
The most prominent PE investments which happened in 2010 include New Silk Route Partners $55 million investment in Nectar Life Sciences and a series of investments in Arch Pharmalabs by Emerging India Focus Funds and India Infoline Venture Capital Fund. Even this year had a kick-start with Arum Investments backing Plethico Pharmaceuticals by $17.41 million.
“Pharma has become more than a CRAMS and CRO play for PE’s and VC’s,” says Vikram Hosangady, executive-director, transaction services, KPMG. He further elaborates that in the last 2-3 years post the Daiichi-Ranbaxy deal and the Abbott-Piramal deal, there is renewed interest in the domestic formulations business which is expected to grow at a consistent rate of 12-15% per annum. Domestic formulation companies with a product basket in the niche therapeutic segments like cardio, neuro, oncology will attract interest from the PE community. “We also see PE funds focused on pharma and healthcare working towards building a portfolio of API companies that they could either sell piece meal or as a basket to a global player, “ he says.
Darius Pandole, partner, New Silk Route Advisors notes, “As the mergers and acquisitions in the industry are increasing, external funding by PE firms is also gaining importance. The strong trend of M&As is going to continue at the same pace and PE investors will stimulate this practice in the industry.”
The PE investment trend is undoubtedly backed by increasing number of M&A activity especially from global players who are keen to increase their footprint in the Indian market. Baring Private Equity Partners India too invested in Shilpa Medicare last year. Amit Chander, head of investments says, “We started focusing on the healthcare investments in 2004 which was then 12% of our total funds. But today it stands at 20% of our investments. We today have a fund of $574 million. However for the industry, the majority deal sizes in future would stick to $15-25 million which is mid sized. Large companies usually do not have the need for capital.”
Chander stresses that there is immense opportunity for investment in the Indian pharma sector. When compared to the global markets, India has a higher spend on the pharma segment—almost 20% of total healthcare spend. However, globally the number is 14%.
There are two sets of pharma markets in the globe. One is the emerging segment which includes Latin America, South East Asia—here India can offer products and medicines with a better pricing as compared to what it offers in home country. Second is the regulated markets of Japan and US. These markets create opportunity for generics but the trick has to be low pricing by Indian pharma companies. “Thus, the growth opportunity lies in both domestic consumption and the export side,” he says.
It should also be noted that valuations of pharma companies have increased significantly in the last two years, which could reduce the attractiveness of the deal and could result in slower deal closures. “Deal sizes will be between $40-100 million as regards PE investments and with respect to strategic buys, given that they will be 100% acquisitions, could be between $500 million upwards depending on the size of the assets,” concludes Hosangady from KPMG.
Source: Financial Express