Global private equity (PE) investors are in a rush to bet on Indian firms that are in the thriving business of manufacturing active pharmaceutical ingredients (API), vaccine-related manufacturing, and producing bulk pharmaceutical chemicals.
After investing close to $1.5 billion in such companies since the coronavirus outbreak, this financial year global private PE are ready with a war chest of $3-4 billion to be pumped into these intermediate firms rather than the front-end pharmaceutical companies, according to six top investment bankers involved in deals facilitating PE investments that Mint spoke to.
“There is a huge demand emerging globally for companies that manufacture pharmaceutical ingredients. As much as $4 billion worth of funds could be forked out by global PE funds over the next 12-18 months. The entire situation has changed and so has the investment strategy. A significant consolidation may be expected in the API and core bulk drugs businesses,” said one of the bankers, who works for a foreign investment bank, seeking anonymity.
“India is a global hub of API, bulk and contract manufacturing in the field of medicines. This will draw a lot of attention after the covid-19 outbreak. API is one of the most attractive sectors for investment and India is well-known for this business in particular. At least 15 PE funds have shown readiness to invest in API over the last few months,” said another banker, also requesting anonymity.
“The change in trend has happened in the intermediate or second-rung segment engaged in the business of API, vaccine manufacturing, generic or bulk drug chemicals, and contract manufacturing of consumables, which are essentially in the business of supplying raw materials to the frontline pharmaceutical firms,” said Gopal Agrawal, co-head, investment banking, Edelweiss Group.
API companies include Divis Laboratories, Laurus Labs, Granules India, Aarti Drugs, and Solara Active Pharma. Generic companies include the likes of Sun Pharmaceuticals, Aurobindo Pharma, Dr Reddy’s Laboratories, Cipla, and Lupin. Contract research and manufacturing services (CRAMs) is one of the fastest growing sectors in the pharmaceutical and biotechnology industry. The pharmaceutical market uses outsourcing services from low-cost providers in the form of contract research organization and contract manufacturing organizations.
CRAMs companies are those such as Syngene International, Biocon, Jubilant Pharmova, and Dishman Carbogen Amics Ltd. Essentially, the non over-the-counter (OTC) companies are attracting PE investors more than ever as an emerging trend since their return on equity (RoE) has improved significantly, according to the bankers. These firms garner a significant portion of their revenue from exports to front-end companies in developed countries, which is another reason that PE investors are showing higher interest.
India’s domestic pharmaceutical market is estimated at $41 billion in 2021. It is likely to reach $65 billion by 2024 and expand to reach $120-130 billion by 2030, according to Agrawal. PE players such as KKR & Co, Carlyle, Advent, Chrys Capital, and ICICI have been showing growing keenness to invest in these API, bulk and contract manufacturing companies now, said the bankers.
“Last fiscal year around $1.5 billion was invested in these companies. Roughly $2 billion could be in the investment pipeline for this fiscal year from PE funds,” said Agrawal. Earlier, as the margin of these firms and RoE did not support investment objectives, the API, non-OTC sector was neglected for a long time. However, the situation has changed. “The RoE of such companies has improved now,” said Agrawal.
More than investment in growth capital, investors may prefer a buyout in this segment, he said. The unprecedented surge in PE investment in these firms in India is a result of the raging second wave of the covid-19 pandemic, which has boosted the demand for medicines and other healthcare ingredients. “To an extent, the whole episode of the US and Europe shifting their manufacturing sites from China to India has played a role in boosting the growth potential of companies in API and the contract manufacturing segment,” said Agrawal.
The demand for self-care and preventive pharma products has shot up with the fear of contracting covid-19 and other ailments spreading among people. This trend is emerging across the world and has increased the export revenues for these drug ingredient manufacturing companies. Drugs and pharmaceutical exports for the FY2021 touched $24.4 billion, a record growth of 18.1%, according to the estimates of the department of commerce. Exports during FY2020 were $20.6 billion at a growth rate of 7.6%.
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