The concept of ‘Big Pharma’ was made through a series of mergers and acquisitions as part of an industry consolidation. It often happens when the ownership pattern within an industry is largely shifted towards professional investment bodies, which can grow the respective business much beyond the capacity of a family-driven management. This growth, which is even beyond geographical boundaries, is undoubtedly powered by a broader management bandwidth collectively created by a team of professionals from the industry. The Mercks, GSKs, Pfizers and Sanofies of the current world were made like that.
The pharma industry in the West caught up with this trend in the seventies and eighties when the large organised investors realised the value of being big in this sector – the value of discovery research, blockbuster drugs and global scale of manufacturing and marketing. While the East, particularly China, Japan and India, is now moving to that phase and the catalysts are again the world’s leading private equity players.
In the calendar year 2020, the Indian pharma industry saw its first complete management takeover of a drug company by a private equity player. The USD 414 million deal saw the global PE giant KKR taking over JB Chemicals and Pharmaceuticals Ltd, replacing the family driven management with a new team of professionals. It was also the year that the pharmaceutical industry in India witnessed the private equity investment crossing USD 1 billion for the first time.
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The sector, comprising drug formulation, active pharma ingredients, contract research and manufacturing services, had record growth in venture capital and private equity deals during 2017 to 2020 with a cumulative investment of USD 3.80 billion. The annual investments during this three year period increased more than four times from USD 395 million in 2017 to USD 1697 million in 2020, involving a total of 75 deals.
Going forward, there were as many as 15 PE/VC deals in the year 2021 worth a total fund infusion of USD 1.64 billion. According to the latest government data, the foreign direct investment (FDI) inflows, which included some strategic investments as well, in the Indian drugs and pharmaceuticals sector reached USD 130 million in the April-June quarter of 2021-22 itself.
According to industry experts, there are multiple factors that attract the increased private equity play in the country’s pharma sector of late. While successful exits in the fast growing and high margin sector is one of the key attractions, the long term growth perspective, the changing research and innovation environment, rapidly increasing capacities in terms of vaccines and biologicals, steady expansion in the global presence and increased spend on medicines in the domestic market are the other factors.
The drug industry in India -- predominantly generic medicine and gradually increasing innovative products – is currently worth USD 45 billion in revenue and it is also the third largest in the world in terms of volume. With an expected growth of over 19 percent annually (CAGR), the industry estimates its total revenue (exports and local sales together) to be at around USD 130 billion by 2030. The drug exports from India, which stood at USD 20.70 billion in the financial year-2020, also saw a sudden jump of close to USD 4 billion in the last one year to USD 24.44 billion (FY 2021-22).
However, the KKR deal that took over JB Chemicals and Pharmaceuticals with a long term perspective emphasizes the trend as its growth in the first one and half years of the management change clearly demonstrated the unique operational efficiency that a professional management could bring into a family-run business.
“This trend will pick up faster in the country’s drug sector now,” says an equity analyst at a foreign brokerage.
“The industry has already established its strengths in terms of manufacturing, market reach, innovation and cost effectiveness. These strengths along with the current growth projection gives enough confidence for large investors,” he added.
According to Nikhil Chopra, new CEO of JB Chem, which triggered the move with a large strategic acquisition within a year after the KKR takeover and a few more on the cards, it is just a matter of time that the pharma industry in India would see a bigger consolidation trend.
“It's a combination of three factors -- The private equity players’ added thirst for takeovers with a long term commitment in the sector; Current promoters’ decision to unlock the wealth that they have built through the family-run business; Availability of a professional management team to replace the traditional one– that will help expedite this trend,” added JB Chem’s Chopra.
— CH Unnikrishnan is Founder & Editor at Future Medicine India. Views expressed are personal.
(Edited by : Priyanka Deshpande)
First Published: Apr 12, 2022 9:04 PM IST
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