The Indian pharma sector is witnessing heightened merger and acquisitions (M&A) activity as some of the leading companies reorganise their portfolios. These are not big-bang acquisitions in the US or India, but rather piece-meal buyouts of local brands and businesses.
The US market with its headwinds related to increased competitive intensity, pricing pressures and high regulations, has not remained as lucrative as it was five to six years ago. Companies have naturally turned towards tending to the domestic market – the other large piece of their business. The Covid pandemic also made companies aware of gaps and non-core segments in their portfolios.
“The Indian pharma market has charted a secular growth story of around 8-10% in the last 10 years and is likely to do so in the coming years,” said Krishnanath Munde, associate director, India Ratings & Research. “Drug affordability has gone up, insurance penetration has increased, and access to health facilities has improved. The market requires less capex and R&D than the regulated markets. Besides, there are debt-free companies with attractive local brands delivering double-digit growth that become acquisition targets of larger companies.”
It’s not just M&A. Companies are forging in-licensing or partnership agreements with MNCs to sell their niche products using local sales and distribution strengths. These inorganic measures help generate cash flow and beef up the overall performance immediately.
However, in a race to elbow out rivals, the pharma companies may be paying high valuations to acquire the branded businesses. For instance, DRL paid around ₹450 crore for Cidmus drug that clocked annual sales of around ₹137 crore. JB Chemicals paid ₹628 crore to Sanzyme for its brands. The valuations typically are three to four times revenue or 15 to 20 times operating profit (Ebitda).
The ultimate load of these valuations is likely to be borne by the patients who will pay more for medications. From this month, companies are expected to take price increases in their portfolios.
In its latest industry report, India Ratings expects the magnitude of price hike to be higher in chronic therapies such as cardiac and anti-diabetic. But, the overall price hikes will be influenced by higher raw material costs and competitive intensity.
Besides, the Indian pharma industry is staring at headwinds over the medium-to-long term. A spate of regulatory changes is expected to kick in over the next couple of years.
Low-cost trade generics are picking up pace – especially in rural India. The Central government has constituted a panel to frame new laws for drugs, cosmetics, and medical devices. It is also creating a common platform to handle the procurement of medicines for all Central government agencies including Jan Aushadhi in a bid to bring down prices of medicines while maintaining their quality.
Earlier this month, the National Green Tribunal asked the environment ministry to immediately notify the standards for effluent discharge by the pharma industry.