Scan any verbiage, online or in print, on Indian pharma and you are unlikely to miss space devoted to some of India’s leading pharma promoters contemplating a stake sale, either in part or in full. While a company like Cipla finds it speculative (and not quite worthy of a comment) others like Glenmark proffer specific reasons such as the need to raise capital to pare debt.

In an attempt to read the pharma tea leaves over a scalding cup of tea on a rainy Mumbai afternoon, a leading pharma analyst who does not want to be named, points this writer to a growing interest among private equity funds for Indian pharma – a link node that seems to run across all the stake sale stories.

A changed pharmapreneur

But then, is it not the other way round? asks Sanjiv Kaul, partner at ChrysCapital and one with a deep understanding of the Indian pharma industry. He feels, there is now instead “a change in mindset in the Indian pharma sector. Today, many of the Indian pharmapreneurs (as he likes to call these entrepreneurs) are more open than ever before to the involvement of private equity in their companies. The pharmapreneurs of the yore preferred greater control, which is not quite the case today,” he says.

Critical mass & global scale

Urging that we instead see a company-specific narrative in each case, G V Prasad, the co-chairman and managing director at Dr Reddy’s Laboratories, feels the question of the private equity interest in Indian pharma stems more from “the fact that the Indian companies are being recognised as a force to reckon with in developing generics and active pharmaceutical ingredients backed by abundant chemistry skills, formulation capabilities and a clear edge in cost-effective manufacturing.” And while these were true earlier too, he says, “they are all reaching critical mass and a global scale with Indian companies breaking into the top 10 in many countries.” While that may be drawing private equity to Indian pharma but given that they are investors at the end of the day looking for an exit within seven to 10 years, there ought to be a clear value that they hope to unlock.

The lure of India business

There is and it is around the India business of these pharma companies says, Aditya Khemka.

The fund manager at InCred Asset Management and a leading pharma and healthcare analyst who has tracked this sector for nearly two decades says, “the PE funds have come to realise that the India business of pharmaceuticals companies is far more lucrative than is being currently perceived. The fact that in many cases it is a low capital intensity and high return on capital (RoC) play. It stems from being more about branding and promotion than manufacturing. Much like in the case of FMCG products where products (a soap or a soup) tends to be sourced from third party with subsequent investments only on branding and promotion (among doctors in case of pharma), there is greater scope to unlock value (in the India branded business though some also see this riding on an inescapable need for opex to create sales teams).”

Is there scope for more?

But then given that the stocks have rallied where is the opportunity to make more money?

According to another analyst, higher returns can accrue either from selling the business at a higher value after making it more profitable or by splitting the business into parts and unlocking value from each and points to Carlyle investment in Piramal Pharma, which subsequently got listed separately. Or the example of KKR, which holds 54 per cent stake in J B Chemicals since October 2020 making it the only PE firm to own a majority stake in an Indian pharma company and with revenue rising from Rs 1800 crore in FY 20 to Rs 3149 crore in FY 23 and the market cap up from Rs 7000 crore to almost Rs 21,000 crore at the moment.

Then, there are also the examples of Intas and Mankind that Sanjiv Kaul refers to – both backed by ChrysCapital that also saw a remarkable surge in both valuations and revenues. He explains: “If you look globally and divide the enterprises into two categories of those that are PE-backed and the non-PE backed then over last 30 years history globally and more than 20 years in India, then you will find that the PE-backed entities have historically performed much better in terms of revenue, EBITDA and in market capitalisation.” He attributes it to largely to the speed of professionalisation and to a more emboldened leadership towards opportunities to be tapped.

He is also quick to caution that it is not as if firms that are not PE-backed do not professionalise or make a mark but feels they tend to lack speed and the drive to effect changes in a time-bound fashion.

To this, others also add consolidation opportunities and an ability to do bolt-on acquisitions and build valuable synergies and scalable businesses.

Hari Buggana, founder and chairman, InvAscent, feels that while the PE funds have had an enduring interest in pharma over the years, there is a confluence of factors at play that is further aiding this today. From capital waiting to be deployed to pharma promoters seemingly more open to the idea of PE participation. “Many of the large PE funds have today either stopped or slowed down their investments into China leaving them with huge funds waiting to be deployed.

Typically, across the top 10 PE funds globally there would be dry powder (funds held in reserve waiting to be deployed) to the tune of $ 50 billion (across sectors) for Asia alone.” Second, he does see promoters of Indian pharma companies more open to the role of private equity.

On the media speculation in recent times over some of the biggest names in Indian pharma seeking the participation of private equity, especially the buyout funds, he says, “it is too early to call it a trend as these could be company-specific developments with different triggers in each case but all of it still within the realms of speculation.”

But then, he reminds, what have indeed remained unchanged, endured and grown are the underlying tailwinds for pharma led by the growing demand for cheaper generic medicines globally.

Sharing his own example, he says, “back in 2005, one of the triggers that led me to set up InvAscent, a growth fund, was the insight that even in the rich countries there was a shift in demand towards less expensive but high quality generic medicines given their rising healthcare costs.” In 2005, he says, “we analysed the prescription data on the US pharmacies and found that 6 out of every 10 prescriptions were filled with generic medicines. Today, the 6 has increased to 8.8 and this trend is not just in the rich nations but there is growing demand also coming from poorer nations that have seen household incomes rise over the years.” All of this, he feels, is aiding the interest in Indian pharma, given that 30 to 40 per cent of generic drugs consumed in the US for example today have origins in India.

There is also an argument that favours India with many countries seeking a China plus one strategy.

Here, he cautions: “It will take some time for global pharma companies to implement a China + 1 sourcing strategy because changing suppliers in the pharma industry takes time due to regulations. However, in the medium-to-longer term, Indian pharma companies have an opportunity to emerge as reliable alternatives to Chinese suppliers”.

If changing pharma supplies takes time, are we getting there? There is apparently still an arduous journey ahead considering that as per data from Pharmexcil (sourced from DGCIS) imports from China, as of year ended March 31, 2023, were valued at US $ 3.5 billion with China still the largest source for APIs (Active Pharmaceutical Ingredients) and drug intermediates.

Dr Yusuf K Hamied, the Cambridge-educated chemist and the non-executive chairman of Cipla widely regarded for championing the case for accessible and affordable medicines, had once told this writer that the reason Cipla and other leading Indian pharma companies in their early years took aggressively to making APIs was the fact that India had imposed huge import duties on such imports, how feasible it is to replicate this in today’s context when there is a price controls, is debatable.

For the moment, it may be worth giving a fresh read to the autobiography of Cipla founder K A Hamied who stood with the freedom fighters of India and closely knew Mahatma Gandhi, Jawaharlal Nehru, Sardar Vallabhbhai Patel and several other leaders but was also the first Indian to set up a pharmaceutical company in 1935.

Cipla’s evolution after all, in many ways, is a narrative of the emergence of Indian pharma in the global arena and that of India as the world’s pharmacy today. Cipla alone is an over Rs 22,000 crore behemoth today. Whether some of it will come into the hands of private equity or remain just a swirling speculation, only time will tell.