PE firms close in as India unwraps $20 billion package

Private equity (PE) investors are betting big on Indian drug makers, especially those that manufacture active pharmaceutical ingredients (APIs), with investments jumping more than fourfold so far this year.

On November 11, India approved an incentive program worth $20 billion to attract companies to set up manufacturing in the nation. Finance Minister Nirmala Sitharaman said the government is looking to offer production-linked incentives to 10 sectors, including pharmaceuticals, over a five-year period. Specialized pharmaceutical product makers are also eligible for the incentives.

With the Indian government earlier announcing a special fund to set up three drug manufacturing hubs, even as it identified 53 key APIs, including paracetamol and antibiotics, penicillin and ciprofloxacin whose output would be boosted on priority, the decision spurred PE interest, as investors started looking to acquire stakes in large API manufacturers in India.

Several mid-sized drugmakers are discussing potential buyouts with PE firms after the government offered incentives to encourage companies to produce drug ingredients in India to cut reliance on China.

Analysts point out that Indian bulk drug manufacturers are set to grow income by $3.3 billion if they expand capacity and global supply.

ZCL Chemicals activity

While bulk drugs maker ZCL Chemicals has initiated talks for a fundraise with at least four PE investors, the PE arm of financial services powerhouse Morgan Stanley is looking to acquire stakes in other API manufacturers, even as it underlines its 20% stake in the Mumbai-based ZCL Chemicals (formerly Zandu Chemicals), an API maker.

ZCL Chemicals has a strong backward integrated API business, along with presence in advanced intermediaries and contract manufacturing. The firm is engaged in manufacturing and exports of advanced drug intermediates and APIs, focusing on niche therapeutic areas of CNS, ARVs and controlled substances. Up to 90% of the firm’s revenue comes from established markets. More than 50% of its revenues come from products which are still under patent.

As one analyst said, there are a few tailwinds in the API space. "Pricing has improved and there is a trend to switch to Indian firms with global players de-risking their dependence on Chinese suppliers. This has bumped up valuations in the listed space as well as in the private space too," said Amey Chalke at Haitong Securities.

Recent deals like Advent-Ra Chem Pharma, Carlyle-Sequent Scientific and Carlyle-Piramal Enterprises are examples of rising interest from PE funds in the domestic API segment.

Several pharma companies including Granules India and JB Chemicals have seen investor interest from global PE majors. Biocon Biologics got a third PE cheque this year as Goldman Sachs bet $150 million on the biopharmaceuticals company. Biocon’s biosimilars unit roped in private equity firms True North and Tata Capital Growth Fund earlier this year.

While Tata Capital Growth Fund, a private equity fund managed by Tata Capital Ltd, agreed to invest $30 million in Biocon Biologics in July, in January, Biocon said True North would invest $72 million at $3 billion on a pre-money equity basis.

In May, PE firm Carlyle announced it would acquire a 74% stake in SeQuent Scientific for $212 million.

PE fund ChrysCapital-backed mid-cap branded formulations player Eris Lifesciences is another case in point. ChrysCapital held a 5.51% stake in Eris Lifesciences as of March 2020. The Ahmedabad-based drug maker posted revenues of $137 million in FY 19-20.

The firm has a manufacturing facility at Guwahati, Assam and a significant presence in chronic, sub chronic and acute segments. Diabetes care, cardiac care and vitamins and minerals are the top three revenue contributors in its overall portfolio.