The total value of PE / VC investments in Indian pharma in 2020 shot up 5-fold YOY. If you compare the first 9 months of 2020, the PE/VC investments are more than the first 9 months of the previous 3 years combined. What is driving this surge in PE investments?
How the Indian pharma sector is segmented?
In terms of sheer volume of medicines produced, Indian pharma industry ranks just behind the US and China. However, in terms of complexity and finesse, it still needs to scale up. But that is an extraneous issue in the current context. India accounts for nearly 50% of vaccine production, which becomes extremely important in the post COVID scenario. Broadly, the Indian pharma industry has 4 key segments.
The first is the active pharma ingredients or API segment, which is the ingredient for manufacture of drugs and API. The API causes the effect of the drug. This area was dominated by China but COVID created supply chain constraints led countries to look to diversify their dependence. Secondly, there is the Formulations segment which is the actual medicinal product by combining various chemicals. In volume terms, India is the world’s largest exporter of formulations.
Thirdly, the bio-similars segment is dominated by the likes of Biocon. Bio-similars are bulk drugs based on biological processes rather than chemical processes. This is likely to be the biggest growth area domestically. Finally, there is the contract research and manufacturing services or CRAMS that outsources pharma manufacturing for other companies. Bio-similars and CRAMS are expected to be worth $90 billion by the year 2030.
Where is the PE / VC money gravitating in Indian pharma?
Look at some of the most significant PE deals in India pharma in the year 2020.
|Target Company||PE Investor||Amount Invested ($m)||Execution Month|
|Intas Pharma||Chrys Capital||$132 million||Feb-20|
|Sequent Scientific||Carlyle||$210 million||May-20|
|Piramal Pharma||Carlyle||$490 million||Jun-20|
|J B Chemicals||Kohlberg Kravis Roberts||$414 million||Jul-20|
|RA Chem Pharma||Advent International||$128 million||Jul-20|
|Granules India||KKR / Blackstone / Bain||Not Available||Not Final|
Most of the PE funds have been coming into the API and the CRAMS space. Clearly, CRAMS is where the big growth is likely and API is where the immediate growth visibility is. One important reason for this surge interest in these pharma segments is that the pharma sector has produced successful exits, on a consistent basis, for PE investors in India.
India is already the world’s third largest manufacturer of drugs by volume and the largest exporter of formulations. India accounts for 40% of generic drug approvals in the US and every third pill consumed in the US is produced by an Indian company. For VCs and PE funds, the big opportunity is two-fold. It lies in Indian pharma’s ability to leverage its chemistry leadership for direct exports of APIs to global markets. The second big opportunity is in custom manufacturing of drugs and intermediates under the CRAMS model. It is in these areas that most of the PE funds are rolling into.
Indian Pharma, the road ahead
Is this current trend of PE investments in pharma a new paradigm or is it just a flash in the pan? There are reasons why this looks like a new paradigm.
• The one big contribution of COVID-19 has been that it brought the focus back on health sector. While exports remains the big opportunity, there is a huge expansion in domestic consumption, which is what many of the PE funds are betting on.
• Indian companies like Zydus Cadila, Strides, Serum and Glenmark are running clinical trials at advanced stages to test a drug and a vaccine for COVID patients. This is the kind of opportunity offering huge potential for Indian pharma.
• The shift from China manufacturing to India manufacturing is happening in a number of industries and foremost among them is Pharma. That story could play out for the next decade; opening up a huge potential for Indian pharma.
• The API segment is expanding capacity to deal with the needs of the post-COVID world. Most healthcare focused PE funds are betting on this trend in a big way as it is likely to boost incomes by nearly $3.5 billion.
APIs and CRAMS appear to be the low hanging fruits for global VC and PE segment. With technology and ecommerce getting increasingly saturated, this could offer the next big opportunity.