PE majors TPG, Temasek planning investments in Indian API manufacturers

Private equity (PE) majors TPG and Temasek are planning investments in active pharmaceutical ingredient (API) manufacturers in India to capitalise on supply disruptions from China. The investment interest comes as Indian drugmakers are focusing on specialty products, while relying extensively on Chinese imports for basic ingredients and other raw materials used in medicines. 

A crackdown on Chinese manufacturers over pollution has led to supply disruptions in the global market and increase in raw material prices. This is the opportunity PE firms are looking to tap into.

“Earlier this we year, we made a small investment in Solara Active Pharma (an API manufacturer) and we are actively looking for more investments in the space,” said Mitesh Daga, managing director of TPG Capital Asia. TPG’s first investment in India was in Matrix Laboratories, an API manufacturer, in 2004. It exited the investment two years later. 

Last year it acquired a significant minority stake in Sai Life Sciences, which provides drug discovery and manufacturing services for innovator pharmaceutical companies. Daga reasoned that while crisis in China presented opportunities for Indian API makers, other factors like premium for high quality manufacturing will make investment in the segment attractive. He added that pharmaceutical companies overseas, too, were looking to derisk their API supplies and some of it could move to India in the next few years.

Singapore-headquartered investment company Temasek, too, felt the time was opportune for investing in API players in India. Nishant Chandra, director, Temasek Holdings, said it was open to investing in bulk drug players here. 

“We are looking at investing in API makers and contract development and manufacturing organisations in India. The supply disruptions from China have created opportunities in the global market, and prices too have gone up. We are open to picking up controlling stake or equity in any suitable company in this space,” he said. Chandra added he thought this growth was sustainable and not a short-term opportunity. 

In 2018-19, leading formulation makers in India saw double-digit growth in their API businesses as they cashed in on the opportunity created by shortage in supplies from China. Analysts felt most global formulation makers were now looking at diversifying their source of raw material, apart from China, to derisk their production. 

Industry insiders said Indian API makers have focused on value-added APIs for many decades and have since moved up the value chain. They supply to leading innovator companies as well as generic medicine makers the world over. 

“Due to regulatory hurdles in the bulk drug space, owing to tight pollution control norms, the production capacity increase was closely monitored by the government. When you cannot increase capacity at will, it is obvious you focus on high value products,” explained an industry veteran. He added this led to India’s higher dependence on China for low-end bulk drugs, key starting material, and intermediaries for most of the medicines made here. 

Jayant Tagore, owner of Hyderabad-based Synthokem Labs, an API maker, said that for critical drugs like metformin (diabetes medicine), the dependence on China for the raw material could halve if API supplies from China stopped. 

Around 67 per cent of India’s $3.6 billion imports of bulk drugs is from China. 

A KPMG-Confederation of Indian Industry paper of 2017 suggested the government help local manufacturers by creating API clusters, providing low-cost utilities, and financial incentives, among others.

Over-dependence on API imports has been dubbed a health security risk and a planned audit of Chinese facilities has not really taken off, rue drug companies.

Yet, Indian manufacturers continue to source their raw materials and bulk drugs from China as it is more convenient and cheaper to import than manufacture locally.