That means pharma manufacturing systems with specific themes, in small batches, with stable margins that have long-term commercial potential. So says Satish Chander, partner with venture capital entity True North.
An example is Texas Pacific Group's acquisition of a 40 per cent stake in Sai Lifesciences for Rs 900 crore. Sai offers contract manufacturing and formulation development, among other services.
In addition to these changes, there is the US sector regulator, the Food and Drug Administration. It has got more funding than ever before and its inspections are becoming stricter. One result is the growing number of its adverse observations for Indian companies.
Prashant Kumar, director at KKR India, says: “Certain branded formulations and speciality pharmas are in our focus area, as they will be relevant even tomorrow.”
The key is global competitive cost positioning. There was price erosion in the US of 10 per cent and 12 per cent, respectively, in the past two years. This cascaded on to current and future margin sustainability. “Margins for business in Indian API, for example, has improved because of greater volume growth and stable pricing,” Kumar adds.
Iqbal Khan, partner at law firm Shardul Amarchand Mangaldas & Co, points to international politics and how it is benefiting our firms. “As US regulators investigate claims of price fixing, trade tension between China and the US has been good for Indian manufacturers,” he says.
Is there interest in biosimilars, touted as the channel to dominate pharma tomorrow? Biosimilars are not a cheap endeavour. The range is between $50 and $150 million for one molecule. Big numbers for any balance sheet and a target that would lead any investor to take a minority stake, not a controlling one.
In contrast, buying a significant stake for some $30 million in a company like Solara Active Pharma Sciences is a faster route to winning commercials for investors, say analysts. It makes several ingredients that, for example, would include ibuprofen under the NSAIDS (non-steroidal anti-inflammatory drugs) category.
More, for private equity investors, getting into biosimilars also calls for complex funding mechanisms.
Kumar adds that of the niche areas getting interest, branded formulations trade at the highest multiples because of their diversified customer base, sustainable margins and outsourced production.
Deal makers suggest the road ahead is exciting. Atul Mehra managing director for investment banking at JM Financial, says the historical trend has been around select capital market deals, acquisitions abroad, domestic branded portfolio acquisitions, sale of assets and raising of growth capital. “The trend is expected to shift towards buyouts, consolidation, exits for investors, acquisition of stressed assets and select overseas acquisitions.”
While the pharma shift is, for now, in these areas, expect more change in the middle and longer term for medicine. “Ninety per cent of chemotherapy will be obsolete in five years and the pace of findings in immuno-oncology is both explosive and transformational,” says Kiran Mazumdar-Shaw, chairperson of Biocon. “Gene editing technologies to change previously untreatable genetic disorders, and stem cells and regenerative medicine are other frontiers. Many surgeries will not be required in the years ahead.”