Indian API segment sees PE, strategic inflow nearly doubling in 2021

India’s active pharmaceutical ingredients (API) space is now a sought-after investment destination for global bulge-bracket investors and private equity managers, with the pandemic reshaping the sector’s fortunes and boosting valuations.

The API sector has seen a three-fold increase in investments in 2021 compared with a year ago.

Three private equity– led investment platforms have been created specifically targeting the API space, while at least half a dozen transactions are in various stages of negotiations, according to bankers and fund managers.

These include Carlyle Group’s $300-million platform with former Mylan India CEO Hari Babu, Advent’s $400-million platform with RA Chem and Hong Asia-focused PE firm PAG’s $200- million platform with Samara Capital and CX Partners.

M&A and PE transactions in API space more than doubled during 2021 to $795 million compared with $293 million in 2020 and just $30 million in 2019, according to data compiled by EY.

“There are macro and micro tailwinds driving investor and strategic interest in Indian API assets and businesses in the last 24 months,” said Rahul Sakia, head of M&A & Strategic Alliances at Rising Pharmaceuticals, which recently concluded a strategic transaction with US-based HIG Capital.

“Realization and intent do not create capacities over time – the demand / supply mismatch resulted in increase in API prices, sharp spike in valuation in API businesses and M&A interest – both strategic & Private Equity,” he said.

“India began its journey in becoming a key supply hub in the global pharmaceutical ecosystem during the 1970s with a strong bulk drug industry as its backbone. Over time, the industry advanced toward more value-added formulations – branded generics for the domestic market, generics for the regulated markets and semi regulated markets, and for some the pursuit of New Chemical Entities (NCE) – shifted focus away from the API base. As new competitors specifically from China came up the ranks, it resulted in India being dependent on imports for API and KSM (Key Starting Materials) excipients.”

“Several of the buyout shops, which already have platforms in the API space, would continue to be on the lookout for bolt-on acquisitions. In addition, there is significant new dry powder waiting/available to be deployed,” said Subhakanta Bal, Managing Director, Rothschild & Co.

Also, there seems to be increased demand from customers for integrated service offerings, which would further drive consolidators to fill gaps in service offerings through acquisitions. API assets with significant exposure to regulated markets, strong compliance track record and/or presence in high growth/high entry barrier segments will continue to witness high levels of interest from financial sponsors as well as corporate consolidators, he added.

There are multiple transactions — each valued above Rs 1,000 crore – in the works as the sector dynamics are rewritten, sources said.

Venkata Narayana Active Ingredients, an erstwhile Shasun promoter firm with a top line of Rs 300 crore, is in talks with PAG, while Hyderabad-based Lee Pharma promoted by Venkat Reddy, a former top executive at Dr Reddy’s, is looking to dilute a significant minority stake. Bangalore-based RL Finechem, controlled by MAPE Advisory Group and co-founded by ex-Merrill Lynch bankers Ramaprasad and Jacob Mathew, is also exploring an option to sell the firm. The company has a top line of Rs 350 crore with an EBITDA of Rs 100 crore.

“Manufacturing outsourcing is increasing as global pharmaceutical companies focus on their core R&D and marketing capabilities and lean on the strength and scale of focused manufacturers for supply. Within this trend, outsourcing to Asia has been increasing driven by cost advantage and gradual competency buildup in the region,” said Satish Chander, partner at domestic PE firm True North. “Chinese players’ reliability is getting impacted – hence Indian players are important from a de-risking perspective. Demand for Indian players has further increased since the pandemic breakout as global pharma companies balance their global supply chain away from China to reduce risk, Chander added.

Meanwhile, API constitutes more than one-third of the overall M&A activity in the pharma space in 2021, according to EY. The pharma sector has seen $2.57 billion worth of transactions in 2021 (so far) compared with $2.86 billion in 2020, the data showed.

“The pharma sector continues to see strong M&A and PE deal activity. Especially in the API space, factors such as development of an alternative for China, backward integration of the supply chain and emergence of PE backed API platforms are driving the activity,” said Bharat Bakhshi, Investment Banking Partner – Pharma, EY.

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