Private Equity Firms Chase India’s Pandemic-Resilient Healthcare Sector 

Overall, deal surged 326% so far year-on-year from $368 million, according to Venture Intelligence data. And it has already surpassed $1.43 billion worth of investments reported in entire 2019.

Among the top deals, Carlyle Group invested in Piramal Pharma, KKR & Co. bought a stake in JB Chemicals and Pharmaceuticals Ltd. and Carlyle also invested in SeQuent Scientific Ltd.

There are more than 10 ongoing deals in negotiation in the healthcare space with lion’s share of interest being in active pharmaceutical ingredient and contract development and manufacturing, Shreyance Shah, executive director, healthcare coverage, investment banking at Nomura, said.

According to Kewal Handa, former managing director at Pfizer India Ltd., the pharma sector has shown positive performance and profitability was not impacted during the pandemic. PE firms have seen and can still create more , Handa said, citing private equity investments in Mankind Pharma Ltd. and Intas Pharmaceuticals Ltd. that have returned fivefold gains. "Valuation will be definitely high for good growth and profitable companies.”

What's Driving PE Interest

The heightened interest in the sector comes when companies are keen to move part of their supply chain away from China. And active pharma ingredients and contract manufacturing have emerged as key focus areas.

"India has the advantage of low-cost of manufacturing, attractive margins, access to trained manpower including scientists, ability to boost returns through financial leverage,” Shah said. The stock market views healthcare as a defensive sector and the outperformance over the last nine months has provided impetus to deal activity, he said, adding that the interest in API and contract development and manufacturing will persist.

Granules India Ltd. has forecast an annual capex of Rs 400 crore for the next two fiscals citing demand tailwinds, not just for APIs but for formulation business. Divi's Laboratories Ltd., too, expects APIs to drive growth.

Biosimilars is another growth segment within the pharma industry, according to Nomura. The research firm expects it to play a larger role in the pharmaceutical sector globally in the next five years. Kiran Mazumdar-Shaw, chairperson of Biocon Ltd., too anticipates high growth for the sector in the medium term.

Private equity firms prefer the domestic pharma sector as there is less regulatory overhang, stable cash flows, branded business, ample availability of managerial talent and less financial leverage, multiple brokerages including Nomura have said. Private equity investors are interested in either new businesses (like animal healthcare) or those with domestic formulations business as bedrock, according to Nomura. Both offer growth potential.

Axis Capital sees deal and volumes rising even more in the remaining two months of the year. The of total PE-driven transactions could easily double or more from last year, Sandeep Gupta, managing director and head of private equity at Axis Capital, said. "Several opportunities such as Granules, Supriya Lifesciences, Blue Circle Organics, Anthem Biosciences etc. continue to be active in the market," he said, referring to potential investment options.

Utpal Oza, managing director and head of investment banking at Nomura, told BloombergQuint that the healthcare and pharma sector will gain from four key themes: Transition of ownership from promoters to an institution, Covid-19 impact and its geopolitical fallout, expensive innovation, and synergy between physical and new digital businesses.