The government’s decision to increase foreign direct investment (FDI) to 74% in existing pharmaceutical companies through the automatic route is expected to boost mergers and acquisitions (M&As) and private equity investments in the sector in future, said experts.
Allowing FDI beyond 74% will continue through the government approval route. Earlier, 100% FDI was permitted through the government approval route. The government has also allowed 100% FDI under the automatic route in greenfield pharma.
“Bringing clarity over ownership as well as removing uncertainty will definitely boost private equity investments in the pharma sector," said Pramod Kumar, managing director of Barclays Capital India. “FIPB (Foreign Investment Promotion Board) approvals normally take a lot of time as well as companies feel the uncertainty over whether the deal will be approved or not. So, changing the FDI in brownfield to 74% will bring a lot of PE investments in pharma and healthcare sector," Kumar said.
India’s pharmaceutical market may reach $20 billion this year and about $55 billion by 2020 from about $18 billion as of 2014, clocking a compounded annual growth rate (CAGR) of over 22%, according to a joint study by the Associated Chambers of Commerce & Industry of India (ASSOCHAM)-TechSci Research released in June.
“Keeping the cost of production low in India and with high pricing in the US, the margins Indian generic firms make are very high. Even the branded generics market in India has high margins. I believe there is a lot of synergy in cross border deals and with this FDI proposal, it will increase the number and size of deals," said Ameera Shah, managing director and chief executive officer, Metropolis Healthcare.
The pharmaceutical sector in India will register higher growth during the course of the next five years (22%) as compared to a CAGR of about 14% clocked by the sector during 2010-14, the report said.
Export of pharmaceutical products from India is likely to exceed the $14 billion mark this year and may reach about $20 billion by 2020, registering a CAGR of about 8%, according to the ASSOCHAM-TechSci Research study.
“This is a welcome change for global pharma players looking at establishing a presence in India but not looking for a 100% stake. Some foreign investors actually prefer having local partners, and this change will facilitate those deals," said Sameer Sah, associate partner, Khaitan & Co.
“The new FDI norms are steps in the right direction. They will stimulate more M&A and investment in CRAMS (Contract Research And Manufacturing Services). We need to now streamline regulations, particularly Drug Price Control Orders (DPCO)," said Kewal Handa, industry expert and former managing director of Pfizer India.
However, there was a noticeable decline in MNC pharma companies’ interest in the Indian domestic branded generics market last year, said EY annual M&A and PE report. This was visible in restrained inbound activity (10 deals worth $1.2 billion). “This can be attributed to various factors such as the strengthening of price control mechanisms, the increasing use of compulsory licensing, and the perception of an unfavourable regime for protection of intellectual property rights in India. However, foreign MNCs are still open to deals if they offer significant synergy opportunities," said the EY report.
Last year, US drug maker Mylan Inc. agreed to pay as much as $800 million to acquire women’s healthcare businesses from Mumbai-based Famy Care Ltd, while Recipharm AB said last October that it will acquire a majority stake in Nitin Lifesciences Ltd, an Indian sterile injectables contract manufacturer, for about $100 million.
Besides the pharmaceuticals sector, the healthcare services space also witnessed a lot of activity last year.
Malaysia’s IHH Healthcare Bhd, the second-largest hospital chain in the world by market value, acquired a majority stake in Hyderabad-based Ravindranath GE Medical Associates Pvt. Ltd for $200 million in August last year. In March 2015, IHH Healthcare had bought a 51% stake in another Hyderabad-based chain, Continental Hospitals Ltd, for $45.4 million. Singapore’s state-owned investment firm Temasek Holdings Pte Ltd acquired about 18% stake in Naresh Trehan-owned multi-specialty hospital Medanta for an undisclosed amount in January last year.
The year 2015 saw 18 private equity deals worth $792 million against 18 deals worth $422 million in 2014, according to Venture Intelligence data.