This as the government looks to push local manufacturing of pharmaceutical ingredients, making India an alternative supplier to global drug makers hit by factory shutdowns in China.
API is the raw material that gives any medicine its therapeutic effect.
“We are already seeing a disruption in the pharma market as many countries, including India, are taking active steps to reduce their dependence on China, the largest manufacturer of APIs," said Amit Varma, managing partner and co-founder of Quadria Capital, one of Asia's largest healthcare PE firms.
"So, we are most likely to see a rise in PE investments in the API space in India," Varma added.
Indian pharma market imports nearly 70% of its bulk drugs and intermediaries from China, which caused most generic drug makers in the country to suffer raw material shortage due to covid-19. As a result, the Indian government announced a ₹140-billion fund in March to set up three drug manufacturing hubs, while identifying 53 key APIs, including paracetamol and antibiotics, penicillin and ciprofloxacin, whose output will be boosted on priority.
“Indian bulk drug manufacturers could grow income by $3.3 billion if they expand capacity and global supply as the virus outbreak disrupts China’s pharma sector," Mia He and Jamie Maarten, analysts with Bloomberg Intelligence, wrote in a 16 March note.
This also spurred PE interest for the Indian pharmaceutical industry as investors started looking to acquire stakes in large API manufacturers in India.
Recently, several pharma companies including Granules India and JB Chemicals have seen investor interest from global PE majors. On Friday, PE firm Carlyle announced that it will acquire a 74% stake in animal health focused API and formulations maker, SeQuent Scientific, for Rs1,580 crore.
“In the current market, Indian pharma companies are expected to do well due to their scale, cost advantage, and a preference for increased sourcing from India. Most of the investors, therefore, are interested in API manufacturers, domestic formulations businesses and drug makers that specialise in acute chronic diseases," said Nipun Goel, head of investment banking at IIFL.
While pharma companies see growing interest from PE investors, the broader life-sciences space is also likely to witness higher investor keenness due to lower public health spends in India.
“The covid-19 crisis has revealed wide gaps in the Indian public health system, more than ever before. The massive healthcare needs of such a large population in the country cannot be solely funded by the government, and therefore, private equity firms will be encouraged to invest across healthcare infrastructure, medicines, services and education," said Varma.
“The deal flow in the healthcare and pharma sector has already increased by 30-40% despite the covid-19 situation. I expect investments to also grow in-line with that, as investors are seeing a huge potential in the sector owing to the largely unmet medical needs of the population," he added.
Despite a slowing economy and the covid-19 disruptions, there were 27 deals in the pharma and healthcare sector worth $376 million during January-April, compared to 20 deals worth $682 million and 18 deals worth $855 million in the corresponding period in 2018 and 2019, according to data from EY.
Valuations too are likely to moderate in the current environment, making the sector more attractive to PE funds.
“Traditionally, the valuations in the Indian healthcare sector have been incredibly rich due to low availability of quality assets. But in a biased market like this one, where companies are facing cash flow challenges and listed players are facing stock price corrections, the valuations are likely to moderate further," said Deepesh Garg, managing director, o3 Capital Advisors.