PE led M&A activity in India Pharma

The deleveraging cycle, new govt, booming market. These are some of the ingredients for increased M&A activity. This time it seems to be led by Private Equity consortia.

Corporate India is in the middle of a "deleveraging cycle" coupled with elections. This is the time companies that borrow banks return the money. They do this to prepare for new economic policies and interest rates which the new government of the day will announce in the interim budget.

An impacted sector is that of private capital. Coincidentally, Private Equity (PE) companies have entered into the 5th year of certain key deals. This means that they are looking for exits and profit booking by selling their stake through the company's IPO or through sale to other financial institutions and PE companies. 

Two such pharma companies are Bharat Serums and Vaccines (BSV) and JB Chemicals and Pharmaceuticals  Ltd. (JBCPL). Both JB and BSV coming on the block is part of the exit cycle for PE investors. However I don’t think this is only because they have completed the typical gestation of 4-5 years. It is also likely due to the position each of these companies enjoys in their respective operating markets. 

JB has built a formidable CDMO business and their network is large enough to be considered favourably by both domestic and international companies. BSV is building (small) positions in the vaccines, hormones, biosimilars and OTC businesses as a cost-effective producer in a commercially attractive market. The two companies neatly complement the “Make In India” narrative.

Thus arises the question of potential suitors. Will we see companies like Dr Reddy’s, Torrent and Mankind? Or would we see PE/consortia such as Carlyle, KKR and/or Blackstone?

I think the objectives would be different for domestic suitors vs PE companies. While domestic companies would look at the synergy that JB or BSV portfolios offer to their own product spread, they will also consider presence in market segments which can offer them opportunities to create a competitive advantage. 

So an alignment with their strategy and a potential boost to it would be top most for domestic suitors. For PE firms, the objective would be quite inorganic. They may evaluate potential tie-ups with other companies in their portfolio, quick acquisitions to strengthen core businesses, and conversely sell-offs for non-core businesses. 

Something that took market observers by surprise are valuation expectations – 25-30 times EBITDA for JB and over $2bn for BSV. Is that a bit too pricey or justified?

The expectations are definitely surprising but since the details of the valuation sheets aren’t publicly available, it is tough to comment on its validity.

BSV has moderate product concentration and acquired term debt (and servicing costs) due to the TTK acquisition. While they maintained revenue velocity, their margins are currently under pressure further accentuated by price controls covering a large part (40%+) of the portfolio.

It isn’t a competiton, but I think JB has an edge due to the massive increase in capabilities through acquisitions and expansion makes it a good target. With MNCs and PE-backed biotechs looking to bring down prices of new products like cell and gene therapies there may be a need to develop specialised manufacturing hubs in EMs specifically Asia. With the China+1 strategy gaining more traction, India becomes a more viable alternative and JB is very well positioned here. 

Overall, such activity augurs well for Indian Pharma where value is being created through asset creation and then reallocation into organisations and structures which are best poised to leverage them and unlock value. That said, one hopes fervently that at the end of the day, the value is realised by the patients and the citizens of India.