Private Equity’s Role in Indian SME Pharma Sector

For Every entity to survive and grow in the competitive environment in today’s Scenario is capital for growth of organization.

Capital is necessary for every organization to survive and expand its organic, inorganic and exponential business growth. Conventional methods of raising large capital involves Debt and Equity through retail Investors. Both the methods of raising finance has their own drawbacks like Debt involves high risk as fix amount has to be paid even if organization earns no profit or when the payback period of project is longer.

Whereas raising Finance from retail investors involves a lot of compliances of stock exchanges to be followed, which puts a large strain on administration of such business. In such a dilemma Private Equity/HNI (i.e. High Net worth Investors) emerges as an alternative for raising finance for the business entities, It involves raising equity from Institutional investors and Accredited investors, who have abundance of capital and are willing to invest in the organization considering its future growth. Raising finance from such Investors would not comply organization to be listed on any Stock Exchange and also it would not be in form of debt which reduces entity’s exposure to risk.One of major industries which attract such investors is Pharmaceutical Industry. The Indian pharmaceutical industry is the world’s 3rd largest by volume and 14th largest in terms of value. India is largest provider of generic drugs globally, Indian Pharma supplies over 50% of global demand of vaccines. Serum Institute of India (SII) is largest vaccine manufacturer in the world. All these features places Indian pharma companies as one of highly attractive investment opportunities.

Ease of doing business has given impetus to production on India and even the worldwide scenario is favourable for Indian Pharmaceutical Industry.

The COVID-19 Pandemic has created a necessity of needed health infrastructure in the country and rising health awareness among people is creating a high demand for medicines and other pharma products. Also as Indian Pharma companies are largest generic drug producers, these generic drugs are exported to developing economies in Africa and other nations as the cost at which such drugs are provided are much cheaper than actual patented drugs.

THE FUTURE BELONGS TO BUSINESSES THAT CAN EVOLVE

Experts believe that resilience and robustness are key elements for the survival of businesses in a constantly changing environment.For the Inspection of quality standards of Indian Pharma drugs, tight scrutiny was conducted by US Food and Drug Administration (USFDA) since 2009. This has played a major role in pushing the industry to continuously invest in upgrading quality standards on US generics compliance to emerge as a ‘high quality reliable’ supplier of medicines to the world.Gujarat leads India in pharmaceuticals and enjoys the share between 35% and 46% of the national share in pharmaceutical production over the last two decades. Ahmedabad and Vadodara are leaders in the production of generics while Ankleshwar and Vapi produce much of India’s bulk drugs. Major Pharma giants like Sun Pharma, Zydus, Cadila and Torrent Pharma have their operations in Gujarat. Also, Gujarat is home to a large SME/MSME sector in Pharmaceutical Industry. Due to contribution of all the players Gujarat accounts for about 40% of all Pharmaceutical production of country.

Gujarat is preferred by many pharma companies due to various factors like having a huge coastline providing connectivity to western countries, better infrastructure for pharma sector and schemes/incentives of government making Gujarat a very attractive option for pharma companies to start their operations.

In the next decade, it is expected for Indian pharma industry to grow at a compounded annual growth rate (CAGR) of 12% to reach at US$130 Bn by 2030 from US$41.7 Bn in 2020. Though the pharmaceutical industry has grown at a CAGR of approx. 13% over the two decades, in the last decade, the CAGR has been 8.5% and it has currently been 6.2% over the past five years. This growth shall be driven by growing domestic market and emerging foreign markets for exports.

With increased pricing pressure and increased competition in the generic drugs the current portfolio of products is expected to further extend this divide. While the global formulations trade value is about US$652 billion (2019), India’s share of exports in the global trade was only about 2.5%. The global pharmaceutical trade is expected to reach a size of US$1-1.3 trillion by 2030, the ambition is to garner a global share of 6-7% by value to attain a size of US$73 billion.

For, Industry to reach its full potential and achieve its set targets it requires initiative and contribution of all the stakeholders. The Entrepreneurs are considered driving force for growth of any industry. The Entrepreneurs are backed by the Private equity investors who believe in vision of such person and provide him capital to expand the operations of business. The Private investors have emerged as important source of capital for the industry. Private Equity (PE)/Venture Capital (VC) investments in pharmaceutical companies have grown by more than 3.5 times in 2020 and crossed $1 billion to touch $1.69 billion during January to September, 2020.

The Pharmaceutical industry enjoys great respect among private investors as it provides the investors good exits. This Confidence of investors/Fund managers helps the pharmaceutical sector to raise funds from various Private Equity investors Some of the major deals reported in 2020 include

1. Carlyle’s $490 million investment in Piramal Phara

2. KKR’s $414 million investment in JB Chemicals

3. Carlyle’s $210 million investment in SeQuent Scientific

4. Chrys Capital’s $132 million investment in Intas Pharmaceuticals

5. Advent International’s $128 million in RA Chem Pharma.

It can be observed that private investors are investing heavily in pharma sector considering the growth prospects and also the reputation of pharma sector to provide better exits for private investors’ boosts confidence leading to mutual benefit of investors and the industry.However, there has always been a conception that only giants of industry are able to raise funds from private equity investors. Recent developments in pharma sector show that even MSME’s/SME’s having a clear vision and a sustainable business plan are able to raise investments through private investors which would act as fuel in growth of the organization on a large scale globally. Also, Pharma industry requires a high Capital Expenditure and has a lot of costs which have a very high gestation period like Patent registration, Research and Development (R&D) costs, Marketing costs, Product registration costs in foreign/Local markets (i.e. Costs incurred to obtain approval from drug regulator of the market stating that the drugs fulfill all the criteria’s to release that in such market. E.g. USFDA in USA or DCGI in India). These costs have a very high gestation period (i.e. the time period of recovery of the costs is generally high and have to be amortized periodically). In a scenario involving such high investments raising funds through debt Raises Company’s exposure to risk as very high amount of finance cost has to be incurred even before/at initial stages of operations of business.

This shows that method of raising finance is an important consideration in deriving organization’s sustainability plan. This can be explained by following table.

Turnover CapexRequired Method of raising finance
Upto 50crore Upto 10crores Debt fromBank/FinancialInstitutions/SIDBI
Between50 crore to100 crore Between10 Crores to 30crores Partial debt andequity from AngelInvestors/HNI investors
Above100crore Above 30crores Partial Debt frombanks and equityfrom PrivateEquity investors.

However the suggestions of raising finance provided above is illustrative. Company/organization may formulate a fund raising plan meeting its requirements. Considering the above situation as the industry requires high capital expenditure and the costs incurred for organic, inorganic and exponential business growth which have a longer payback period, in such situations debt is not the best alternative for the business as it requires fixed payments even in case of inadequate profit, So it is better for organization to diversify its equity holdings among Private Equity/HNI to achieve organic, inorganic or exponential business growth.

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