Bulk drugs sector may soon see flurry of deals
India’s bulk drug makers are likely to see an unprecedented deals spree over the next three months, with at least six transactions worth more than $1 billion in final negotiations, three people aware of the developments said.
The transactions include the sale of controlling stakes in Hyderabad-based Nosch Labs for at least ₹2,000 crore and Bengaluru-based RL Finechem for ₹1,200-1,400 crore to buyout firms.
“In both RL Finechem and Nosch, private equity players including Advent, Carlyle and PAG have evinced a strong interest,” said one of the three people cited above. Nosch recorded revenue of around ₹750 crore and an operating profit of about ₹200 crore for this fiscal year. The company makes raw materials for drugs.
Chennai-based Malladi Drugs, too, is looking to sell its business for around ₹1,500 crore. The company recorded ₹500 crore worth of sales and ₹125 crore operating profit for the fiscal year.
Hyderabad-based drug ingredients maker Lee Pharma, too, is seeking around ₹1,500 crore from PE firms or be merged with a speciality chemicals firm after shelving its IPO plans. The company logged sales of ₹450 crore for the fiscal so far. Emails sent to the companies cited above did not elicit a response until press time. Spokespeople for Carlyle and PAG could not be reached immediately.
“ ₹8,500 crore worth of deals have already been closed this year so far. The ongoing financial year may close with a total deal value of over $2 billion,” said the head of investment banking at a large capital markets firm. The demand for homegrown bulk drug makers has shot up so much that at least three global private equity giants—Advent, Carlyle and PAG—have drawn a new strategy altogether to take controlling stakes in active pharmaceutical ingredient (API) companies.
“In fact, for the first time, private equity giants are setting up separate dedicated platforms aimed at taking over controlling stake in Indian bulk drug makers. Carlyle, Advent International, PAG, Blackstone and Chrys Capital are some of these PE firms. Even though China remains the biggest exporter of raw materials to Indian bulk drug firms, large companies from Western countries increasingly prefer India’s final certification on bulk drugs rather than Chinese certifications. This is the first time bulk-drug or API businesses are in so much demand, and if the trend continues, we may also see a major consolidation in the bulk drug manufacturing industry, with specialty chemical firms, too, coming forward to buy bulk drug manufacturing companies,” said the banker.
“Valuations, which used to be 6-8 times Ebitda, has now zoomed to 10-12X Ebitda. Most deals that have happened are at double-digit Ebitda valuations,” said this person. Ebitda stands for earnings before interest, taxes, depreciation, and amortization.
“Until 2020, hardly ₹1,500 crore worth of deals were happening in the bulk drug manufacturing industry. Now, the same industry will see more than $2 billion worth of deals in a year. The valuations of formulation companies are already high, and there is hardly any headroom for an M&A in that space. The latest bet is on the bulk drug manufacturing industry, which will grow at a CAGR of at least 20% over the next three years,” said an equity capital markets head of a large investment advisory firm.
Traditionally, the API segment of the pharma industry has been the less attractive cousin of the drug formulation industry. But, after the outbreak of the second wave of covid, India’s API business is suddenly seeing a reversal of fortunes as there is a significant uptick in market valuations for bulk drug businesses. The demand for bulk drug firms is increasing among public investors also. In the past six months, the IPO market has also seen a flurry of API firms getting listed, while no single formulation company has come to the market.
Glenmark spun off its API division and debuted on the bourses with a ₹1,500 crore IPO at about ₹8,000 crore valuation in July 2021.
Tatva Chintan launched a ₹500 crore IPO in mid-2021 and now has a market capitalization of over ₹5,000 crore. The stock price has doubled in three months post the IPO. Ami Organics went public with a ₹570 crore IPO last month.
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