From an international perspective, a Bain & Company report of April 2016 highlighted setting a new healthcare M&A record in the year 2015. During this year the total deal value was over 2.5 times higher than the average annual deal value of the previous decade. The report also mentioned that the Asia-Pacific Region grew in the same year by about 40 percent, fuelled by a number of activities in India and China.
Commenting on India, the Bain report specifically mentioned that during the year, the Private Equity (PE) investors prioritized their investments in the country, not just targeting the global demand for pharmaceuticals, but also based on rapid domestic demand growth.
More popular targets in India were tertiary care, specialty care and laboratories. This is vindicated by TPG’s investment of US$146 million for a minority stake in Manipal Health, which operates multi-specialty and teaching hospitals in the country. Similarly, The Carlyle Group made a minority investment in the pathology lab chain – Metropolis Healthcare. This trend is expected to continue in the coming years and would in all probability include pharma companies of various sizes, with high performance or with high future potential.
In this article, I shall focus only on generic pharma companies in India.
A changing need of due diligence:
Despite some major uncertainties in the generally thriving domestic generic pharma market, this sector has the potential and possibility to come under the radar of many PE investors during the coming years.
However, in this scenario, to embrace success with lucrative returns, I reckon, there is a changing need of due diligence to follow, before suitable pharma companies are appropriately targeted. Conventional pharma due diligence, however stringent it is, may not capture appropriately the high-impact, up and down sides of long term business sustainability for the desired return on investments.
The rationale:
Consideration of significant cost savings in the pharma value chain won’t be just enough, any longer, to tide over any unforeseen rapid downturn in many pharma company’s business performances in the country.
This is largely because, many pharma companies in India have been thriving, so far, taking full advantage of some major loopholes in the regulatory area, including clinical trial; ethical marketing strategy and practices; overall generic product portfolio selection; new generic product developments; besides many others.
The need of a changing format of pharma due diligence in India is largely prompted by this prevailing scenario, even in the midst of stellar success of some companies, and plenty of lush green shoots, as they appear to many.
The process of tightening the loose knots has commenced:
All these loose knots are expected to be tightened by the governments, sooner or later. In fact, while watching the intent of the Government and from some of its recent actions, it appears that the process has just commenced. Public and judicial pressure in these areas would also increasingly mount, with several related and major Public Interest Litigations (PIL) still remaining pending before the Supreme Court of India.
A few examples in this critical area:
Thus, for any successful PE investments, especially for relatively long term, alongside conventional areas of due diligence, several non-conventional, but high business impact areas, need to be effectively covered for the Indian generic pharma companies, in general. Following are just a few examples in this critical area:
- Business practices that the promoters personally believe in and practice
- Belief and practices of key company personnel
- Quality of regulatory approval
- Product portfolio scrutiny
- Marketing demand generation process and its long-term sustainability
- Ability to introduce high-tech formulations with differentiated value offerings
- Ability to come out with cost-effective manufacturing processes
- Are Independent Directors, if any, really ‘Independent’?
I shall now very briefly try to illustrate each of the above points..........
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