Although M&A outlook remains bright in India's pharma and healthcare sectors, the country is not immune to the global developments around the sector. The US government’s recent measures as part of its budget announcements to reduce the prices of drugs, is likely to have an impact on the revenue of Indian entities exporting to or dependent on the US market. Similarly, the competition is up for Indian drug exporters from other emerging markets as well, writes M&A experts Ravi Shah and Avani Dalal from Cyril Amarchand Mangaldas.
The Indian pharmaceutical, healthcare and biotech sector has been attracting increasing levels of investor interests. The sector has witnessed a remarkable spike in deal value in 2022, by touching $6.14 billion as against $3.69 billion during 2021.
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Interestingly, it is the large domestic companies doubling down on the Indian market that has backed these mergers and acquisition (M&A) activities. Some of the notable deals include Torrent Pharma’s buyout of the dermatology firm Curatio Healthcare and Mankind Pharma’s acquisition of Panacea’s domestic formulation brands. Private equity has also claimed a significant chunk of deal activity in 2022 including notable deals such as Abu Dhabi Investment Authority’s investment of $250 million (approx.) into Intas Pharmaceuticals.
Foreign investment into the pharmaceutical sector during the first six months of 2022 was $699 million as against $559 million recorded during the same period of 2021. Further, the Department of Pharmaceuticals approved 21 FDI proposals worth Rs 46.8 billion for brownfield pharmaceutical projects during the first nine months of 2022.
Key Regulatory and Policy Initiatives
The sector has witnessed important regulatory and policy initiatives in 2022. Of particular importance is the release of the New Drugs, Medical Devices and Cosmetics Bill (“DMC Bill”) in July 2022, which seeks to amend and consolidate the law relating to the import, manufacture, distribution and sale of drugs, medical devices and cosmetics into a single legislation, with an intention to update the pre-independence legislation of the Drugs and Cosmetics Act, 1940, and to meet the evolving needs, including, a proposal to regulate the ever growing space of e-pharmacies for the first time, new definition of ‘drugs’ and ‘medical devices’ placing them outside the purview of ‘drugs’, constitution of the Drugs, Medical Devices and Cosmetics Consultative Committee to ensure uniformity in administration across the county and new provisions around clinical trial management.
Foreign Exchange Regulations
With the notification of the new overseas investment (OI) regime in August 2022, the Ministry of Finance and Reserve Bank of India have significantly streamlined the regulations governing the outflow of foreign exchange and investments from India. The new regime may enable Indian entities with opportunities to acquire strategic assets overseas at an attractive valuation in an otherwise declining global economy due to inflation and war. The OI regime also permits more structuring flexibility for Indian entities to undertake an acquisition through their overseas subsidiary, for a bona fide business purpose. On the other hand, India’s Foreign Direct Investment (FDI) Policy for investment in the pharma and medical devices sector remains unchanged with FDI up to 74 percent under the automatic route into brownfield pharmaceutical and up to 100 percent under the automatic route permitted for greenfield pharmaceutical investments. Investments above 74 percent into brownfield pharmaceutical continue to require government approval. Further, FDI from an entity of a country sharing land border with India, or where the beneficial owner of an investment into India is situated in or is a citizen of any such country also continues to require prior government approval.
The Indian government has also undertaken several policy initiatives to boost the sector. Some notable initiatives include:
Way Forward: 2023 Outlook
The pharmaceutical and healthcare sector is expected to log a growth of 8-10% in the upcoming fiscal year. It is also anticipated that businesses will continue to reassess the risk of their dependencies on global supply chains and look for organic and inorganic opportunities in India to reduce their supply chain dependency on a single jurisdiction, given the COVID-19 pandemic and the more recent Russia-Ukraine war which has had a significant impact on the operations of the pharmaceutical companies internationally. Accordingly, 2023 may see more diverse deals across value chains, from manufacturing, R&D to product marketing and distribution. Private equity players are also expected to continue looking for attractive opportunities in the sector and also look for exit opportunities through secondary sale.
Companies with innovative capabilities, such as telehealth or innovation in medical devices space, are also attracting significant investor attention. It is expected that 2023 will see more capability-driven deals providing access to newer technologies as large pharma companies are looking to divest non-core assets and optimise their portfolio. However, volatile public markets and rising interest rates may put additional pressure on the ability of corporations and investors to undertake M&A.
FDI in the sector may also increase as several MNCs are looking at opportunities in emerging markets to provide growth. As a result, this will further boost M&A in the Indian pharmaceutical sector. The policy initiatives mentioned above are also intended to tackle issues such as lack of adequate infrastructure and logistics, concentrated supply chains and high cost of finance and lack of substantial tax or financial incentives available to set up domestic manufacturing.
India is however not immune to the global developments around the sector. The US government’s recent measures as part of its budget announcements to reduce the prices of drugs, is likely to have an impact on the revenue of Indian entities exporting to or dependent on the US market. Similarly, India also has strong competition from other emerging economies in the South-East Asian and Arab region to gain larger market share of API manufacturing where certain Chinese companies are also looking to form alliances. While these geo-political developments may impact the growth of Indian companies, it also creates an opportunity for the Indian companies to gain larger market share in the US as well as form manufacturing alliances in the South-East Asian and Arab region.
As India enters the ‘Amrit Kaal’, it is expected to remain one of the faster growing major economies in the world due to robust domestic demand. Deal activity is anticipated to increase with the pharmaceutical and healthcare sector continuing to be a promising sector for further investments in 2023. The role of professional advisors in this regulated sector in India will also play a significant part as Investors navigate through the legal, regulatory, financial and operational complexities involved in undertaking a M&A transaction in this sector.
—The authors, Ravi Shah, is Partner, and Avani Dalal, is Senior Associate, at law firm Cyril Amarchand Mangaldas. The views expressed are personal.
(Edited by : C H Unnikrishnan)
First Published: Mar 15, 2023 2:31 PM IST
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