Indian pharmaceutical sector is set to see both inbound and domestic integration, although the high valuation and regulatory uncertainty in the short term M & A activity hit. Local companies will also seek overseas procurement.
India’s fragmented pharmaceutical sector could witness further consolidation over the coming two years but high valuations could stymie deal-making in the short-term, believe industry watchers.
A spate of recent acquisitions in the Indian pharmaceutical sector has put the market into the spotlight with Illinois-headquartered Abbott Laboratories most recently acquiring Piramal Healthcare’s domestic drug formulation business for US$3.7 billion.
The industry is an attractive growth market with solid margins in generic drug making. However company stock valuations have gone through the roof, which could prevent further M&A over the coming months.
“Given the fragmented nature [of the industry], I think consolidation is inevitable,” said Aarthisundari Jayakumar, a pharmaceuticals analyst for Indian brokerage, Alchemy Capital.
“But currently valuation expectations are very high, with Abbott paying nearly 10 times revenue for Piramal’s domestic formulation business. Under such circumstances, we might see less consolidation in the near term.”
There are over 20,000 different players in the sector and the leading company by market share only has around 7% market share. The attention has now politicised the sector, with legislators considering imposing restrictions on foreign ownership, under the premise that further foreign consolidation could cause drug prices to rise.
But the view that more industry consolidation must happen appears to be universal.
“There’s a tremendous need for domestic and regional consolidation,” said Vijay Karwal, head of retail, consumer & healthcare, Asia for the Royal Bank of Scotland. “Asia needs to develop regional champions. There’s a political desire for the creation of strong domestic players.”
But with valuations so high, there is unlikely to be a bum rush. Instead foreign and domestic companies could wait for valuations to fall, or even begin their own domestic businesses.
“It's a growth market and it's easy to grow organically in this market. Brand creation might be a much cheaper exercise than to acquire a brand,” said Jayakumar.
RBS’ Karwal agrees, saying that it could take two to three years for domestic consolidation to start taking hold, although he sees better prospects for foreign acquirers.
“It would not surprise me if we see good size pharma M&A in India again this year but it’s more likely to be multinational companies making sizeable acquisitions,” he said.
“A lot of global pharma companies have not really made a dent in India to date and the only way they can do this is through the acquisition route,” added Nikhil Gholani, managing director of Indian brokerage, IDFC.
Outbound acquisitions by local pharmaceutical companies are also likely this year, although observers note that the difficult experiences some Indian companies faced after acquiring developed assets could make companies cautious.
“The developed markets acquisition experience has not been great for the Indian players,” said Karwal. “I don't expect to see much outbound into Europe or the US from Indian corporates except in cases where they could acquire a very specific skill-set or route to market.”
Piramal could well seek to acquire outside the pharma space due to the non-compete clause it has signed in the Indian market, believes Jayakumar. She adds that Lupin World could also buy offshore, and that it has been particularly vocal about seeking a strategic fit in Latin America and Japan.

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