PE refuses to chew pharma pill

Indian drug firms' poor performance drives away investors.

Despite news of the private equity in the domestic healthcare and pharma industry touching almost Rs 40 crore in the first nine months of the year, PE firms are not exactly bullish about investing in the pharma industry alone.

In fact, a closer look at the investments reveals that a larger part of the money is being flown into healthcare delivery systems like hospital chains and not in pharma companies.

While the number of deals attracted by the life sciences sector amount to 6 per cent of the total, the cash inflow is merely 3 per cent of the total money invested.

Surprisingly, even though the Indian pharma industry has a lot of room for investment, PE investors are still wary of locking their money here with ChrysCapital and Kotak, which invested in Mankind Pharma and Intas Biopharmaceuticals, being a few exceptions.

Even so, of the Rs 30 crore that ChrysCapital has invested in the country, only about Rs 4 crore has been invested in the pharma sector.

Says Rajiv Shukla, executive director, Avendus Advisors, "Universally, public pharma has not performed well. Also, most Indian pharma companies are growing at a very slow pace. So, PE investors are cautious of investing here. And any partially successful company makes enough cashflow to finance itself."

But he believes that if the pharma industry wants to grow further, laterally and vertically, it must aim for a high growth rate.

Currently, the pharma industry witnesses a little over one PE deal a month. This figure needs to grow by almost 4 per cent a month for there to be accelerated growth in the sector.

Interestingly, even though the pharma sector is not perceived to be very risky, investors find it to be in its nascent stages of development.

"There are four value creators in a pharma company "" domestic sale, CRAMS, generic business and R&D," says Sanjeev Kaul, MD, ChrysCapital, and adds that the company takes all four factors and their risk and reward mechanisms into account before investing.

"We won't invest in a pharma company just because it plans to demerge its R&D as that is just a short-term opportunity for us," he says.

Though investors believe that there is a huge potential for value creation in the industry, they also assert that the level of preparedness of the pharma companies in the four value creators varies heavily.