Nikhil Puri, managing director of Ambit Corporate Finance, has served with some of the largest investment banks in the US like Arthur Andersen, Lehman Brothers and Bear Stearns. In his 12-year career, he has been instrumental in executing over 45 strategic and financing transactions in the life sciences sector. One of them was representing Betapharm of Germany in its sellout to Dr Reddy’s Laboratories. In an interview with PB Jayakumar, Puri examines the Indian merger and acquisition scenario, especially in the healthcare segment. Excerpts:
What is the mood in the US and among the investor community towards India as an investment destination?
The US economy is recovering with optimism and the general feeling is that the worst is over. The unemployment ratio is declining, savings of people have improved and lenders of home loans are more cautious and stringent. The general sentiment is that the overall situation is improving and my judgment is that it will be back to the pre-crash days in two-three years.
Companies across sectors look at India as an attractive destination in the long term due to its demographic strength, cost competitive skills and general optimism about future growth. But short-term prospects are not that bright. Stock prices have built in general optimism and fruits of future government policies. The ownership structure of most companies leaves very less free float as owners hold over 50-60 per cent.
Many investors burnt their fingers in the emerging markets by investing in small and mid-cap companies. foreign institutional investors now look at top 50 or top 100 large-cap companies for investment rather than investing in small and mid-cap firms. Real estate, infrastructure and traditional sectors like pharma and IT are of interest to investors.
There is a feeling that multinational drug companies are looking at India as an important location in their growth plans and are keen to acquire Indian companies. What is the situation?
It depends on company-specific strategies. India and China are difficult to ignore for any player. India has moved to product patents, has a huge middle class, its healthcare and insurance systems are improving and it has a good branded generics market. So, it is imperative for any large drug maker to consider India in its business plans. But there is no urgency for an immediate acquisition. The Daiichi-Ranbaxy deal offers a lot of optimism, but it does not mean that all multinational players will show urgency and buy the way Daiichi bought Ranbaxy.
For innovator companies like Pfizer or GSK, Indian generic companies are small considering their revenues. What value can they derive from acquiring an Indian company?
Generics have a huge market and many large companies have stated their interest in the business as it offers a cost-competitive alternative. For example, Pfizer could not sell the largest-selling drug, Lipitor, well in the German market, but the generic version of Sandoz did huge business in that country as the regulator there offered it as a therapeutic substitution. In Mexico, some drugs were selling at 60-70 per cent of the original price even after the expiry of the patent, but when generics came in, prices crashed. Companies such as Pfizer, Sanofi-aventis, Novartis and GSK are now seriously looking at generics business.
Do you think the multinational players will try to take strategic stakes in Indian drug companies as many family-run Indian drug makers are reluctant to sell even at good valuations?
No multinational drug company will be interested in a minority stake. When they do it, they will insist on a majority stake. According to my experience, multinationals are concerned about their reputation and will not compromise on that as the decision-makers there are answerable to their shareholders. Most multinational companies are cash-rich. Acquiring an Indian player for a few billions or a few hundred million dollars will not impact their balance sheets. But, if an Indian owner says that he is ready to sell for X amount, it does not mean that the buyer will immediately agree to pay. In case of most large drug makers, various internal committees have to give the go-ahead. The general feeling is that Indian assets are over-priced.
Will the domestic industry consolidate in the near future and more Indian players become subsidiaries of overseas players?
What I find is that most Indian entrepreneurs enjoy their business and are not in a hurry for a distress sale. If you look back, even mediocre Indian drug companies were growing at an average of 10-12 per cent in the past few years and expanding to new geographies. At some point in time, at least some of them will have to sit back and think whether they can sustain this growth momentum for the next five years. I think consolidation will happen in the domestic industry and more inbound mergers and acquisitions will happen. But it does not mean that floodgates will open.