Big Indian pharmaceutical companies have built up a war chest close to ₹30,000 crore ($3.6 billion), amassing dry powder for acquisitions to get entry to new markets, fill gaps in their portfolio and move up the value chain.

Last week, Mankind Pharma approved raising ₹7,500 crore and increased its borrowing limit to ₹12,500 crore to prepare for ‘big and small acquisition’ opportunities when they presented themselves. It is reportedly one of the contenders for buying Bharat Serums and Vaccines. Cipla’s management said in its earnings call that it was willing to consider large acquisitions in India that would fill gaps in its therapy segment and consolidate its leadership position. In the US, it is looking for product-specific opportunities.

The cash surplus with pharma companies has been consistently rising from FY21 onwards to reach the current figure of around ₹28,100 crore or 15 per cent of the capital employed, according to data by Ambit Capital Research.

Gaining market share

The key drivers for acquisitions are to consolidatine their position and gain market share in the Indian market, where margins are high and generate good cash flows, while overseas acquisitions are for market access, product capabilities, and specialty products.

“There are a couple of large, big-bang M&A targets that are currently in the market after a gap of many years. They are attracting significant interest from pharma companies. In general, on a steady state basis, pharma companies have been taking a strategic approach with small, niche buys to fill portfolio white spaces or to gain select market access,” said Anshul Gupta, Managing Director and Head, Healthcare Investment Banking, Avendus Capital.

The Indian pharmaceutical sector is largely a generic market and with the low barriers to entry, there is always the threat of competition catching up. Organic growth has its limitations; therefore, moving up the value chain is the other option.

“Indian companies have always been keen on M&A in order to move up the product value chain to stay ahead of competition in generics. This involves moving from simple to more complex generic products as well as areas such as biosimilars and specialty. Doing all of these internally is tough,” said Prashant Nair, Analyst, Ambit Capital.

“It’s the need to keep evolving and move up the value chain, which is the primary driver of the M&A, not so much scale or making up for lack of volumes. In the past companies did buy for scale, but of late companies are very happy with organic growth and looking at acquisitions to add capabilities,” he added.

Healthcare mergers

In 2023, there were over 30 tie-ups, licensing agreements, partnerships and marketing collaborations in the sector. Mergers and acquisitions in the sector saw a 17 per cent fall in deal value and a 5 per cent fall in deal volumes, according to Deloitte. The share of pure pharma deals fell to 25 per cent from 56 per cent a year ago due to a gradual shift from acquiring full-fledged businesses by strategic players to selecting specific drug portfolios. The focus has shifted to boosting the core portfolio from diversification.  A notable deal was in September when Nirma announced buying a 75 per cent stake in Glenmark Lifesciences for $680 million.

 In the first quarter of 2024, the sector saw 24 M&A deals for a total value of $456.3 million, according to GlobalData Deals Database. One of the biggest deals in the quarter was the merger of Suven Pharmaceuticals with Cohance Lifesciences to create a combination that will involve  contract drug production, specialty chemicals, and API manufacturing.

The pace of deals is seen hastening. “Now, with the kind of cash that most companies have at their disposal, they can be more aggressive. Buy assets rather than just look for licensing deals or tie-ups. As long as they have adequate cashflow, there will be more inclination to buy assets,” Nair said.

Gupta pointed out an increasing pharma interest in diversifying into adjacencies such as point-of-care diagnostics and medical devices, which leverage pharma company’s strengths in doctor, hospital, or clinician touch points.