Fuelled by an ‘Atmanirbhar’ push and growing preference for India-made pharmaceutical raw materials over Chinese, the Active Pharmaceutical Ingredient (API) sector is in the spotlight for mergers and acquisitions (M&A).

Attractive valuations, bright future prospects and certified plants make the Indian API sector attractive for Indian and global investors.

Sector observers revealed that several API players are planning a complete exit by stake sale. Two such Hyderabad and Chennai-based API makers are scouting for investors with valuations of approximately ₹1,500-2,000 crore each. The interested investors include Private Equity (PE) groups, chemical players and integrated pharmaceutical companies who look for APIs that are crucial in their formulations. Global majors such as True North Capital, Carlyle, Advent International have already spiced up the pan.

For instance, Bengaluru-based RL Fine Chem is said to be in talks with investors, including the Asia-focussed PE Fund, PAG to sell its 100 per cent equity and monetise API capabilities. Its three manufacturing facilities - two with USFDA certification - with annual turnover of ₹350 crore, makes it an attractive buy for those interested to tap regulated markets like the US. The company eyes 10-12 times the EBITDA valuations. A company source told BusinessLine , that the investors prefer entire holding in the company, hence the promoters will make a complete exit post deal, which is estimated at approximately ₹1000-1200 crore.

Rising valuations

The valuations for API, M&A has gone up from what was earlier at 6-8 times the EBITDA value to about 10-12 times. Formulations valuations ranges between 15-18 times the EBITDA.

“The valuations have gone up as investors are getting competitive to pick stakes in API companies. Second, structural issues such as Chinese supply-chain disruptions and geopolitical tensions have prompted global pharma players to consider India to hedge their operations. Also, major pharma players are trying to be self-sufficient on critical API for manufacturing,” said Ashesh Shah of Trans-Continental Venture Fund (TCVF), adding that return-on-capital in API wasn’t very attractive due to the low-margin commodity products. But now the margins have improved.

Apart from the market and the structural factors, a government push for the sector has further lifted the prospects for API players. “Government schemes for healthcare covering the bottom-of-the-pyramid has yielded a composite impact on the pharmaceutical sector. Earlier API was considered the poor cousin of Indian formulations industry. But the last 12-18 months has seen a sudden reversal of fortunes for API entrepreneurs,” said Sanjeev Shah, a chartered accountant and valuation expert.

The API companies get about half of their revenue from exports. Acquiring an API company that has plants with certifications such as WHO-GMP, USFDA, Health Canada, European Medicines Agency among others gives immediate access to regulated markets.

“Setting up an API facility is a complex procedure requiring multiple environmental clearances, approvals and public hearings (if set up outside demarcated industrial estate). Time required to start a new plant is two to three years. But looking at the current demand scenario, no investor would want to let go of this period,” said Bhavesh Upadhyay, a pharma sector expert, adding that the next 15 years appear promising for API space in India.

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