The Ranbaxy buy out by Daiichi Sankyo has not surprised private equity (PE) companies. It has increasingly been seen in 2008 that PE players are shying away from funding startups and early stage companies engaged in drug discovery and new drug delivery systems.
Instead, they are betting their money on consumer-oriented businesses in the Indian pharmaceutical and healthcare sectors. Such businesses garnered $450 million worth of PE investments. So do not be surprised on your visit to a multi-specialty hospital or the medical retail chain outlet located in your city, and finding out that it is a PE-funded facility. Of late, Indian companies, which have a direct interface with the consumer, have been getting attention from PE players including ICICI Ventures, ChrysCapital, IFC, Apax Partners. Not surprising, health and wellness centres, spas, ayurvedic and herbal skin, slimming and beauty centres are finding favours with them.
Multi-specialty hospitals chains such as Apollo Hospitals, Max Healthcare and Fortis Healthcare have been the key beneficiaries of this trend in recent times. Companies with strong domestic sales such as Mankind Pharma, in which ChrysCapital invested $25 million, are on their wish-list. Also, contract research organisations (CRO) like Radiant Research and SIRO Clinpharm have benefited from the PE players? generosity.
Explaining the change in mindset of the PE players, Nitin Deshmukh, CEO, Kotak Private Equity, says, ?Investments are happening in more established business models because these have profitable cash flows and there are lower gestation periods on scale up. Startups and early stage companies in drug discovery, new drug delivery systems, bio-therapeutic agents, etc have negative cash flows for long periods. Hence, PE players are lukewarm to them.?
Evolvence India is slated to make its first investment of the year in a mid-size Indian generic drugs company later this month. In the past too, players like ICICI Ventures, ChrysCapital, IFC, Apax Partners, Kotak Private Equity, JP Morgan Private Equity Fund, American International Group, among others, have placed their investments in pharmacy retail chains, hospitals and clinical research and medical devices manufacturing firms.
Investment climate is good for Indian pharma and healthcare sectors, says Sanjiv Kaul, managing director, ChrysCapital. ?Indian companies are becoming aggressive on the domestic and global front and they need capital as well as business counsel. PE funds are looking for returns, which Indian companies can provide to them,? he adds. A major gain that the PE players seek from their investments is in the form of capital gains, arising from the increased valuations of the investee companies over a period of three to five years. PE players make their returns by divesting their investments at significant premiums over their initial investments to another investor or in the capital markets at a later point of time.
The investee companies make use of expert advice of the PE players to streamline their financial structure and gain financial credibility among the investor community before going for an IPO. In short, there is value created for both the PE player and the investee companies.
