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Funding Eases For Indian Drugmakers

Recovery of financial markets brings new sources of capital to India's pharmaceutical chemical sector

by Jean-François Tremblay
September 6, 2010 | A version of this story appeared in Volume 88, Issue 36

Credit: Arch Pharmalabs
A view of a clean room in a plant operated by Arch Pharmalabs, which is planning a stock offering this year.
Credit: Arch Pharmalabs
A view of a clean room in a plant operated by Arch Pharmalabs, which is planning a stock offering this year.

Against their rivals in the West, Indian drugmakers have competed on the basis of lower salaries and the low cost of building drug-manufacturing facilities in India. But lack of access to capital has often prevented Indian firms from putting in motion ambitious expansion plans.

New sources of cash are now becoming available. For the past year or so, it has become far easier than before for Indian drug producers to borrow from foreign banks. Moreover, the buoyancy of India’s stock markets is enabling several companies to plan initial public offerings. With the increased availability of funds, a new wave of Indian pharmaceutical producers is poised to emerge as stronger competitors to companies in the West.

“We plan to invest between $50 million and $100 million within the next three years,” says Smitesh Shah, chairman and managing director of Calyx Chemicals & Pharmaceuticals, a producer of active pharmaceutical ingredients (APIs) located in Mumbai’s Thane suburb. Calyx hopes to raise the funds via a stock market listing sometime during its current fiscal year, which ends in April 2011. It will use them to build facilities, make acquisitions, and fortify its capital base, Shah says.

Established Indian pharmaceutical firms—such as Piramal Healthcare, Dr. Reddy’s Laboratories, Cipla, Aurobindo Pharma, and Wockhardt—have been listed on stock markets in India and abroad for many years. Seven additional Indian firms will likely list for the first time within the next 18 months, says Navroz Mahudawala, director and founder of Candle Partners, a Mumbai-based investment bank for which the life sciences industry is a key sector.

It’s a good time to list in India, Mahudawala points out. “The stock markets have substantially recovered and are now only 12–14% below their all-time peak of 2007,” he says. “The valuations of the pharma sector have also appreciated.” Producers of APIs will account for most of the new listings, he expects, although makers of finished drugs will likely list as well.

There have been almost no initial stock offerings in the Indian pharmaceutical sector for several years. The financial crisis that began in late 2008 made it nearly impossible to even consider a public listing. In fact, obtaining any form of financing throughout 2009 “was extremely difficult,” Calyx’ Shah recalls.

Even before the 2008 crisis, the idea of listing on an Indian stock market was not particularly attractive, says Ajit A. Kamath, chairman and managing director of the custom API producer Arch Pharmalabs. Traditionally, he says, Indian drug stocks were not favored by investors and as a result traded at less than 10 times annual earnings per share.

But for the past year or so, Indian drug producers have had access to many other financing options. From international bankers, Shah says, it’s now possible for the best Indian drug firms to borrow at rates comparable to what their competitors in Europe are paying. International banks are offering Calyx and a few others interest rates of only 2% to 3% over the London Interbank Offered Rate, the rate at which major banks borrow U.S. dollars to meet their short-term liquidity needs. The 12-month LIBOR stood at a little more than 1% in August.

Indian banks offer loans to small and mid-sized drug producers at far less advantageous terms, with rates often exceeding 12% annually, Candle Partners’ Mahudawala says. Local bankers have a poor understanding of the pharmaceutical industry, he adds. They have trouble differentiating between the prospects of domestically focused Indian pharmaceutical producers and the opportunities available to firms that meet the regulatory requirements of the U.S. Food & Drug Administration or the European Medicines Agency, he says.

Easy access to debt financing from abroad is emerging at the same time that a stock market listing is becoming an attractive option. Over the past year and a half, Indian investors’ perception of drug stocks has improved to the point that pharmaceutical companies trade at multiples of 25 to 30, including companies that are only providers of contract development and manufacturing services, Arch’s Kamath says. “There has been a paradigm shift in the way that financial analysts look at pharma stocks in India,” he says. Arch itself is planning a public stock offering by November.

This change in perception is taking place because Indian pharmaceutical producers have a good story to tell investors. The Indian economy is humming—gross domestic product growth should exceed 8% this year—leading to a demand for drugs from Indians who in the past could not afford them. Beyond India, global demand is surging for low-cost generic drugs, which are the sweet spot for Indian makers of APIs and finished drugs.

Growth prospects for Indian producers of APIs are also far better than for their competitors in Europe. “We can tell investors that we will more than double our revenue within five years, but it’s not something that they can say in Europe because they’re generally not building new assets,” Calyx’ Shah observes. In light of these good prospects, investors in Indian companies are well aware of the potential gains they could reap if the firm is purchased by a foreign buyer, as has happened on several occasions in the past two years.

A stock offering can have numerous benefits for Indian drug companies. At Arch, the public listing will enable managers to provide an exit to private investors who have supported the firm for as long as seven years. “Seven years is a longish time horizon by any standard,” Kamath says.

Arch will also use new capital to acquire technologies that it hopes will further boost its appeal with customers, adding to its present capabilities in biocatalysis, high-potency manufacturing, and simulated moving bed separations. One such capability under consideration is continuous-flow manufacturing. Kamath adds that other uses would include building new plants and acquiring other firms in India. Being publicly listed will make acquisitions easier, he notes, because Arch could largely finance the deals with an exchange of shares, rather than cash.

Calyx will similarly use proceeds from a stock offering to expand capacity or acquire Indian competitors. In 2008, Shah notes, the company significantly boosted its R&D capabilities to the point that it employs 150 researchers. Calyx now has a pipeline of 40 APIs that are awaiting launch over the next two years. The company does not develop finished drugs.

Easy access to financing is not happening throughout the Indian pharmaceutical industry, however, Candle Partners’ Mahudawala cautions. Although a few prominent companies such as Calyx and Arch have drawn the favor of investors and international bankers, most Indian companies still meet their financing needs by borrowing from Indian banks at exorbitant rates, he says. But with up to seven initial public offerings likely to occur over the next year and half, the emergence of cash-rich Indian drug producers will not be unnoticed by their Western competitors.


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