This year, the mergers and acquisition (M&A) scenario in India has seen a muted growth trajectory. While experts are hopeful for a better activity graph in 2024, this year is ending on a somber note.
The overall M&A in India has been subdued in the year-to-date (YTD) calendar year 2023 in comparison to the last calendar year 2022. As per Equirus estimates, the M&A deal size in the Healthcare and Pharma sector declined to Rs 170 Bn in ytd calendar year 2023 – around half of Rs 355 Bn that was registered in calendar year 2022.
“The PE Deals registered a rise of 60% in value of deals from Rs 296 Bn in calendar year 2022 to Rs 469 Bn in ytd calendar year 2023. The component of healthcare deals in the overall PE space has also gone up to the highest level of 13% in ytd calendar year 2023 – this was at around 7% in calendar year 2019,” Bhavesh Shah, Managing Director & Head – Investment Banking, Equirus told Financial Express.com.
This effectively means that alternative capital is finding its way to more stable businesses like healthcare away from consumer discretionary investments, witnessed in the previous years, Shah explained.
‘M&A activity in healthcare & pharma sector in India has been consistent’
A recent Grant Thornton Bharat Pharma and Healthcare Dealtracker Report revealed that the pharma and healthcare sector witnessed a decline in deal volumes in Q3 2023, with 26 deals totalling $2.7 billion, down 32 per cent from the same period in 2022.
However, deal values increased by 298 per cent year-on-year, due to two high-value deals valued over $650 million each and four deals valued over $100 million each, the report highlighted.
According to the report, comparing Q3 2023 to Q2 2023, there was a decline in both deal volumes and values by 26 per cent and 14 per cent, respectively. This decrease was largely attributed to a marquee deal in the previous quarter – Temasek Holdings’ $2 billion investment in Manipal Health Enterprises. Q3 2023 witnessed a 138 per cent increase in deal values excluding this deal.
The M&A sector showcased resilience and recorded a 161 per cent increase in values, despite a 50 per cent decline in volumes compared to Q2 2023, it added.
The report maintains that this decline in volumes was largely due to a single multi-million dollar deal, namely Nirma’s acquisition of a 75 per cent stake in Glenmark Life Science for $689 million. This single transaction alone accounted for 54 per cent of the values in the M&A space during the quarter.
“I would say M&A activity in the healthcare and pharma sector in India has been quite consistent for the last few years. On the PE side, financial sponsor interest continues to be very strong in the sector, especially for differentiated or scaled -up assets. PE activity has also been driven by the rationale of creating platform assets by deploying an inorganic roll-up strategy with the key benefits of this strategy being larger scale, greater diversification, expansion of capabilities, and ability to harvest revenue and cost synergies, all of which ultimately improve asset quality at exit for the PE owner (relative to at entry),” Subhakanta Bal, Managing Director at Rothschild & Co told Financial Express.com.
According to Bal, there were significant PE transactions announced in healthcare services (hospitals and single-specialty) in the current year. Trade activity in pharmaceuticals, especially in the B2B segment, continues to be strong including from strategics. Trade activity has been primarily driven by a desire to expand in high growth segments such as HPAPI, oncology, peptides and injectables.
“The other trend is the growing incidence of large Indian companies participating in and completing acquisitions within India, i.e. domestic consolidation. We are witnessing this trend play out in healthcare services (across both multi-specialty and single specialty segments) and in pharmaceuticals especially B2C segment (i.e. branded formulations),” he said.
In the branded formulations segment, large domestic companies are keen to enhance presence and plug specific whitespaces from a therapy area standpoint. In certain therapeutic areas, organic growth has been lower than expectations, making acquisitions a preferred alternative, he said. “Ability to eke out cost synergies through procurement efficiencies and SG&A cost optimization are an additional benefit. Most large Indian pharma companies enjoy a healthy balance sheet, providing the ammunition to fund inorganic growth,” he added.
One of the other factors that has led to an increase in M&A activity in the Indian healthcare sector has been an increasing trend of promoters/founders looking to monetise their ownership or induct external partners either driven by succession planning considerations or desire to accelerate growth/enhance capabilities, he claimed.
According to Shah, a good chunk of the Private Equity deals is control in nature, so arguably they are M&A deals. “What we are seeing is more and more platform deals backed by large Private Equity funds, especially in the healthcare space. The PE funds are complementary healthcare assets in the hospitals, API and biologics area. The key to the aggregation in the Platform deals, is the complementarity of the assets from a product or region perspective, he told Financial Express.com.
‘Relatively lower level of activity in the MedTech space’
Bal maintains that the Indian healthcare sector has witnessed healthy M&A activity in the current year, with deals worth nearly US$5 billion transacted and/or announced.
“By volume of transactions, we have had around 130 transactions in the Indian healthcare sector in the current year, which compares well with a similar number witnessed in 2021 and around 160 transactions in 2022, he said.
Over the five-year period of 2018-2022, Indian healthcare sector witnessed M&A activity witha cumulative deal value of US$35bn, which was a healthy increase over the preceding five-year period.
“Historically, M&A activity in healthcare sector in India has been weighted towards pharma and healthcare services/hospitals, with relatively lower level of activity in the MedTech space,” he said.
However, this has largely been due to relative scarcity of scaled up domestic MedTech assets available to transact, Bal explained.
With multiple companies now scaling up in the MedTech space, there is growing interest from financial sponsors.
“We could also see more inbound trade M&A activity in the MedTech space as overseas companies look to expand their footprint and get access to commercial infrastructure in India along with the ability to cater to other markets from India. Also, in certain categories within MedTech, select large global incumbents have progressively reduced their focus (as they gravitate towards more higher value segments), thereby providing the opportunity for well capitalized Indian players to enhance their market share,” he told Financial Express.com.
In addition, there has been increasing activity in the single specialty space as the segment matures, assets grow in scale and demonstrate strong unit economics.
The key factor that has been driving the M&A and PE deals has been the desire to achieve scale and the extra sliver of returns through inorganic means, Shah explained.
“The financial investing managers are getting mandated for sizeable amounts of funds to be invested in for returns that have a significant alpha. The standalone investments can fetch a certain level of organic returns. However, aggregation plays can yield higher returns if executed well to add the inorganic piece in the overall returns. Hence the need for more and more platform plays,” Shah told Financial Express.com.
The impact on the industry of this style of investment can be manifold, he explained.
“This can improve efficiency and integration of combined entities. A lot more emphasis can be provided on to technology and data-driven decision-making. This could also spawn innovation and new product development with the backing of the funding coming in and the cash flow being generated with the help of efficiencies of scale,” he added.
What are the expectations for 2024?
M&A and investing activity in the Indian healthcare sector is likely to continue at strong levels and could potentially even increase in certain segments within the healthcare sector, Bal maintains.
“A combination of factors such as significant increase in PE activity, increasing trend of promoters looking to monetise their ownership or induct external partners either led by succession planning considerations or desire to accelerate growth/enhance capabilities, and domestic consolidation, are all expected to act as tailwinds for M&A activity in the Indian healthcare sector going forward, he told Financial Express.com.
According to Shah, with interest rates likely to come down in 2024, we are likely to see more flows coming in through the financial investors. “I expect the PE to continue to dominate the deal scene in the healthcare and pharma space, with platform plays continuing to become bigger,” he added.