Indian drug makers, whose business models have been under pressure as revenues from the US generic market grow at a slower pace, will have to move away from playing the cost game and focus on innovation to move to the next level, and the potential for innovation offers a bright future for these companies, says Abrar Mir, managing partner, Quadria Capital Investment Management Pte. Ltd, the Singapore- and India-based private equity (PE) firm that focuses on healthcare.
“India has been fantastic in chemistry—that led to the golden age of pharmaceuticals… Most importantly, India needs to leverage its expertise in chemistry to ultimately innovate new chemical entities and create an engine for global blockbuster drugs,” he added in an interview. Edited excerpts:
Big picture, what is driving increased PE interest in India, and what has changed for PE firms to be bullish on the country of late, when historically, investors have got poor return on the capital they have committed?
There are a number of responses that are driving this interest in India. India continues to be one of the largest economies in Asia. We have renewed confidence in its underlying fundamentals. And as a consequence, we are seeing a large amount of investor interest globally in the big picture India story.
Whether it is confidence in the long-term prospects in India, or confidence in the underlying regulatory changes that are occurring, at every level, we are seeing renewed confidence because of the country’s strong fundamentals—that is the big picture—the secular trend that is the story of India is driving that renewed interest.
The exit scenario has not brought about a change in PE behaviour. What has happened is that, people have begun to recognize that be it India, or any market, if you are in a position to build fundamentality good quality businesses, then exits will come.
When I was a kid, my mother told me, ‘do what you are good at and the money will come.’ And that is exactly what is happening in PE. If you continue to focus on building fundamentally strong businesses that have scalable business models, that are driven by good secular trends, and have good management teams, then, ultimately, investors will get returns on their investment. So, I think, that is the view investors have taken, and it is not just PE investors, but also institutional equity investors. Underlying some of the fundamentals in India, is the prospect that there is an opportunity now, with the regulatory changes, for long-term economic trends to build very solid fundamental businesses that will emerge as champions of the future.
Quadria Capital specializes in health care. This sector is known for the big deals for PE firms like pharma companies and hospital chains. But are there enough deals in the $50 million range that you operate in?
No doubt in my mind… Healthcare in particular is probably one of the fastest growing segments in India. There are a large number of players within this segment. India continues to be a highly fragmented market, and we are continuing to see a large flow of high-quality deals.
Keep in mind, India is probably one of the most sophisticated investment banking markets. So, entrepreneurs as well as intermediates from investment banks are very familiar with how PE works, and how deals work and they encourage entrepreneurs to think that way. Unlike Indonesia or the Philippines where entrepreneurs may not be so familiar with how the PE market works, entrepreneurs of similar companies in India, that are looking to raise in the $30-50 million range, are very sophisticated. A consequence of that is deal flow is very robust.
Within healthcare, if we were to get into specifics and look at verticals, what is it that you’re really pursuing?
To be honest, India has done so well across all segments in healthcare. We have seen that over the past 20 years, the pharmaceuticals and what we call the life sciences segment, has been one of the critical success factors for PE and investors generally. Pharma continues to be a large part of the India healthcare landscape for investors, and it will continue to do so in the long term as well. For PE today, as the pharma industry is now evolved, it is hard to find the right deals. From our portfolio, we are fortunate to partner with companies like Concord Biotech. We believe they are very well-positioned to grow into the API (active pharmaceutical ingredient) market, and we continue to see fast and upcoming businesses emerge in that space.
The biggest segment of opportunity continues to be the healthcare space. It is all about the provision of healthcare. Clearly, India from any dynamic lags many developed markets, but is also behind many emerging markets. For example, access to healthcare—there are not enough hospitals. Access to primary care and access to doctors continues to be a dynamic which is driving growth. We are going to see a large part of the investments continue to go to that space. Bear in mind, in India, out of every 10 new hospitals that are being built today, seven of them are being built by the private sector. So we have a long way for us to grow in that space.
A related question—the business models of most large pharmaceutical companies in India are under stress. For Indian pharmaceutical companies, their revenues from the US generic market have been seeing slower growth or even declines. Is the golden age of investing in Indian pharma behind us?
India went through a period of explosive growth where many PE/institutional investors benefited from that growth in pharma companies—and this is what can be termed as the golden era of the pharmaceutical industry in India. As a consequence of that, we have had companies that have become industry leaders and emerging giants of future. However, we certainty believe there is still very strong growth left in that market. What we have got are good scalable businesses. We have good business models and expertise among entrepreneurs and our scientists. But at the next level, it is not going to be just the cost game, but it will have to be the innovation game. In the ‘golden era’, we didn’t have much of new innovation that was being led by Indian pharma companies. The potential for innovation is the future of Indian pharma.
Are valuations a concern?
Valuations are always a concern in India and South-East Asa. And, frankly, from our perspective, valuations particularly in the public equity markets are not sustainable. In healthcare, some of the equity multiples continue to exceed what is fundamentally achievable or fundamentally attractive. One advantage we have is that, as a PE investor, when we negotiate with an entrepreneur, it is not only about the price. Nine out of 10 entrepreneurs want to understand what you can bring to the business that is beyond money. And when you can identify the specific and strategic operating value-add, that will at least help us enter into a business at a more reasonable multiple. We have an ability, as a private investor, to at least circumvent some of the bubbles that we think are being created in the equity markets—but, overall, the equity markets have an unsustainable valuation paradigm.
But as entrepreneurs in this space are aware of the valuations that their listed peers command, does that make it more difficult for PE firms like you to get the deals? How does India compare to South-East Asia in terms of valuations?
Yes and no. Yes, in the sense that an entrepreneur looking to sell his business or to bring in an investor purely based on valuations, will be looking to the equity markets and benchmarking his company—that makes it difficult for PE investors. But in my experience, when there is an investor that is only interested in valuation and not value-add, then they can buy from equities market. Most entrepreneurs like to bring in private investors only for one thing—value-add. They ask, ‘what can this investor do in my business that I can’t do in my own’ or ‘where can he open doors and what expertise can he bring to my business that I cannot do on my own’. There is a consequence to that which is not about valuation. It is about a synergy between the investor and the entrepreneur.
Unfortunately, the sentiment of high valuations is not just India-specific, but also extends to SEA (South-East Asia) and across Asia. Frankly, valuations are very high in north Asia and China. Valuations particularly in the healthcare space continue to be excessive, particularly in the public market. The issue with healthcare is simple—people understand growth that is coming in this space, they understand there are secular trends driving this growth, they recognize this is relatively low risk and there is not a lot of downside risk. Given that, and the scarcity of high-quality assets across Asia, the healthcare market continues to trade at a premium to most other sectors.
In the healthcare space, when it comes to innovation, where do you place India?
India has been fantastic in chemistry—that led to the golden age of pharmaceuticals space. China has been very innovative in biology—they are making innovative drugs that are being registered globally. China is also using chemical entities for the first time, and getting FDA (Food and Drug Administration) approvals. For me, the next move for India is to play into the biological space globally. Most importantly, India needs to leverage its expertise in chemistry to ultimately innovate new chemical entities and create an engine for global blockbuster drugs.
In India, you have a separate $12 million fund for early investments/start-up firms. Is that something you look to replicate in S-E Asia, too?
That is possible. We want to continue to support start-ups and early-stage business that will ultimately be the giants of the future. We want to see if these early-stage businesses can also find synergies with our portfolio companies. For example, the way technology plays in running efficient healthcare ecosystems—this is an important dynamic not just for some of our portfolio companies, but for the industry as a whole. So, we want to continue to support those players and to help them achieve sizable scale.
Coming to your funds, Quadria Capital plans full deployment of its $300 million South and South-East Asia-focused fund by this year-end. Have you started work on your follow-on vehicle?
We continue to think about the right timing for raising a new fund. We continue to work with our investors who have been very supportive of us so far. For example, we raised just over a $300 million fund, but we have spent over $450 million, and we have over-invested because of the solid support of our investors. We have not thought about the next fund, or the quantum of this fund.
When it comes to PE, how different is India from South-East Asia?
My basic view is that India is more developed in the PE space than South-East Asia… Entrepreneurs are very familiar with the asset class. Many families have now evolved into being much more institutionalized in India… We are seeing now for the first time, first-generation and second-generation families start to look outside of their own businesses and look to outside investors… But this journey is just beginning in South-East Asia.