Indian Condition not yet conductive for Acquisitions – Ajay Piramal

He was one of the original ‘takeover tycoons’ in India’s post-liberalisation era with an appetite for taking over pharmaceutical businesses. Ajay Piramal, Chairman of the Piramal Group, has since diversified his business interests, having sold his then flagship, Piramal Healthcare to Abbott for a whopping $3.7 billion in 2010. Mr. Piramal spoke to The Hindu on the industry, and his plans going forward. Edited excerpts:

The group has a presence across sectors in the Indian economy. What is the current scenario? Beyond green shoots are there more concrete signs of a recovery?

For the recovery to be seen in terms of numbers, it will take time. I can, however, see that the foundations are being laid for a recovery. The new government is trying to hasten the speed of decision-making which itself is very important. Second, there were many obstacles which were not allowing industry to grow. There was a sort of anti-industry view that was industry versus people. That is changing. Now, it is industry and people.That recognition is clearly there. Also, markets have clearly run ahead of everything else. But when they run ahead, promoters feel there is more access to funds which was not there in the last 2-3 years. Today, plans for investments are being made. Orders will take time to grow but I think it is in the right direction. In sum, decisions are being made quicker, there is a pro-industry view, there is talk of laws being amended in environment, land and labour, and markets are doing well. All this means there will be growth.

While things are looking better for the economy, how are they for the pharmaceutical industry in India? What are the issues confronting the Indian generic pharmaceutical industry? Do you regret getting out of generic pharmaceutical manufacturing?

In pharma, it is not happening yet. It falls in so many different buckets – Ministries of industries, health, chemical & fertilizers. For people to get a total view of pharmaceuticals, they have to take an integrated approach.

From the generic point of view, clearly we must get in an environment which looks upon the industry in a positive manner. Earlier, the generic industry was looked upon as strength for India. I do not see that happening anymore. It is always negative whether it is pricing or promotional practices. You have to turn the approach around to make it more positive. I do not have any regrets. We are pretty happy that we did what we did because subsequently we are seeing a lot of issues in the industry. I think we have gone into other industries where we see a lot of growth opportunities. There was a plan and thinking behind it, and things have moved in that direction.

You have become more like a private equity player after selling to Abbott, and identified certain sectors to grow. What are the plans ?

As we look at it, there are three really big parts to it.

One is the whole pharmaceutical space where we have a presence in critical care and make inhalation anaesthetic drugs. It is really a global market, and we are growing 20 per cent, manufacturing both in India and the U.S. although we may increase manufacturing in India a little. Sales may go up marginally by 1 per cent in India. Second is contract research and manufacturing services (CRAMS), which have been growing at 15-18 per cent where we manufacture for large and small global companies. Third is our over-the-counter (OTC) business in India at around Rs. 250 crore and growing at around 25 per cent. Finally is our R&D wing in Germany, where we have tracers for early diagnosis of Alzheimer’s disease.

Second is our information and data company which in healthcare converts data into insight out of the U.S. As more and more data is available, people want to know how to use it. It is for the long term. We have invested around $650 million, and will grow it through acquisitions and organic growth.

The third is in financial services business, and we made a large investment in Sriram Group. It is not a private equity investment. We are increasing our loan book in NBFCs, and these two are going to grow in India. Funds will be required across sectors, and Shriram is into second-hand vehicle finance, SME, general insurance, life insurance, and as economy grows, financial services will also grow.

India REITs , is growing well. We are providing real estate funding , and find there is good growth. There is the new trend of REITs, where commercial properties and people can get a steady yield. I think our financial markets are quite advanced, and there will be a different set of investors of low returns but without risk.

All three businesses will get their importance but sometime in the future, we may have to separate it out and hive them off. In terms of cash and investment, obviously financial services will be the largest in terms of assets. In terms of turnover, healthcare will be large.

There has been increasing regulation of the industry by the National Pharmaceutical Pricing Authority on the price of drugs sold in India. Is it becoming more difficult for the pharma industry?

We are not in the domestic pharmaceutical industry although we are in the OTC space. From what I see, all these developments are not in the right direction. There is a one-sided view, and not enough dialogue between industry and the pricing authorities.

Earlier on, it was industry versus people and it is still continuing. You cannot kill Indian manufacturing in drugs. India was a strong manufacturing base for pharmaceuticals, and they must encourage that rather than kill it. If you make pricing unviable, then industry is not going to stay. Take the example of penicillin and all the anti-infective of which there is no manufacturing in India anymore because it has become so unviable and you are dependent on China. If you talk about ‘Make in India’, we must have a reasonable regime which allows free markets to operate.

So, where have the authorities gone wrong? What can be done to remedy the situation?

This was going on for a while that pricing has to be regulated, and that the scope of price control has to be enlarged but I think they have gone overboard. Also, in India, there is enough generic competition so you do not have to bring down the price of everything.

People have a choice, and if they do not want to pay as much for a branded drug, they can buy the generic version. But let people exercise the choice. Why should government come and bring down prices? This I do not understand. If it is a monopoly situation and life threatening, it may be justified but you cannot have it for the whole industry. You have to encourage growth in the industry otherwise people will not be attracted to remain in manufacturing.

Is the situation ripe for a consolidation? What about fears expressed in several quarters that the Indian pharmaceutical industry will be dominated by the multi-nationals?

I do not see too much consolidation taking place in the industry because unlike other industries, pharma is not capital-intensive and I am talking more about formulations. Secondly, if you bring down a lot of the pricing, it is not very attractive as a market leader anymore. Also, with a lot of negative news reports coming out in the open, I do not see foreign companies as interested in doing acquisitions in the domestic industry as they were earlier.

In bulk drugs though, there could be some consolidation because many companies had over-stretched and have gone through corporate debt restructuring (CDR) process and they were becoming NPAs with banks. I do not see global companies increasing their presence too much. Some marginal acquisitions could take place but India is not as attractive as it was earlier.

There is somehow negative news as far as how pharmaceutical regulation is taking place in India. One is clearly on the pricing that we are seeing. Secondly, there is this talk about Intellectual property (IP) and clinical trials. So, people do not think India will be a base for their R&D. Thirdly, there is the talk about coming down strongly on promotional practices. All these are getting bad press, and so, it is no longer as attractive so I do not see major transactions taking place.

With regard to multi-nationals dominating here, it cannot happen because look at the situation even today. The largest company has a 7 per cent market share, and there are so many players. It is a highly fragmented industry, and multi-national pharmaceutical companies have been in India for over 100 years and have not been able to make so much of a dent.

We have seen that even the level of R&D in the pharmaceutical sector has been moving out of India. Can the government take remedial steps to bring that back?

I do not think so. It will continue to move out of India. It is because the way approvals for clinical trials are being given or the way they are conducted, which reflects a lack of understanding about how clinical trials are run. Till recently, it was almost completely banned and clinical trials had stopped completely.

Now, they have relaxed some things but you cannot have that as clinical trials may take years, and there is a shortage of quality investigators. People approving clinical trials today do not have the expertise or the experience so they just put in conditions . I do not see much happening unless there is a major change in the outlook.