Pharma hive-offs PE firms' loss

Companies taking the stock market route have got better valuations

MUMBAI: Domestic pharmaceutical companies planning to demerge their research & development (R&D) units are opting for stock exchanges than private equity funds.

The high valuations that Sun Pharmaceutical received after spinning off Sun Pharma Advance Research Centre (Sparc) and the fact that Nicholas Piramal India Ltd (NPIL), too, adopted a similar strategy are pushing others in this direction.

Now, sector leader Ranbaxy is contemplating following suit, according to industry sources.

Before freezing on the option of demerging and listing the R&D unit, Nicholas did indeed consider going for private equity (PE) funding.

"The company may not have got higher valuation had Nicholas set up a private company with private equity funding," said an investment banker, who did not wish to be named.

Swati Piramal, director-strategic alliances & communications of NPIL, had earlier told DNA Money in an interview: "We are looking at various option available for demerger, from private equity funding to public listing."

Sujay Shetty, associate director, PriceWaterhouseCoopers, said a company has a scope of better price discovery in a public listing.

"As the number of investors increases, it can bargain with many investors for the value of its R&D asset. In case of private equity, the bargaining power reduces as it is a single institution deploying funds and taking all the risk."

According to bankers, pharma majors have time and again turned down private equity deals.

"Either the pharmaceutical company has an issue with the valuations or the private equity player was ready to fund only those assets it felt had good value," said the investment banker.

Analysts said the valuation issue with private equity funding arises as the R&D pipeline of domestic pharma companies lacks depth.

Private equity investors usually prefer to work on 3-4 potential drugs at one time, Shetty pointed out.

"Most of the Indian pharmaceutical companies have only one molecule that is towards the end of discovery research cycle, or Phase III. The pipeline usually has potential drugs that are in early or mid stage of development," said Sarabjit Kour Nangra, vice-president, research, at Angel Broking.

"Demerging R&D assets is a luxury that only a handful of companies enjoy," said Alok Gupta, country head of Life Sciences and technology at Yes Bank. "One cannot go to the market without a robust R&D pipeline," he added.