How to Plan a Greenfield Pharma Facility in India | NPMS

NPMS  |  nmspharma.com  |  M&A Advisory Insights

Category: Pharmaceutical M&A Advisory  |  Reading time: ~14 minutes

What Buyers and Sellers Get Wrong About Pharmaceutical M&A Due Diligence

The counterintuitive truth: in today's pharma M&A market, due diligence is more important for the seller than the buyer — and most sellers never realise it until it is too late.

By Ketan Naik, Founder — NPMS (Nirnaya Pharma Management Services LLP)  |  42 years of pharmaceutical operations & M&A experience

Primary keyword: pharmaceutical M&A due diligence India

Over the course of four decades in the pharmaceutical industry — and through direct involvement in mergers, acquisitions, joint ventures, and divestments across India — I have sat on both sides of the due diligence table. I have represented sellers preparing their operations for scrutiny and buyers evaluating what they were about to commit significant capital to.

What I have observed, consistently, is that both sides make the same fundamental mistakes. Buyers arrive at due diligence with the wrong focus. Sellers arrive unprepared for the wrong reasons. And in most cases, both are operating from a framework that was designed for financial transactions — applied to a business that is fundamentally operational.

Pharmaceutical manufacturing companies are not financial instruments. They are living, complex operational systems — with GMP compliance histories, regulatory approval portfolios, workforce dependencies, quality cultures, and supply chain vulnerabilities that a balance sheet will never reveal. The real value of a pharma manufacturing business, and the real risk, lives in its operations. And due diligence that does not go deep into operations is not due diligence. It is a comfort exercise.

This article covers what both buyers and sellers consistently get wrong — and offers a perspective that most M&A advisors will not give you, because most M&A advisors are bankers and lawyers, not pharmaceutical operators.

The Seller's Blind Spot: Due Diligence Is More Important for You Than for the Buyer

This is the statement that surprises most pharma promoters when I say it in a first consultation. The conventional wisdom is that due diligence is something the buyer does to the seller — a scrutiny exercise, a risk assessment, a verification process. The seller's job, in this framing, is to respond to questions, provide documents, and try not to look too bad.

This framing is dangerously wrong. And in today's Indian pharmaceutical M&A market — with an increasing number of private equity firms, strategic aggregators, and financial buyers active in the space — that misunderstanding is costing sellers crores.

Why the Seller Needs Due Diligence More Than the Buyer

The buyer has one primary risk: they pay too much for something that turns out to be worth less than they thought.

The seller has multiple risks — and most of them are permanent:

• They sell to a buyer whose intentions for the business, its workforce, and its patients were never honestly declared
• They accept deal terms that look attractive on closing day but include earn-outs, clawbacks, or operational commitments that become punishing within 18 months
• They discover post-sale that representations and warranties they made — about compliance status, regulatory approvals, litigation exposure — trigger claims that claw back a significant portion of the sale proceeds
• They hand over a business they spent 30 years building to a buyer who asset-strips it, lays off the workforce, and abandons the product portfolio within 3 years
• They fail to disclose operational or regulatory issues that the buyer discovers post-close — triggering legal disputes that drag on for years

The PE Firm Problem: Know Who You Are Actually Selling To

The Indian pharmaceutical M&A market has seen a significant increase in private equity activity over the last decade. PE firms have acquired pharma manufacturing assets aggressively — and in many cases, the outcomes for the business, its people, and its long-term operational health have been poor.

Not all PE buyers are the same. Some are genuinely long-term oriented, operationally capable, and committed to building the businesses they acquire. But a meaningful subset of PE activity in Indian pharma is driven by a simpler thesis: acquire undervalued assets, improve reported EBITDA through cost reduction and accounting restructuring, and exit at a higher multiple within 5–7 years.

In the second model, 'improving EBITDA' often means cutting quality budgets, deferring capex, reducing headcount, and restructuring the business in ways that look good on paper but hollow out the operational capability that made it valuable in the first place. R&D pipelines are deprioritised. Key talent leaves. GMP compliance deteriorates. And the pharma promoter who sold the business watches from the outside as something they built over decades is dismantled for a financial return.

What Seller-Side Due Diligence Looks Like in Practice

At NPMS, when we advise a seller, we start with two parallel workstreams — and both are non-negotiable:

Workstream 1: Know Your Own Business Before the Buyer Does

A seller who discovers a significant GMP compliance gap, an unresolved regulatory observation, or an undocumented liability during the buyer's due diligence process has lost negotiating power permanently. The buyer now knows something the seller was not prepared for — and they will use it.

The solution is to conduct a rigorous operational and regulatory self-assessment before the sale process begins. Not a polished information memorandum. An honest assessment — the same assessment a sophisticated buyer would conduct. Find your own issues first. Fix what can be fixed. Disclose what cannot — on your terms, with context, rather than being discovered.

• Conduct a full GMP gap assessment against your current regulatory approvals — identify any observations, open CAPAs, or compliance risks
• Review your regulatory approval portfolio: are all licences current, product registrations valid, and export certificates clean?
• Assess your key personnel dependencies — which roles, if vacated, would materially affect operations or regulatory standing?
• Review all pending litigation, customer disputes, and regulatory correspondence
• Clean up your financial records — ensure your P&L reflects operational reality, not best-case adjustments

Workstream 2: Due Diligence on Your Buyer

Most sellers never do this. Most investment bankers running sale processes actively discourage it — because it slows the process and complicates their fee timeline. Do it anyway.

• What is the buyer's track record with previously acquired pharma manufacturing businesses in India? Visit those businesses. Talk to the management teams that stayed and the ones that left.
• What is the buyer's stated post-acquisition operating plan — and is it credible? A PE firm that plans to 'professionalise operations' without any operational pharma expertise in their team is telling you something.
• What are the actual deal terms beyond the headline number? Earn-out structures, escrow holdbacks, representations and warranties insurance requirements, and non-compete clauses all affect the real value of what you are receiving.
• What happens to your workforce? Get commitments in writing — not verbal assurances.
• What happens to the brand, the product portfolio, and the manufacturing site? A buyer planning to acquire your manufacturing licences and shift production elsewhere is not paying for your business — they are paying for your approvals.

The Buyer's Mistake: Starting Due Diligence Without Asking the Right Questions First

Pharmaceutical M&A due diligence is expensive. A comprehensive operational, regulatory, financial, and legal due diligence process on a mid-size Indian pharma manufacturing business can cost ₹50 lakhs to ₹1.5 crores in professional fees — and take 3 to 6 months of management time on both sides of the transaction.

In my experience, a significant portion of that cost and time is incurred on targets that should have been disqualified — or substantially re-priced — in the first meeting.

The First Meeting Is Due Diligence — If You Use It Correctly

Most buyers treat the first meeting with a seller as a relationship-building exercise — a chance to express interest, build rapport, and receive the management presentation. That is a wasted opportunity.

The first meeting is where a buyer with genuine pharmaceutical operational experience can identify, within the conversation, whether the target is likely to be a serious acquisition candidate or a problem asset dressed up for sale. Not definitively — but directionally, clearly enough to decide whether the full due diligence investment is warranted.

The NPMS First-Meeting Question Framework

These are the questions NPMS asks in the first substantive meeting with any acquisition target. They are not designed to be adversarial. They are designed to be revealing — because a seller who genuinely has a clean, well-run business can answer all of them fluently and without preparation.

On Regulatory & Compliance Standing

• What regulatory approvals does the facility currently hold, and when were each last inspected? What were the observations — verbally, before any documents are exchanged?
• Are there any open CAPAs from any regulatory authority — CDSCO, WHO, or any state drug authority — currently outstanding?
• When was your last internal GMP audit, who conducted it, and what did it find?
• Have you ever received a warning letter, import alert, or been placed on a regulatory watch list in any market?

On Operations & Production

• What is your current OEE (Overall Equipment Effectiveness) across your primary manufacturing lines? If the promoter does not know this number, note it.
• What was your batch failure rate and rework rate over the last 12 months?
• What is your workforce attrition rate in manufacturing, QA, and QC — and what has it been over the last 3 years?
• How many of your key technical people — Head of QA, Head of Manufacturing, lead pharmacists — have been with the business for more than 5 years?

On Commercial Reality

• What percentage of your revenue comes from your top 3 customers — and what are the contractual terms with each?
• What is the age profile of your regulatory approvals and product dossiers? How many are more than 10 years old without renewal?
• What capex has been deferred in the last 3 years — equipment replacement, facility upgrades, utility systems?
• What is the real reason you are selling — and why now?

The Due Diligence Hierarchy — What Most Buyers Get Backwards

Most buyers sequence their due diligence with financial and legal at the front and operational at the back. This is the wrong sequence for a pharmaceutical manufacturing business.

The reason most buyers sequence due diligence with financials first is that financial due diligence is easier to initiate — it requires documents, not site visits and operational expertise. Operational due diligence requires people who can walk a manufacturing floor, read a batch record, interpret a CAPA log, and understand what they are looking at. Those people are harder to find and more expensive to deploy.

But in pharma M&A, the operational findings are the ones that most frequently break deals, trigger price renegotiations, or — worse — go undiscovered until after close. The savings from catching a significant GMP remediation requirement, a workforce dependency risk, or a deferred capex liability early in the process dwarf the cost of deploying experienced operational due diligence resources upfront.

Why Complete Transparency Is the Best M&A Strategy — for Both Sides

After four decades in this industry, I have a clear, unambiguous position on transparency in pharmaceutical M&A transactions: complete, proactive, upfront transparency is not just the ethical approach — it is the strategically superior approach for both buyers and sellers.

For Sellers: Transparency Protects Your Deal and Your Legacy

• Every issue the buyer discovers that you did not disclose becomes a warranty claim, a price chip, or a broken relationship — often all three
• A seller who proactively discloses issues — with context, with remediation plans, with honest assessment — retains control of the narrative. A seller who conceals issues and gets caught loses it permanently
• Buyers who conduct thorough due diligence respect sellers who have prepared honestly. They distrust sellers who have prepared defensively. Trust accelerates transactions. Distrust kills them.
• Post-sale relationships matter. Many pharma M&A transactions include transition periods, earn-out structures, or ongoing advisory roles for the seller. Those relationships function when they are built on honesty and fail when they are not

For Buyers: Transparency from the Seller Is a Signal, Not a Given

• Do not assume transparency — create the conditions for it. Ask questions that cannot be answered dishonestly without the dishonesty being visible to an experienced operator
• Reward honesty in negotiations. A seller who discloses a compliance issue upfront and has a clear remediation plan is a better counterparty than one who presented a flawless picture and forced you to find the issues yourself
• Build transparency requirements into the deal structure — representations, warranties, and indemnities that are specific, operational, and enforceable, not generic legal boilerplate

The Questions That Change Everything

If I could give one piece of advice to every pharma promoter considering a sale, and every pharma buyer entering a new acquisition process, it would be this:

To sellers: conduct your own due diligence before the buyer does. Find your issues first. Fix what you can. Disclose what you cannot — on your terms, with your context. Know who you are selling to as well as you know what you are selling. And remember that the price on closing day is not the value you receive — the terms, the buyer's intentions, and what happens to your business and your people in the 5 years after closing determine that.

To buyers: the first meeting is your most valuable due diligence tool. Use it. Ask the questions that reveal operational reality, not the questions that elicit prepared answers. Sequence your due diligence with operations first and financials second. And recognise that in pharmaceutical manufacturing, the numbers on the P&L are downstream of the operations — understand the operations and the numbers will make sense. Miss the operations and the numbers will mislead you.

— Ketan Naik, Founder, NPMS (Nirnaya Pharma Management Services LLP), Vadodara, Gujarat