The way the leading Indian drug firm, Ranbaxy Laboratories, was acquired by Japan's Daiichi Sankyo, has made them realise the vulnerable nature of the domestic pharmaceutical industry and the need for more preconditions to prevent the promoter from selling off his company soon after the investments are made.

Though PE interest in the pharmaceutical sector is rather small compared to other sectors, about 20 PE firms had made small investments in the healthcare sector in 2007. The significant ones included Chryscapital's $24-million investment in Mankind Pharma, Avenue Capital putting in $17.91 million in Morepen Laboratories, and Rideback Capital investing about $5 million in Granules India.

The Ranbaxy-Daiichi deal is expected to make PE firms review their positions on investments in acquisition-prone industries like pharmaceuticals.

"PE companies invest in a company if they feel that its promoter can deliver goods. If the promoter changes, then its a different ball game.

If such acquisitions are going to be a trend, a precondition factoring in such reverse-acquisition possibilities will have to be factored while making an investment decision," aid Sanjiv Kaul, managing director, Chryscapital.

"Typically, PE firms are medium- to long-term investors. In case the promoter exits in a time frame much before than what was envisaged by the PE firm, then the investment consideration changes and both the promoter and the PE firm may not necessarily gain in the same manner. Even if it is the same, it may not be attractive to the PE firm," Kaul added.

Agrees a Mumbai-based representative of an international PE firm: "There is no risk for PE firms if the deal is similar to Ranbaxy-Daiichi where the shareholder is offered a 30 per cent premium on the company's value.

But one cannot expect that to happen very often. Hence, investment firms will have to think of a lock-in period where no acquisitions can take place," he said.

The issue is more of a concern when PE firms put in angel investments expecting high returns after guiding the company through an intense growth path over a period of four to five years, he added.

While PE firms agree that the issue could be true for small companies, they feel that the Ranbaxy-Daiichi deal has brought in a sea change in the perceptions of large domestic pharmaceutical companies.

However, Akhil Awasthi, partner, Baring Private Equity Partners India, has a different view: "We are among the investment firms that are open to complete buyouts.

The precedent the Ranbaxy-Daiichi deal has set will make more companies listen to such ideas. This sector has a lot of potential and the Ranbaxy deal will trigger more such opportunities for buyouts for management control."