The US wants to cut its reliance on Chinese pharma. These stocks could benefit.

The global pharma ecosystem relies on the creation and manufacture of new drugs in a way that is both cost-effective and time-efficient. Hence, most multinational corporations look for ways to optimise their drug production by outsourcing part of their research and manufacturing to CDMOs. However, they rarely outsource their core research to the contract research organization (CRO) or CDMO.

The CDMO is the bridge between the groundbreaking research and the new drug. CROs andCDMO specialise in scaling production from experimental stages to the mass production needed to meet global demand. They navigate complex US Food and Drug Administration norms and other regulatory landscapes, ensure quality control, and manage the logistics of distribution.

According to areport by Mordor Intelligence, the Indian CDMO market is estimated at ₹188 trillion for 2024 and projected to touch ₹3.74 trillion by 2029, at a compound annual growth rate (CAGR) of 14.7%. Major Indian pharma companies that are scaling their CDMO business include Akums Drugs, Cipla, Cadila Pharmaceuticals, Dr Reddy’s , MSN Laboratories, Syngene and Piramal Pharma.

What’s driving the CDMO sector in India?

India’s technical finesse, skilled talent pool and regulatory ease have made it a conducive market for outsourcing drug development and manufacturing. The ability to keep manufacturing costs at almost a quarter of those of Western countries is one of the key reasons behind India’s emergence as a CDMO hub.

Factors such as proximity to major commercial markets and operational facilities (India has the highest number of USFDA-approved plants outside the US) have made the country a reliable partner for the global pharma industry.

Continuous expansion of R&D capabilities through strategic investments in high-level technologies and manufacturing infrastructure has ensured Indian firms’ compliance with global quality and regulatory parameters. Indian companies offer a large pool of scientific talent that is being trained quickly within these CROs to work on a variety of research projects for a range of clients from around the world.

India produces more than 200,000 science graduates a year and a large percentage of them could be deployed for this kind of work. Middle management researchers with PhDs and professional experience from abroad are also an asset.

US Biosecure Act

On 9 September the US House of Representatives passed the draft of the Biosecure Act, which aims to prohibit US pharma companies from doing business with five Chinese drugmakers over the next eight years. The Chinese firms are BGI Genomics, MGI Tech, Complete Genomics, WuXiAppTec and Wuxi Biologics.

Under the act, if any US company continues to do business with them, they will lose all forms of federal funding such as subsidy grants, loans or contracts with executive agencies. The goal is to reduce America’s reliance on the Chinese pharma sector and restrict technology exchange with the country in the interest of national security.

If the bill becomes law, almost 120 US biotech and pharma companies will be brought under the purview of this bipartisan initiative, delivering a setback to Chinese firms. CDMO specialists such as Piramal Pharma, Syngene, Sun Pharma and Cipla are expected to reap the benefits of the act as the US pharma companies will shift their manufacturing bases away from China.

Now, let’s take a look at three companies expected to benefit from the US Biosecure Act:

Innova Captab

With a market cap of ₹4,435 crore, Innova Captab stock is up about 43% over the past year. According to a report by Crisil, the company’s CDMO business is projected to grow at a CAGR of 31%, surpassing the Indian CDMO segment growth rate of 14-15%.

About 58% of the company’s total revenue in FY24 was from the CDMO segment. Key factors driving this growth are the enhanced manufacturing capacity of the Baddi plant and the launch of the Jammu plant, which is ready to begin operations in Q3 FY25. The establishment of this greenfield facility is expected to bolster the company’s manufacturing of injections, syrups, orals and creams, driving a potential topline of ₹1,500-1,800 crore.

With 30-35 new pharma products expected to be developed at this facility, Innova Captab is well-positioned to expand its market coverage from 40-50% to 60-65%. The branded generics division generates 30% of the company’s global revenues, whereas the regulated generics segment (operated under its recently acquired subsidiary Sharon Bio Medicine) accounts for 18%. New product launches and global market expansion have positioned both of these segments for high profit margins and solid double-digit growth rates.

Innova Captab’s revenue and earnings growth are key drivers of its stock’s performance. Revenues grew to ₹1,081 crore in FY24 from ₹926 crore in FY23, while net income improved from ₹67.95 crore in FY23 to ₹94.34 crore in FY24. It has a trailing price-to-earnings multiple of 41.7x.

Piramal Pharma

With a market cap of ₹30,334 crore, this leading global pharma player has returned close to 129% to investors in the past year.

Piramal has seen solid revenue growth due to the robust performance of its CDMO business. Total revenues grew to ₹7,082 crore in FY24, up 15% from FY23. CDMO revenues for the period increased 19% year-on-year to ₹4,750 crore. Profit after tax came in at ₹81 crore compared to a loss of ₹180 crore in the year-ago period.

With a trailing price-to-earnings multiple of 754x, Piramal Pharma is one of the most expensive stocks on the market.

In Q1 FY25, the CDMO business reported 18% year-on-year growth to ₹1,057 crore, accounting for 54% of total revenues of the company. Consistent momentum on new orders of on-patent molecules, steady growth of its generic active pharmaceutical ingredient (API) business, innovation continue driving growth for the CDMO segment. Revenues from R&D activities for 50% of the CDMO segment in FY24, compared to 45% in FY23.

Commercial manufacturing of on-patent molecules generated ₹973.4 crore of revenue compared to ₹436.4 crore in FY23. Integrated service offerings drove 40% of the service order booking while differentiated offerings contributed 44% of revenue (up from 37% in FY23). A favorable revenue mix and raw material cost optimisation have also led to a discernible improvement in the profit margins of Piramal’s CDMO business.

Syngene International

With a market cap of ₹36,601 crore, Syngene International, a subsidiary of Biocon, has returned almost 193% to investors over the past five years.

In December 2023 the company completed the acquisition of a multi-modal biologics manufacturing unit from Stelis Bio-Pharma for ₹617 crore. This gave it a biologics drug production capacity of 20,000 litres. While the facility is being currently used to build monoclonal antibodies, the company plans to invest an additional ₹100 crore for further repurposing.

The company has also bought 17 acres of land in Genome Valley, Hyderabad, to enhance the scale of its operations. For FY24, total revenue came in at ₹3,291 crore, up from ₹3,264 crore in FY23, while revenue from operations grew 9% year-on-year. For the June quarter, revenue grew to ₹727 crore, marginally up from ₹716 crore in the year-ago period. For fiscal year 2024, profit after tax grew by 12% to ₹519 crore. With a trailing price-to-earnings multiple of 75.7x, Syngene’s stock is fairly expensive.

In conclusion, it’s clear that the CDMO opportunity is huge and Indian companies are tapping into it. With new US regulations that could benefit India, there could be a long term increase in the size of the opportunity. Now it remains to be seen which Indian companies make the most of this and generate big returns for their shareholders.

For more such analysis, read Profit Pulse.

Note: We have relied on data from Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.

Sriparna Ghosal is an experienced financial writer. Her interest extends to global stocks as well. She studied economics at Calcutta University.

Disclosure: The writer and her dependants do not hold the stocks discussed in this article.