Acceleration in China+1 trend in Pharmaceuticals sector!

What’s the Point?

US legislators are in the process of considering the US Biosecure Act that attempts to diversify US pharmaceutical supply chains from companies that have linkages with Chinese government / military. This could potentially benefit India’s CDMO (Contract Development and Manufacturing Organization) companies as they could replace some Chinese companies in the supply chain. Improving funding environment for global biotech also means greater potential volumes for Indian CDMO companies. This highlights the potential of the investment opportunity in this space at this juncture. Improving outlook for pharmaceutical exports bodes well for external trade and the overall economy.

What are CDMO companies?

CDMO is an organization that serves the pharmaceutical industry and provides clients with comprehensive services from drug development to commercial manufacturing. Drug lifecycle entails a long-drawn process of discovery and development stages, followed by commercial manufacturing. This involves high failure probabilities, forcing global pharma companies to outsource (in part or full) drug lifecycle stages to CDMOs. As per estimates, India’s CDMO market is at ₹18,800cr in 2024, and is expected to grow to ₹37,200cr by 2029, at a CAGR of 14.7%.

Source: Company Data

What is the US Biosecure Act? Why could India benefit?

The US Biosecure Act intends to prevent Chinese biotech companies and manufacturers from benefiting from US government funding directly and indirectly by prohibiting companies that use manufactured goods or services from certain Chinese companies in particular and those linked to Chinese government / military. The legislation is intended to protect US national security. Reportedly, the bill has bipartisan support, meaning both major political factions are in support of the bill. While the bill needs to be passed by both the House and the Senate, it is likely to become law.

With Chinese biotechs being among the largest globally, the US and other western companies moving away from them could divert some business to Indian CDMO and CRO (Contract Research Organisation) companies. Indian pharma companies have developed significant expertise in global pharma manufacturing, and are some of the largest manufacturers of generics pharmaceutical drugs. Availability of high-quality talent and relatively low costs also make India a potential choice of destination. Indian CDMO companies are playing pivotal roles in driving global innovation.

Source: Jefferies

Indian CDMO companies – multiple positives emerging

CDMO companies saw relative weakness in 2023 on account of slowdown in global biotech funding, which limited the additional outsourcing contracts. Calendar year 2024 has seen improved funding environment, with Q1CY24 seeing funding upwards of US$20bn, vs average ~US$12bn per quarter in CY23. Growth for Indian companies have been high on market share gains in the past few years, but improved funding environment and increasing pace of China plus One theme could accelerate growth.

Investment opportunity in the Pharma sector!

The China + 1 theme continues to benefit India’s exports sector, particularly on the manufacturing side. Additional embargoes on Chinese exports by western countries could bode well for Indian companies in the medium term. India’s Pharma and Healthcare seems to be well placed with trends such as US generics supply-demand being favourable for manufacturers, patent expiries in the US, rising domestic market share of larger companies, and pharma valuations being reasonable. Investors could consider investing in HDFC Pharma and Healthcare Fund to take exposure to this sector. More details about the sector and the opportunity are detailed in the product presentation at this link.

Sources: Ministry of Commerce and Industry, Jefferies and other publicly available information.

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