Why Indian Pharma Stocks Are Poised for Growth Amid Global Supply Chain Shifts

The Indian pharmaceutical sector is currently at a pivotal juncture, driven by recent developments that are reshaping the global supply chain landscape. This article delves into why Indian pharma stocks are emerging as promising investment opportunities and why they should be on your radar.

The Rise of Indian Pharma: A Sector in Flux

The pharmaceutical industry is undergoing a significant transformation, influenced by various geopolitical and economic factors. My research, which is independent of any specific sector, reveals intriguing trends in the pharmaceutical sector, particularly in Contract Development and Manufacturing Organizations (CDMOs) and Contract Research Organizations (CROs). These companies are experiencing a surge in business inquiries from U.S. pharmaceutical players, and several key factors are contributing to this shift.

CDMOs focus on both drug development and manufacturing, while CROs are specialized in managing clinical trials and research. Outsourcing these functions to countries like India is becoming increasingly attractive to U.S. firms. This trend is largely due to the cost-effectiveness, flexibility, and scalability that outsourcing offers compared to the more expensive and rigid drug development processes in developed markets like the U.S.

The U.S. Biosecure Act: A Game Changer

One of the most significant factors driving this increased interest in Indian pharma companies is the proposed U.S. Biosecure Act. This legislation aims to safeguard U.S. biopharma research by limiting state funding to entities engaged in business with suppliers from certain countries deemed to pose national security risks, including China, Russia, Iran, North Korea, and Venezuela.

The Biosecure Act specifically targets technology transfers to Chinese biotechnology companies, such as WuXi and BGI Group. The U.S. pharmaceutical industry’s heavy reliance on China for outsourced R&D and manufacturing presents risks, particularly amidst rising geopolitical tensions and concerns over intellectual property theft. Consequently, U.S. companies are actively seeking alternatives, and India is emerging as a prime candidate.

The Biosecure Act allows a transition period until 2032, providing U.S. firms ample time to diversify their supply chains and reduce their dependency on Chinese suppliers. This transition period aims to avoid potential disruptions in the U.S. pharmaceutical market, such as price increases, delays in drug development, and shortages.

The Growing Opportunity for Indian Pharma

The global CDMO market was valued at approximately USD 82 billion in 2023 and is projected to grow at a compound annual growth rate (CAGR) of 15% over the next five years. Currently, China holds an 8% share of the global CDMO market, while India’s share stands at just 2.7%. This disparity highlights a significant growth opportunity for Indian pharmaceutical companies.

Domestic regulations in India are also supporting the sector through Production Linked Incentive (PLI) schemes, further enhancing the potential for Indian firms to benefit from the shifting supply chain dynamics.

Key Players to Watch

Here are some Indian pharmaceutical companies that are well-positioned to capitalize on the realignment of global supply chains:

1. Suven Pharma

Suven Pharma has established strong relationships with major U.S. biopharmaceutical firms. The company’s CDMO segment has grown from contributing 18% of its business in FY20 to 32% currently. Suven Pharma’s industry-leading operating profit margins and extensive network of 25 pharma and specialty chemical innovators make it a noteworthy player in this space.

2. Syngene International

As Biocon’s global innovation-focused subsidiary, Syngene International engages in both CRO and CDMO services. Despite recent challenges due to reduced U.S. biotech funding, Syngene is poised for recovery and growth. The company’s focus on drug discovery and development positions it well for future opportunities.

3. Laurus Labs

Laurus Labs provides comprehensive CMO and CDMO services, from clinical phase drug development to commercial manufacturing. With 17% of its revenue from CDMO services and 3% from biotechnology, Laurus is heavily invested in R&D and has undertaken significant CDMO investments. Its strategic focus on gene therapy and precision fermentation enhances its potential for capturing new business opportunities.

4. Neuland Laboratories

Neuland Laboratories generates 49% of its revenue from exclusive business with innovator customers, with 54% coming from North America. The company’s engagement with U.S. clients regarding the Biosecure Act highlights its growing importance in the global pharmaceutical supply chain.

5. Piramal Pharma

Piramal Pharma derives 41% of its revenue from North America and 58% from its CDMO segment. The company has increased its innovation-related CDMO work from 35% in FY19 to 50% in FY24. Strategic investments, such as in Yapan Bio Pvt Ltd, further position Piramal Pharma as a significant player in the sector.

Other potential beneficiaries of this shift include Shilpa Medicare, Aurobindo Pharma, Cipla, Vimta Labs, Jubilant Pharmova, and Strides Pharma. While this list is not exhaustive, these companies are well-placed to benefit from the changing dynamics in global pharmaceutical supply chains.

In conclusion, The evolving landscape of pharmaceutical outsourcing and the impact of the U.S. Biosecure Act present significant opportunities for Indian pharma stocks. While immediate returns should not be expected, these companies are poised for long-term growth as they capture new business from U.S. firms seeking to diversify their supply chains. Investors should closely monitor these developments and consider adding these stocks to their watchlist for potential future gains.