A Breed Of Pharma Companies Is Doing Well. Here’s Why
Why these pharma companies are doing well.
As generic drugmakers face pricing pressure in the U.S. because of increasing competition from China, a crackdown on polluting industries by India’s neighbour has helped a breed of domestic pharma companies: the manufacturers of main ingredients that go into making a medicine.
Most makers of active pharma ingredients—or the central compound of a drug—have seen revenues rise and margins expand in the past few quarters, according to their quarterly filings. That’s because prices of the key raw materials rose as China shut toxic-spewing factories, causing a supply crunch. Also, hypertension drug Valsartan was recalled globally because of contaminated APIs supplied from China.
The developments led global pharma companies to look to diversify sourcing away from China, which may benefit Indian API firms, according to a Jefferies note. The Indian active ingredient makers, their annual reports show, have started increasing capex plans to take advantage of it.
The China Factor
Cheaper copycat versions of drugs from China increased competition in the U.S. market, hurting margins of Indian drugmakers. And China’s new norms to improve the upgrade polluting equipment has made API manufacturing costlier due to higher operating expenses and capex, increasing prices.
That has only increased costs for makers of formulations in India. About 60 percent of the APIs used by Indian drugmakers are imported from China, according to the Pharmaceuticals Export Promotion Council. For some APIs, the dependence on imports from China is as high as 90 percent.
As a result, China’s regulatory changes are expected to be a long-term negative for formulation suppliers, Piyush Nahar, an analyst at Jefferies, said. But it’s a positive for domestic API makers.
Divi’s Labs has been the largest beneficiary of supply-chain disruptions in API and intermediates, Deepak Malik, analyst at Edelweiss Securities, said. The company, in its earnings conference call, said it’s spending Rs 1,500 crore on capex to capitalise on the new opportunity.
Vijay Kumar Garg, joint managing director at IOL Chemicals Ltd., said the company benefited from the supply crunch for Ibuprofen (painkiller). He expects robust growth till the year ending March 2021 when fresh global supply comes.
Drug Recall
Last year, Valsartan, used to treat high blood pressure, was recalled by many global pharma companies, including India’s Torrent Pharma Ltd. and Aurobindo Pharma Ltd., after active ingredients were found to be contaminated in 2018.
The U.S. Food and Drug Administration lowered the impurity threshold for APIs after the Valsartan recall and has been scrutinising the key raw materials aggressively. Global formulation companies are looking for new sources of APIs to diversify the risk of being dependent only on China.
Varinder Bansal, managing partner at Pantomath Asset Management, has invested in Solara and Hikal as he expects higher volumes with better margins. As domestic players start to replace the imports, there remains a massive opportunity for the Indian API industry to scale up profits and trade at much higher valuation multiples, he said.