I just wanted to start off by getting an overall outlook from you as to what the opportunity looks like for Indian pharma players due to the Biosecure Act.
Aditya Khemka: I think the Biosecure Act will benefit a lot of Indian pharma companies who actually do business with global innovators. It may also benefit those API manufacturers who do business with global generic pharma companies. But our money at InCred Healthcare PMS lies with companies that do more business with global innovators. The rationale behind the Biosecure Act is that China had become too much of a monopolistic source for raw material for pharmaceutical products.
And as we have seen historically, we have seen Russia weaponize gas. We have seen China weaponize the COVID vaccine. So, I think the western world sort of just got jittery with the over-reliance on China as a single source of raw materials for pharmaceutical products. And it will definitely benefit all the CDMO, contract manufacturing players in India, specifically those who do business with the global innovators.
How long do you think the transition could actually take for global players to actually shift beyond China?
Aditya Khemka: So, look, I do not think in the next decade or so they can shift completely from China. The idea is not to shift completely from China. The idea is to develop an alternate vendor ecosystem in event that China tries to weaponize its capabilities on the pharmaceutical raw materials side.
There should be an alternate vendor that can support you, even if at higher prices or higher cost. So, I think that is where the Indian players come in. Remember, last we checked, Indian API exports were around $4 billion and that number compares to China’s API exports of roughly $40 billion.
China is 10 times the size of India. So, even if they sort of end up diversifying to the extent of 20-30%, Indian API revenues could potentially triple or quadruple in that time frame. But this will take 10 years. Pharma being a regulated sector, you cannot just overnight decide to shift the vendor ecosystem or develop an alternate vendor ecosystem. There is a lot of filings, approvals, regulatory barriers to cross. So, it is not something that can happen overnight. But it is a long-term trend that will definitely play out over the next 5 to 10 years.
And what is the impact on generic players who actually source raw materials from China and those who have a heavy dependence as well from the same? For example, companies like an Aurobindo.
Aditya Khemka: So, look, I do not think Aurobindo is falling under the purview of the US Biosecure Act in that sense. I think the Biosecure Act is meant more for companies on the American soil, specifically companies that have manufacturing capacity on American soil. And Aurobindo has a couple of facilities, but their majority of production happens in India. So, they can continue to source raw materials from China. However, Aurobindo or any other Indian pharma company that sources raw material from China will hence remain reliant on China and subject to some distress in case China flexes its muscles or tries to weaponize the ability of manufacturing raw materials for API.
Let us look at a company which has a presence in the US. Can I say for our viewers to understand a hint here, maybe a company like Piramal Pharma would be the biggest beneficiary because they have presence in the US soil and they would benefit because of China plus one?
Aditya Khemka: Absolutely. So, you can say that any Indian pharma company that has manufacturing capabilities outside India, specifically in Europe or US will be, I think, the first order beneficiary of the Biosecure Act. I would give an example here.
We own a stock here called Jubilant Pharmova. The company was given a grant from the US government to create a manufacturing facility on the US soil and the US government would have the right of first refusal on production on the facility. And when the US government does not want to source material from that facility, the company is free to manufacture other materials and sell it to whoever they wish to sell.
When I say developing an alternate vendor ecosystem compared to China, I mean that they want to obviously develop manufacturers on Indian soil, India being a geopolitically friendly country to the United States, but they also want some capacity on shore and therefore, players like Jubilant or Piramal or any other player that can have capacity on foreign soil, specifically US and Europe and can manufacture and execute the capacity will definitely be the first order beneficiary.
The second order beneficiary will be the similar companies but with facilities in India because then still there will be alternate vendor ecosystem to China and that will also benefit. So, these are I think the two orders of beneficiaries that you will see in the next again 5 to 10 years.
There are two levels of beneficiaries, one you said the local manufacturing which have presence on the soil and the ones who are actually catering to this category, which is CDMO. Now, let us split it into complexities, which is that which companies are let us say in complex products or speciality products and injectable. Lupin is in speciality drugs. Aurobindo is in injectables. Divi’s is right up there when it comes to CDMO. So, in terms of complexities, which chain would be the biggest beneficiary? Will it be oral generics? Will it be CDMO? Will it be injectables?
Aditya Khemka: See, unfortunately, I do not think complexities equal higher profitability. I think that is a common misnomer when people try to evaluate contract manufacturing organisations. Complexity along with limited competition becomes a higher profitable business. No complexity, but limited competition is still a higher margin business.
And complexity with high competition is a low margin business. So, from that perspective, if you ask me, companies that do business with innovators have a moat in the sense that the innovator is willing to share their IP and the patent is still valid, it is still in force and hence, they cannot face further competition from anybody else and hence the companies that have that exclusive arrangement with innovators have their trust, have the ability to cater to their high requirements of quality and timely inventory deliverables, etc, these are the guys who will make more money.
And if you ask me, I think an Aurobindo or a Gland or some other players like that, they are mostly doing business for generic pharma companies, maybe even western generic pharma companies.
Generic pharma companies are not having a very good time in terms of their end product prices in the US or Europe and hence, their ability to pay their vendor ecosystem is that much lower.
Compared that to innovators, they are highly profitable in the US and Europe and they have the ability to pay their vendors higher given that the vendor can satisfy their norms of quality and delivery, etc.