In my humble opinion, its a kind of technical consolidation. People exiting / re positioning after making a descent buck.
WRT earnings…there arent any signs of signifigant pricing presurres that I came across in any management commentary. Nor were the earnings COVID induced…thats for sure.
I think most companies ( specially the export oriented ) should resume their upward march in some time. On domestic focussed MNCs, I guess there are concerns about their ability to sustain premium pricing / brands as more heavy weights join in the E- Pharmacy space. Here too, I believe that branded / premium products don’t go out of fashion in a hurry.
Let me try to elaborate a bit what I meant by saying COVID related global disruptions - If an API player has better growth because of companies focusing on additional supply chains - that’s the effect of Corona as the supply chain disruptions in lockdown phases and global restrictions etc. brought forward this food of thought.
Also, if formulation business found a better approval regime - no doubt they must have fared better after working on earlier compliance issues but the supply/demand situation as induced by Corona resulted in a slight better approvals (I may be wrong in my assessment).
So, although these export oriented firms did not benefit directly from any Corona related drugs/vaccines etc. much but these global disruptions did work in their favour. Again, reserve the right to be wrong.
Thanks for your inputs, would be good to know why you say with certainty that the growth is no way related to Corona related disruptions.
Thats a fair assessment, in my opinion. Indian API makers indeed have their plates full with orders due to the MNCs across the world de-risking and adding alternate sources of supplies.
Is it a short term thing??? I really do not think so. Diversification of supply chains looks like a well thought out process ( also encouraged by National Govts ), specially in case of essential products like medicines. Its almost a national security issue, after all.
What remains to be seen is to how do the Formulation majors perform on compliance once the FDA starts its physical audits.
Agree, the diversification of supply chain is not a short term thing. I never meant that, what I meant is that the exponential growth, because of this diversification and other Corona related global disruptions, which we saw in last 2 Q results may continue for another 1 or 2 Qs post which the growth would remain but be more inline with other secular sectors. I am not questioning the growth in business, I am just trying to understand for how long the API and Formulation businesses would report excellent growth as they did in last 2 Qs because of Corona induced tailwinds…
In my opinion, the API tailwinds are here to stay. Was reading some reports on China vs India API industry size. Even a 5 pc shift from China to India would double the Indian industry.
Eventually, we may be in for a 10-20 pc kind of shift. That should be possible.
Plus the operating efficiencies and economies of scale.
On formulation, for players making Speciality generics and Complex generics, the runway should be pretty long.Like - Sun, Cipla, Dr Reddy’s etc. Not too sure about players making drugs with lower degree of complexities. Like - Alkem, Ajanta.
However, all the players are smart enough to know that crowding the mkt by launching molecules with existing competition is a recipie for disaster and hence unlikely to play out in a hurry. And thats also a reason for the pricing pressures to come off in US.
Also, Ajanta is smart that ways and have a wide spread of geograhies where they sell.
I have also been observing that in plain Vanilla generics mkt ( in US ), sources of competitive advantage come from 2-3 things- Tech know how, compliance and backward integration. Eg- Alkem is good at first two but lacks the third in US. Same for Ajanta.
In India, distribution and brand building play an imp role. Thats where Alkem is very good.
API supply chains cannot be switched fast. It might take O(years) to file updated ANDAs to call out different API suppliers. This has been confirmed both in management concalls (Alembic management about Sartans) and also in my joint interaction (with @harsh.beria93) with a Pharma expert: Amit Rajan (posted here: Pharma compliance issues):
Any China switches, either started before Covid (likely) or; if they are exacerbated by Covid, imo these are yet to reflect in Quarterly results.
A lot of demand for APIs have also come because of higher inventory levels being maintained by large generic players (can be verified in inventory numbers of companies like Sun, Lupin, Cipla for H1FY21 compared to H1FY20).
Switching an API supplier for a given ANDA requires atleast 8-10 months as s-ANDA has to be filed (assuming the supplier already has a DMF, if not it will require much longer in the order of O-years).
Good to know the runway for this change. Since you are invested in Syngene, where do you see a Biocon and Syngene fit in this long runway scheme of things? They do not seem to fit either in pure API or Formulation space. More of research outsourcing, biologics etc. What do you think about the profitable runway, competitive intensity and edge of this side of business…which I find a tad different from other export oriented API and Formulation pack. pls correct me if wrong…
Yes I remember reading this and that makes even harder for me to understand the excellent growth of API players if the tailwinds for supply chain switches etc. are yet to play. As harsh mentioned that larger inventory of formulation pack could be one reason - and that reason looks a kind of spurting jump for few Qs? followed by more sustainable, normal good CAGR growth - rather than these extraordinary jumps. Pls note I am just questioning to make my understanding better from more learned members here who have better grip of Pharma industry…
Oh yes. Syngene and Biocon should do well on the back of Biologics / CR / CRAMs.
Probably thats why they command such premium valuations.
A bulk of future drugs in Pharma space are slated to come from 4 broad areas ( thats because bulk of Pharma R&D is going in these areas ) - Biologics, Complex Generics, Speciality drugs and Oncology drugs.
Companies poised to capitalise these opportunities should do well, specially in the developed markets.
Govt Sanctions INR 15000 Crore under PLI Scheme for Pharma Industry. This is apart from INR 6940 Crore Sanctioned earlier under PLI for API industries. The list of drug class covered under this PLI scheme is listed ín the article.
Good to see that the Govt of India has finally recognised Pharma Industry as a source of Forex earnings for the country. Perhaps , the govt will continue to support pharma industry so that they don’t face any major hurdles.