Pharmaceutical growth cure lies in CDMOs' resilience to market ailments

They get growth Rx from outsourcing, with fewer Trump tariff side effects

Indian generic and formulation pharmaceutical (pharma) companies are contending with tariff-related challenges and subdued volume growth in the domestic market. However, one segment within the pharma industry that remains well-positioned is contract development and manufacturing organisations (CDMOs).

 

Strong outsourcing demand from global pharma giants is expected to sustain the growth momentum of listed CDMO players. Moreover, the impact of Donald Trump’s tariffs on the CDMO sector is expected to be less severe compared to their pharma counterparts.

 

It comes as no surprise that CDMO players have outperformed over the past year, delivering an average return of 60 per cent, while the Nifty Pharma index has gained just a fifth of that. Although this outperformance is expected to continue, given the rally and current valuations, the gap between the two may narrow.

 

The imposition of reciprocal tariffs will impact the CDMO sector, but the effect will be smaller than that on generic and formulation players. CDMOs, operating on a business-to-business model, will be better positioned to pass on the tariffs compared to business-to-consumer companies. Among CDMOs, those focused on generics will face greater pressure than innovators. Companies like Piramal Pharma, Syngene, and Sai Life Sciences, with US-based facilities, could offset some of this impact.

 

The primary driver for the listed players in this space is the robust growth trajectory. Analysts Alok Dalal and Dhawal Khut from Jefferies Research estimate that the Indian CDMO industry, valued at $7.3 billion, will grow at an annual rate of 14 per cent between 2023 and 2028, nearly doubling to $14.1 billion. In comparison, the global CDMO market is expected to grow at just 9 per cent annually.

 

Multiple factors will contribute to this growth. Indian CDMO companies stand to benefit from benign global macros, including increased requests for proposals, favourable dollar-rupee fluctuations, sustained outsourcing by Big Pharma, and the China+1 diversification strategy employed by global pharma stakeholders, according to analysts Rohit Bhat and Hrishikesh Patole of B&K Securities. 

 

Kotak Research also expresses optimism about the sector’s prospects. Analysts at the firm, led by Alankar Garude, highlight immense opportunities for Indian companies driven by the ongoing supply chain realignment. Factors such as the availability of skilled talent, a cost advantage, and technological expertise, particularly in small molecules, will further enhance growth.

 

In the base case, despite factoring in no benefit from the US Biosecure Act, assuming China remains relevant, and accounting for a delayed impact from supply chain derisking, analysts expect the Indian contract research and development and manufacturing market to almost quadruple to $12 billion within the next decade.

 

To capture greater market share, Indian players are expanding capacity and introducing new capabilities in complex chemistry and emerging technologies. This includes new opportunities in cancer treatments, such as antibody-drug conjugates (ADCs) and glucagon-like peptide-1 (GLP-1) peptides, which are essential in regulating blood sugar and appetite, as well as cell and gene therapies and chimeric antigen receptor T-cell therapies. These triggers are expected to help CDMOs increase their global market share, which currently stands at just 2 per cent.

 

B&K Securities has maintained its ‘buy’ rating on Aurobindo Pharma and Suven Pharma, while expecting Laurus Labs to perform well due to strong execution on ongoing capital expenditure. BOB Capital Markets also has a ‘buy’ rating on Suven, citing its strong execution, focused approach in the ADC segment, a robust balance sheet, solid return ratios, and strong promoters.

 

Within its coverage, Kotak Research favours Piramal and Syngene. Piramal’s diversified presence with niche capabilities positions it well for future growth. Syngene, on the other hand, offers a strong combination of top-tier small-molecule expertise in discovery and attractive valuations. While Sai Life Sciences is poised to deliver a strong earnings trajectory thanks to its solid capabilities and timely expansion, the brokerage remains cautious of its relatively high valuations.

 

Emkay Research has a ‘buy’ rating on Blue Jet Healthcare, citing its simplified business model, lean cost structure, debt-free balance sheet, and niche portfolio as key strengths. These factors contribute to a strong margin and return profile, high revenue per commercialised product, and best-in-class asset turnover, according to the brokerage.