Six Indian drug firms that are doing serious business in coronavirus times

Indian pharmaceutical companies had a tough time in the US market, battling regulatory scrutiny and competition. Times changed with the coronavirus: companies now quickly hear from the US drugs regulator and they are scaling up production. The world sources from China most key materials needed to make medicines, but opinion is turning against that country. That sentiment is an opportunity for Indian pharma companies specialising in outsourced research services and product manufacturing. The world's race for a coronavirus drug hinges on Indian companies working with their global peers. Business Standard tracks six companies to feel the pulse of Indian pharma.

Ujjval Jauhari , Business Standard
7th July

India’s pharmaceutical companies shine bright in the coronavirus pandemic, turning a corner after sweating it out in the coveted US market due to pricing pressure, consolidation and regulatory scrutiny.

The Food and Drug Administration (FDA), USA's regulator for drug and food safety, has sped up approvals for facilities of Indian drug manufacturers. Analysts say the pandemic has opened the door for Indian companies manufacturing a spectrum of drugs like hydroxychloroquine, the anti-malarial drug touted by US President Donald Trump as a potential “game changer” in the fight against the pandemic, and Remdesivir, the investigational antiviral drug.

Indian pharma companies are working with global institutions to develop vaccines against the coronavirus disease Covid-19. Companies sense an opportunity in contract research and services majors (CRAMS)—the outsourcing of research services and product manufacturing—and niche drug manufacturing as the world looks to reduce its dependence on China for key medicines and ingredients.

The world sources from China 60-70 per cent of key materials needed to make medicines, said Gautam Duggad, head of institutional research at Motilal Oswal.

“A ban on imports from China could lead to supply chain disruption in the Indian pharma industry. Due to economy of scale, raw materials procured from China are estimated (to be) nearly 20-30 per cent cheaper than those manufactured domestically. Meaningful investment for setting up facilities in India to replace Chinese supply would be needed, which requires time as well as regulatory approvals,” Duggad said.

Ninety per cent of the world's imported antibiotics, like penicillin, come from China. An estimated 80-85 per cent of the key starting materials (KSMs) and chemicals needed to manufacture drug intermediates come from China.

Analysts say six Indian pharma companies are likely to benefit most from the pandemic and the possible shift in active pharmaceutical ingredient (API) manufacturing from China to India.

Cipla

Cipla’s Remdesivir will be sold at hospitals—mostly government-run—treating Covid-19 patients. Cadila Healthcare, Dr Reddy’s Laboratories, and Jubilant Life Sciences are likely to come up with their own antiviral drugs to treat Covid-19, but Cipla has the first-mover advantage.

As the drug’s API is made in India, Cipla may price it less than Rs 5,000 per vial. “Assuming Cipla can garner all initial orders from the Maharashtra government, it could cash in on (a) Rs 30-crore opportunity from that state alone. Cipla promises to be the only player in the space to deliver annual 100 basis point (bps) return on capital employed (ROCE) expansion over coming years given the early mover advantage the company has,” said an analyst at a domestic brokerage. Maharashtra has the highest number of coronavirus cases among Indian states.

Cipla has a strong portfolio of respiratory medication and it is a strong player in the antiretroviral drugs segment. India and the US are likely to have a high demand for respiratory drugs considering the high respiratory stress in Covid-19 patients, said analysts. It has a large pipeline of products that will add to its revenue streams once they get regulatory approval.

Glenmark Pharmaceuticals

Investors cheered Glenmark Pharmaceuticals when the company launched Fevipiravir, an oral drug to treat mild-to-moderate Covid-19 infections, at Rs 103 per tablet. As Covid-19 cases increase in India, 70-80 per cent patients would need Favipiravir, according to analysts. Glenmark has completed a clinical study on the drug and secured approval from the Drug Controller General of India (DCGI). As other companies may launch similar products, competition could bring down the drug's price.

“The price will reduce by over 50 per cent in the next two months. This drug has a short-term window--only as long as the pandemic lasts. Therefore, companies will rush to launch,” said an analyst. Glenmark is conducting trials on a combination therapy of Favipiravir with Umifenovir that would aid faster recovery from the disease.

Amey Chalke, who works with at Haitong Securities, expected Glenmark to rake in Rs 40 crore-Rs 50 crore in revenues in Financial Year 2020-21.

Aurobindo Pharma

Aurobindo manufactures and ships a large range of products for the US, benefitting as that country stocks up drugs to fight rising coronavirus cases. The FDA has cleared one of Aurobindo's key manufacturing plant called Unit 4, enabling the company to get for more sales. Aurobindo gets 92 per cent of its sales from international markets and only 8 per cent from the domestic market.

Aurobindo called off in April a $900 million deal to buy three US manufacturing plants of Sandoz, the generics unit of Swiss drug maker Novartis. This move was first seen as boosting Aurobindo’s growth in the US but when it was called off in April 2020, the market perceived it as a debt overhang being solved in uncertain times.

“Clearance of Unit 4 improves US visibility. While the recent termination of the Sandoz deal is negative, zero net debt by FY22 in the current environment will be positive, in our view. Despite a high US base, low product concentration provides comfort and it (Aurobindo) is in a better position to take advantage of drug shortages, given its range of products. We increase our FY21E earnings per share by 6 per cent and FY22E earnings per share (EPS) by 5 per cent. The stock trades at an attractive valuation of 13x FY22E price-to-earnings (P/E),” said analysts Param Desai and Ankeet Pandya, who work Elara Capital, in a June 4 report.

Aurobindo has a diversified portfolio and it is not dependent on any individual product to generate revenues.

IPCA Laboratories

The company benefitted by supplying hydroxychloroquine to the US in March, but since then the FDA has revoked emergency authorisation for the drug's use in Covid-19 treatment. After the US late March lifted an import ban on hydroxychloroquine, IPCA continues to gain market share from other players in that market. Analysts expect the drug will continue being used in the rest of the world for Covid-19 treatment, as there hardly any other options. IPCA, being the largest producer, should gain.

The company clocked 23 per cent year-on-year growth in sales/revenue in FY20. With the US opening up IPCA’s products since March, analysts say the company's strong pain relief and acute drug portfolio should grow at a healthy pace of over 20 per cent during FY21.

Cadila Healthcare

Cadila, too, is benefiting by supplying hydroxychloroquine. It has ramped up manufacturing the drug—from 3 metric tonne (MT) per month to 20-30 MT (about 100 million tablets) per month. The company has strengthened its research to develop a vaccine against Covid-19 and it expects its business in the US will grow.

Cadila’s wellness products, like Sugar Free, Nutralite, Complan, Glucon-D and Nycil, should deliver double-digit revenue growth in FY21. For FY22, analysts see the company clocking around 16 per cent annual earnings growth over FY20.

Divi’s Laboratories

Divi’s Laboratories will be a beneficiary from the ‘move-away-from China' mood, as it is a major exporter of generic active pharmaceutical ingredients (about 59 per cent of its FY20 revenues) and it is sought after for CRAMS (about 41 per cent of FY20 revenues). It makes niche ingredients and is a custom manufacturer to global pharma companies.

Divi’s clocked 10 per cent growth in revenues for the quarter ended March 2020 as reported profits were up 33 per cent year-on-year. The company expects to expand capacity at two plants (set up at a capex of Rs 600 crore each) by the second half of FY21. It will ramp up supplies to non-regulated markets soon but costs will remain high. Major benefits for the company will come by FY22 as supplies to developed markets pick and new capacities come on stream.

Disclaimer: This information is from a third party—Business Standard—offered through a tie-up to Kotak Securities customers for free for life. This information is provided “AS IS” and “AS AVAILABLE” basis and Kotak Securities Ltd make no representation or warranty of any kind , express or implied regarding the accuracy, adequacy, validity , reliability , availability or any completeness of the information provided herein. The third party content is not created or endorsed by any business offering products or services through it. The provision of this third party content is for general informational purposes only and does not constitute a research call, recommendation or solicitation to purchase or sell any security or make any other type of investment or investment decision. Also, the views and opinions stated in the content belong to Business Standard. Kotak Securities does not uphold nor promote any of the views. These reports do not, in any way, qualify as a Kotak Securities research report.. KSL holds no responsibility of any kind as regard to any discrepancies, errors, omissions, losses or damages. For data reference to any third party in this material no such party will assume any liability for the same. Kotak Securities Ltd and/or any affiliate of Kotak Securities Ltd does not in any way through this material solicit any offer for purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material.. Kotak Securities Ltd (including its affiliates) and any of its officers directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. All recipients of this material should before dealing and or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice.. The recipient alone shall be fully responsible/are liable for any decision taken on the basis of this material.. No part of this material may be duplicated in whole or in part in any form and or redistributed without the prior written consent of Kotak Securities Ltd. This material is strictly confidential to the recipient and should not be reproduced or disseminated to anyone else.

A few links for further reading

Are Indian banks out of the woods?

Earnings season is over at most Indian banks. Looking at the September-quarter results, one might be tempted to say the worst is behind for the India banking industry. Many banks have surpassed analysts’ profit estimates; even if a few have announced losses or smaller profits, that’s primarily on account of one-off deferred tax asset adjustments. Three government-owned banks and one owned by Life Insurance Corp continue to be in a bad shape. At least 10 public-sector banks are busy with their consolidation plans. Is Indian banking out of the woods? The answer will have to wait, writes Tamal Bandyopadhyay.

Don’t waste this crisis

The gross domestic product (GDP) growth numbers for the July-September quarter, the lowest in 26 quarters, are no surprise. Most analysts had — belatedly — forecast the bad news. It is now clear that if the government does not get its act together by Budget day, two months from now, a quick recovery from the current depths should not be expected. The economy is on a cusp from where it can swing either way. Nirmala Sitharaman is on test.

Fix the holes in your investments and insurance plans ahead of the new year

Make changes where required so that your investment and insurance portfolio are equipped to meet the rigours that 2020 may have to offer. With the year drawing to a close, your thoughts may have turned to taking a holiday and visiting a new destination. Or you may want to just curl up in a blanket and laze around by a bonfire. While you do deserve some rest after toiling for the entire year, one essential task you must not overlook is to check your financial portfolio and ensure it is in good shape.

Want to get this in your email?