CDMO sector to be key beneficiary of China+1 strategy in pharma: Vishal Manchanda
"What the challenge for the sector is all of this
growth
that we are seeing in the US is tactical. So, it is not going to stick and probably we will see challenges in the next few quarters on the growth side," says Vishal Manchanda, Systematix Group.
Help us make sense first of all of what we can expect from quarter four results when it comes to the
pharma companies
. Do you believe the growth will be volume or price driven and what is the outlook?
Vishal Manchanda:
The quarter four will broadly be in line with what we have seen in the previous three quarters. The domestic growth on a YoY basis will be in high single digit range with select companies outperforming. From US perspective, it will be selectively strong for a few companies like Zydus and Sun Pharma, specifically on a quarter on quarter basis Zydus should report very strong growth, on a quarter over quarter basis probably they will report the strongest US
revenues
when compared to peers. But what the challenge for the sector is all of this growth that we are seeing in the US is tactical. So, it is not going to stick and probably we will see challenges in the next few quarters on the growth side.
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What will lead to this particular growth? Will that be a volume led or a price led growth in this particular quarter and how much will be the impact of the new launches in this particular growth?
Vishal Manchanda:
So, largely the US growth is going to be led by these high value launches that specific companies have in their
portfolio
, so that is driving the US growth, but these high value launches are not something that is going to stick in the base. They will probably come off in the next two or three quarters, so that is the challenge.
And from an India perspective, the growth has always been a mix of volume, price increase, and new product introduction. So, volume so far if I look at the India pharma growth, the volume has been in the low single digit range.
So, out of the high single digit growth, the rest will come from price increase and new meal product introduction.
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Let us talk about the US part of the pharma earnings because a lot of these companies are external facing and have broad exposure to the US as well. What kind of earnings impact are you expecting from the US markets? What kinds of sales are you expecting for the companies that have their manufacturing as well as distribution over there and how much price erosion if at all are you expecting from the US
markets
this year?
Vishal Manchanda:
So, price erosion is something that has always been happening and it continues to happen. It is in the mid to high single digit range and largely depends on the portfolio that companies have, specific portfolios that they have in the US, but it is going to be in the mid to high single digit range and it will sustain.
From a tariff perspective, we are yet to see the tariffs, but I think Indian companies do not have the bandwidth or the P&L to kind of absorb the tariffs and reduce their prices to the extent of tariffs.
So, probably what Indian companies will need to do is pass on the tariffs to the US consumers. So, this will be inflationary for the US customers if at all tariffs come. Since the US is taking a longer time to put tariffs on pharma, they are actually evaluating kind of different option, is the traditional tariff option.
So, probably they might also come out with specific segments in pharma that they might want to put tariff in and specific segments in pharma they might want to exempt.
They might also look at a differential tariff, India versus China. So, all of these things are possibilities. We will have to wait and see. But as of now it is better to stay away from pharma companies that are heavy on generics in the US.
But sticking with the tariff, does it stands a case within the pharma segment which can actually benefit from the China plus one theme because till Q3 what we were getting to hear is that all of these CDMO companies were rather getting a lot of inquiries for some of the Indian manufacturers. So, help us understand that how are you analysing the situation. As of now when you say that one should stay away from the companies having a lot of generic exposure in the US, but other than that which segments to look out for?
Vishal Manchanda:
Fundamentally, I would prefer companies with a lower US exposure. Actually if you want to invest in a largecap, then US exposure is part and parcel to it, but I will prefer companies like Sun Pharma which has got a US exposure but a lower US exposure, 30% of sales to US and again within that 30% large part of it is speciality and less of it is generics.
So, generics is where the risk is, speciality is probably at less risk versus the generics. So, specific names, Sun and then probably the next name I would look at Cipla in the largecap category which again has a 30% exposure to US while the other peers, the largecap peers have exposure between 40% to 50% of their sales to the US. So, coming to the themes that can benefit from China plus one, I think CDMO is clearly the theme that is benefiting from China plus one.
Companies are talking about higher requests for proposals and this kind of commentary is consistent since the last few quarters and we also are seeing numbers being delivered by CDMO companies, so that is a segment to look out for. But we will need to pick stocks that are at attractive valuations.
And also, want to get your sense on a couple of other stocks, the likes of Zydus and Lupin. They have been in the news flow recently. They have lost the Myrbetriq patent case in the US court. What will be the impact on this because what we understand
Lupin
has said that the district court's decision does not enjoin them from continuing sales of this Myrbetriq tablets in the US. So, what could be the potential impact on both of these companies Zydus as well as Lupin on the back of this court order?
Vishal Manchanda:
So, the district court has kind of great says that the Myrbetriq patents are valid and hence logically Lupin and Zydus will need to withdraw from the market. But they have a choice to continue. But if they continue to sell the product in the US market, it will be considered at risk and they would be liable to penalties and these penalties can be kind of 3x of sales on the upper end. So, it is a bit risky to continue. I think companies are better positioned to decide on whether they want to continue with the sales or not.
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