Indian CROs and CDMOs poised for greater growth

India’s brand recall is still strongest in the global pharma and biotech landscape as “pharmacy of the world”.  The country’s export success in generics is well established.  With close to $25 billion of exports in 2022 and more than 55 per cent of exports being directed to highly regulated markets, the industry continues to consolidate its positioning as a high quality manufacturing destination that is also cost competitive.

While the industry rests on this foundation of sustainable scale in generics, it continues to spread its wings across other prioritized avenues for growth – biosimilars, vaccines, and contract services.  The resurgence of the API segment continues as a key priority as well for all stakeholders – industry, investors and policy makers.   

Of the various growth avenues gaining momentum, contract services continues to be the least discussed but is increasingly emerging as the dark horse.  As a strategic advisor to several leading companies and private equity funds, I have experienced first hand the level of industry and investor investment appetitive across segments of contract services.   This is supported by both macro forces driven tail winds as well sustained capacity enhancement by the growth oriented domestic industry.

Macro tail-winds – Evolving FDI direction and outsourcing preference
The macro forces are doubly powered.  The World Bank’s Global Pulse Survey covering a large pool of multinational enterprises clearly pointed to share of FDI earlier directed to China now being diverted to a mix of other countries in the post COVID world.  Within that, India is pitted to substantially gain on FDI in the pharmaceutical manufacturing and services space.  Beyond FDI being redirected, conversations with stakeholders in global pharma  and the CRO industry point to increasing focus on reducing level of outsourcing to China.  This is likely to impact all segments of opportunity – early discovery, medicinal chemistry, small volume synthesis, in-vivo and early biology activities and large volume manufacturing of APIs.

Riding the tide – Shoring up capability to capitalize on expanding opportunity
Combined with this preference for near shoring and ally shoring of pharmaceutical outsourcing activities is the continuing trend of Indian industry investing in capabilities and growth.  Over the past few years, Indian CROs, both standalone and service arms of pharma companies, have made organic and inorganic investments to enhance breadth and depth of offering and value proposition.

Focus on biology and biologics: Indian CROs have long standing engagement in medicinal chemistry and the country enjoys perception of being a reliable and experienced hub for chemistry services.  This continues across the continuum of molecule synthesis to small batch and large batch manufacturing.  However, while doing so relatively late compared to regions such as South Korea or even Europe, several Indian CROs and CDMOs are now embracing the opportunity in biology and biologics.

The biology opportunity has been within the spectrum of discovery and early development services and has been largely the driver for several strategic investments in the last few years.  The most active focus has been on integration of GLP in-vivo capability within the overall discovery or development services offered.  It is notable that most stand alone GLP in-vivo providers in India have greater business concentration in toxicology as compared to discovery focused PK services.  This has been primarily due to constraint of market reach to innovative ventures globally, a barrier that can be broken by larger strategic investors with presence in high value discovery markets.

We anticipate that the transaction and expansion momentum in in-vivo services will continue over the next few years.  This is likely to provide a strong growth lever backed by the opportunity to offer more integrated services to global customers.  While sufficient large animal capability still remains a constraint for ADME and DMPK work in discovery, the strategic focus on a more integrated
and wider offering to customers is likely to reap benefits in the short term as well as medium term.

Beyond integrating biology service offerings, standalone CDMOs in India as well as CDMO divisions of larger Indian pharma companies have both also been focused on strategically expanding capacity in biotechnology.  While Kemwell was a pioneer in biotechnology CDMO services from India, the overall momentum until now has been more geared towards proprietary product portfolio as compared to CDMO services.  However, now we note expanding momentum in CDMO services across the range of peptides, biosimilars, novel biologicals, vaccines and even next generation cell and gene therapies.

Laurus’ investment in Richcore and Piramal’s investment in Yapan Bio emphasize this expanding trend. Global emphasis on scale-up partnerships during COVID, also led to more companies exploring contract manufacturing opportunity for vaccines (across both drug substance manufacturing as well as fill-finish).  Several of these are now continuing to pursue the focus on contact services for peptide and protein production.  Samsung Bioepis is a global benchmark is tactically combining proprietary portfolio with contract manufacturing services in biologics.  The model is now gaining favour with several Indian pharma companies; and we expect the base of CDMO service providers in India for biologicals to further expand over the next three years.  In addition to biopharmaceuticals, several CDMOs are also strategically focused on cell culture meat
and industrial biotechnology, both large volume market
opportunities with potential for geometric growth.

The funding fuel – enhanced private equity appetite
Indian capital markets have rewarded CDMO services with a valuation premium compared to generic manufacturers and access to capital has not been a constraint for CDMO providers in India. The overall investment momentum has also been spurred by significant appetite of private equity funds to invest in the segment.  Multiple transactions in the segment reinforce the buoyant growth outlook for Indian service providers.

Notable transactions include TPG Capital’s investment in Sai Lifesciences in July 2018, CX Partners’ investment in Veeda Clinical Research in December 2018 (and subsequent bolt-on acquisition of Bioneeds by Veeda in July 2021), True North’s investment in Anthem Biosciences in March 2021 and Goldman Sachs’ investment in Aragen Life Sciences (earlier GVK Bio) in May 2021.  With capital markets cooling off for IPO linked exits but industry’s fundamental growth potential remaining robust, we anticipate private equity investment momentum to continue over the next few years.  This will further provide fuel for consolidation, inorganic expansion and creation of higher value service platforms from India.

Getting closer to customer: Focus on geographic expansion
Finally, in addition to the expansion in capabilities and capacity in India, several leading Indian CDMOs have acknowledged the value of being proximate to customers, especially the long tail of discovery ventures.  In the context of Covid led disruptions to global supply chain and consequent impact on business operations, proximity is valued by both the customer itself and policy makers focused on re-shoring or near-shoring the pharma value chain.

Several Indian CDMOs have been actively exploring acquisition opportunities across geographic borders.  We expect this appetite for geographic expansion to continue given the macro propellants at play.  In the next five years, larger Indian CDMOs are likely to nurture stronger onshore presence in US and Europe.  This quest for onshore capability is most intense in discovery CROs but is also true of large scale API and formulation manufacturers.

Greater global growth vital
Opportunity in the pharma and biotech industry is rapidly evolving with biologics and next generation therapies gaining more ground.  The global value chains are recovering from Covid caused disruption and evolving into a world where localization and supply chain resilience have gained greater prominence.  As the dust settles in the post Covid world, Indian CROs and CDMOs are poised for growth with expanded capability, wider and more integrated service offering and a strong focus on offering greater value to customers.  The industry bandwidth is increasing with standalone CROs bolstering balance sheets and aggressively pursuing global growth and leading Indian pharma companies more actively embracing the contract services opportunity.  The next five years will be pivotal for these investments to reap rewards; and for Indian CROs and CDMOs to gain their space in the global landscape.