CDMO Stocks – It is defining the next big trend in Indian pharma

As the NSE Pharma Index touched an all-time high amid global uncertainty, it is turning into more than just a defensive play. Pharma is turning out to be an aggressive play on the contract development & manufacturing (CDMO) opportunity.

What exactly is the CDMO business all about?

A CDMO is typically an outsourced partner in the pharma value chain. The CDMO partner is not only involved in drug development, but also in manufacturing. Setting up factories in developed economies can be prohibitive in terms of costs. An easier option is to outsource the drug development, testing, analysis, and manufacturing to countries like India. India has an array of such CDMO companies that promise high-quality testing and production facilities, quality manpower, and refined R&D skills. Globally, CDMO is a $150 billion opportunity, and India currently has just about 3% of the market.

Why are CDMO stocks surging in India?

If one looks at the performance of stocks within the pharma space, it is the CDMO stocks that have done exceptionally well. That is also backed by the CDMO growth shown in quarterly numbers. In the last 6 months; Laurus Labs rallied by 87%, Gland Pharma rallied by 75%, Divi’s Labs rallied 57%, Sai Life Sciences 52%, Neuland Labs 42%, and the list can go on. In fact, stocks that derive at least 40% of their revenues from CDMO have rallied more than 50% in the last 6 months. Valuations are a concern as the average P/E of top CDMO stocks is more than 65X, but then growth never comes cheap. After all, CDMO companies have been reporting 20% revenue growth and 60% profit growth!

Big demand for peptides and weight loss drugs

While revenue and profit growth are more like a manifestation of the CDMO story, there have been some key drivers. Pharma giants like Novo Nordisk of Denmark are increasingly outsourcing the manufacturing of complex peptide APIs to Indian CDMO players. Peptides are, typically, polymers of 40 or fewer amino acids. More than 50% of these peptides find applications in weight loss drugs like semaglutide, liraglutide etc. These peptides for GLP-1 drugs has seen substantial CDMO outsourcing to India. Also, there is increasing interest in complex biologics, biosimilars, and ADCs in cell and gene therapies. With biotech funding recovering, this is emerging as one more opportunity for CDMO players.

China Plus One is the other big CDMO driver

While the basic thrust for CDMO activity in India has come from complex peptides and biosimilars, it is China Plus One that is driving structural demand for Indian CDMO. Since the pandemic, global pharma and biotech companies have been aggressively looking to reduce their dependence on China by diversifying their pharmaceutical supply chain. This supply chain rebalancing has resulted in substantial demand for Indian CDMO activity. India can offer scale and scalability in this business, which derisks the business model of global drug players. More importantly, CDMO will help Indian pharma to move up the value chain, beyond generics. That is what is actually making the cut!