Indian Drugmakers Look Beyond Tough U.S. Market To Build Overseas Business

Domestic pharma companies see a limited revival and upside even as the American market faces drug shortages. Many are considering investing in India and other branded formulation or finished drug markets of North America, South America, Africa and Asia.

"This is the right capital allocation decision," Manoj Garg, director of investments at WhiteOak Capital Management, told BQ Prime. Branded markets like South Africa, Mexico, Southeast Asia—the Philippines, Thailand, Romania—typically have a market size of $3-8 billion, he said, with Brazil being the largest at about $15-20 billion.

Domestic pharma companies see a limited revival and upside even as the American market faces drug shortages. Many are considering investing in India and other branded formulation or finished drug markets of North America, South America, Africa and Asia.

"This is the right capital allocation decision," Manoj Garg, director of investments at WhiteOak Capital Management, told BQ Prime. Branded markets like South Africa, Mexico, Southeast Asia—the Philippines, Thailand, Romania—typically have a market size of $3-8 billion, he said, with Brazil being the largest at about $15-20 billion.

"We have seen some players prioritise U.S. business a little lesser," said Alembic Pharmaceuticals Ltd. in its fourth-quarter concall.

In its last earnings call, Natco Pharma Ltd. said that its subsidiaries in Canada and Brazil are doing extremely well. "The future of the business is the subsidiaries."

The company is setting up a subsidiary in Colombia and in Indonesia. They are also looking to buy an asset in the U.K., the management said.

"That's the strategy that we're doing on the international business," said Rajeev Nannapaneni, director and chief executive officer, Natco Pharma. "We try to globalise and use the R&D [research and development] pipeline that we have to extend a multiple number of markets, so that we strengthen the businesses."

According to a B&K Securities report, Ajanta Pharma Ltd. at a recent conference said the company expects gross margin increment to be driven by revenue mix. It estimated the branded Africa market is expected to outgrow 1.5 times the industry growth; Asia market to grow in mid-teens; India region is expected to outgrow Indian pharma market with a double-digit growth and the U.S. is likely to expand in mid-single digits.

Ajanta Pharma had 73% of the total sales from the branded generics across India, Asia and Africa in FY23, while the U.S. contributed 22%.

With a lot of generic makers eyeing similar geographies, competition in these markets is not a concern, said Aditya Khemka, fund manager at InCred PMS Healthcare.

"India is the most competitive branded market in the world, but it's still the most profitable," Khemka said. "It is all about the ability of the company to create brands in these markets."

Even with 6,000 brands existing in India, the best player generates over 45% Ebitda margin on its domestic business, Khemka said. That compares to U.S. with only around 600 generic players and the top company making 20% operating margin.

Long gestation period is a risk associated with targeting these new geographies, according to Khemka. Companies will have to typically stick around for seven to eight years, investing on medical representatives and launching new products. For the first five to seven years, the sales team cost might exceed the revenues, he said.

"But post that, if the brand is established, profits will perennially grow," Khemka said. "This is a cash-flow rich business."

According to Garg, while companies will have to build their sales, marketing and distribution network but steady growth and strong profitability outlook in branded markets makes them attractive, he said. Also, in these markets, realisations are good and prices are stable like India. "Though it takes time to build front-end infrastructure, once you are there, profitability is very good."

Currency risk, however, exists like any overseas business.