We are seeing a rise in COVID-19 cases in China. How will this impact India Pharma Inc., as the sector is dependent on China for key chemicals for pharma manufacturing? What steps has Hikal taken to become more self-reliant for key pharma raw materials etc?
In the past two years, Hikal is constantly trying to become more self-sufficient for APIs. Two years back, we were buying a significant amount of raw materials from China but we are finding alternative options for that in India for manufacturing our key APIs. We take KSMs and intermediate which are the raw materials (starting materials) from China and we manufacture the APIs ourselves. The situation may be a little different for the rest of the pharma industry where they import a lot of the direct APIs. From a Hikal perspective, we are in a better position compared to last time. Our efforts to be self-sufficient in KSMs are finally bearing fruit.
The COVID-19 outbreak and China Plus One strategy being pursued by global MNCs have only affirmed the position of India as the most preferred destination for outsourcing research & development and manufacturing due to its proven track record of high-quality research capabilities, in addition to its competitive cost structure.
Has the pharma procurement chain become better and more resilient?
We are currently dependent on China for about 50 per cent of our KSMs and we intend to bring it down further in next few years. In the last two to three years, we have been looking at partners within India and other geographies that are not dependent on China. Europe is also a destination for some of the KSMs but the Ukraine war has slowed down these efforts.
In our long-term plan, the objective is to have a robust supply chain out of India and Europe and reduce dependence on China.
Hikal’s Pharma vertical generates 57 per cent of the company’s revenue and EBITDA. Do you expect that to increase in the next financial year?
We have a hybrid business model for our pharma business. We are in the business of custom synthesis and contract manufacturing also known as CDMO. The second pillar is the API business, which focuses on generic APIs. We aim to grow in both business verticals of pharma and keep developing new products and acquiring new customers. We plan to launch new APIs not only in regulated markets but also in other markets that are offering good potential for some of our anti-diabetic products. The Middle East, Southeast Asia, North Africa, and Latin America markets have shown good potential. Historically, our presence was less in semi-regulated markets but now we are making more efforts to cater to other significant markets for our own APIs. Our API business’ objective is to keep developing three to four new products every year and launch them in regulated and semi-regulated markets.
On the CDMO side, we are seeing more traction coming out of the China Plus One strategy being pursued by Big Pharma companies. They have all also realised that being dependent on China is a geopolitical risk for their supply chains. There is a definite strategic shift towards India. We are having several discussions with various big pharma customers and some of them have shown results in 2022. Going forward, we will see more positive results in 2023 and 2024. We believe that both verticals within pharma, that is the CDMO and API business, are good for the future and we will maintain a growth rate in the high teens for both of them in the next few years.
You’ve signed a multi-product 10-year contract for the API with a global player. Which is obviously part of their China Plus One strategy. Could you tell give us any more colour on this deal?
The said project is progressing well and the contracted APIs are in various stages of development. The plant is also under construction and will be up and running by the middle of 2023. We will see revenues being generated out of this plant from FY 2024.
The objective of the customer was two-fold. They had several smaller suppliers for these APIs in China and India, primarily in China, but they wanted to de-risk from that. They call this a supplier consolidation programme and we could get a few products in that supplier consolidation programme. We are in further discussion with the customer and we may get a few more in the next wave of consolidation.
What role can government play in providing further impetus to the sector? Could you comment on the success of schemes like the Production-Linked Incentive (PLI) scheme, for instance?
PLI is a very welcome step. I think the government is doing the right thing to announce PLI for pharma in various forms. We expect faster clearance of environmental applications from various government authorities for introducing new products. It has improved a lot in the last two years, but can be better. Notifications have been issued by the Ministry of Environment at the central level that permissions can be given at a category level rather than giving product-wise approval to the API manufacturing industry. Hikal’s Pharma Business operates in Gujarat and Karnataka and we are in touch with various government authorities to get benefits out of these notifications and get faster approvals.
Our multinational customers also feel that this process is slow in India and structural changes are required in this aspect.
Any pre-budget expectations that you would like to highlight?
It is a little too early to say anything about the budget but PLI is the right step that the government has taken. As we move along, we (hope to) start getting faster clearances from these various government authorities to set up new manufacturing facilities and expand capacity and introduce new products that will help us in the future.
What are the demand drivers that have contributed to the growth of Hikal’s business verticals?
Our API portfolio selection has been judicious in the past few years and they are now showing results. We file few DMFs but we ensure that we have a robust process, competitive cost and a reliable supply chain. This will ensure that we get a leading market share in the industry. On the CDMO side, the market is more open to outsourcing, especially from big pharma. They are coming into India more as part of their China Plus One strategy.