To attract capital, domestic players should show their ability by quickly ramping up their capacity to supply APIs and generic drugs to global manufacturers before their much larger Chinese counterparts fill the void.
- By Mahesh Singhi
Indian healthcare firms have all the trappings to create immense value for investors as the deadly Covid-19 virus and the search for an antiviral cure going viral with many domestic firms with a proven capability for new drug development (NDD) joining the race. However, to pass the test of a lifetime, it may be ideal for the domestic players to close ranks since no one firm alone may be able to develop the remedy quickly enough beating the resource-rich `big-pharma’ league and the nimble Chinese players. Else the virus will pass and so be the opportunity, warns Mahesh Singhi, Founder & MD, Singhi Advisors.
Barely four months back investors were ditching the healthcare space almost en mass as back-to-back bad news roiled the sector. An overdose of regulations leading to price caps on products and services and warning letters flying thick and fast from the US Food and Drug Administration (USFDA) to many facilities of makers of generic drugs and Active Pharmaceutical Ingredients (API) followed by earnings downgrades were the immediate triggers. Investors’ were right in their judgment that such incessant negative news flow would crimp the revenue growth as well as margins of these companies going forward.
However, in a dramatic turn of events, the rapid rise of Covid-19 pandemic and the subsequent mitigation measures including lockdown flipped the fortunes of the healthcare firms, at least for now. This is evident from the sudden traction the healthcare stocks gained during the last few months mirroring in their stock performance vis-à-vis the broader market. While the virus shaved off over 26 per cent from the benchmark BSE Sensex between January 17 and April 16, the sub-index BSE Healthcare gained more than 6 per cent during the same period.
The divergent reading of the benchmark and its sub-index is indicative of how the market perceives the fallout of the pandemic and the subsequent lockdown to playout for the broader economy and the healthcare space. It is now clear these episodes would push the economy into a hard landing (though a consensus reading on economic growth is yet to be reached) there are multiple positives in the works for the healthcare space.
For one, there are no two opinions that domestic drug manufacturers are staring at a once in a generation opportunity by joining the race for developing an antidote for the virus infection. Equally true is that it may take a while for developing an antibody to the coronavirus since developing a vaccine is a cumbersome process. Even if a firm manages to zero in on a possible drug candidate, it has to go through a myriad process of testing, verification and authentication processes before entering the human trial phase which is a long haul.
This is not to say that domestic companies should quit the race for developing the vaccine, but they could do a lot better for investors by focusing on their efforts on other therapeutic remedies including sprucing up their anti-viral drug capabilities and capacities or immunity building measures at large.
The resultant market expansion will just not be limited to anti-viral drugs or vaccines but will also create an additional need for drugs related to anxiety, blood pressure, sleep disorder, nutrition and immunity building measures. for these lines of products and services. Such efforts would attract investors’ interest as data shows that despite a slowdown in cross border Foreign Direct Investment (FDI) flow, the global investors are warming up to the pharmaceutical sector.
To attract capital, domestic players should show their ability by quickly ramping up their capacity to supply APIs and generic drugs to global manufacturers before their much larger Chinese counterparts fill the void. A catch here is that many of the domestic drug makers in search of cheap labour and raw materials built a massive dependency on mainland China. This is now proving to be their undoing since the global lockdown rendered these capacities and facilities idle since they could not ship products from there to their domestic manufacturing facilities. Therefore, to future proof business, they must bring these capacities back home once the shutdown is lifted.
More, it may be prudent for healthcare players to take this opportunity as a bridge to future business by going beyond making generic drugs and supplying APIs. They should double down on their spending on research and development (R&D) to develop their capabilities to respond to an event quickly. They should also benchmark their products to globally accepted quality standards to stay in the game for long.
On the balance, Indian healthcare firms have all the trappings to create immense value for investors as the deadly Covid-19 virus and the search for an antiviral cure are going viral globally with many domestic firms with a proven capability for new drug development (NDD) joining the race. However, to pass the test of a lifetime, it may be ideal for the domestic players to close ranks since no one firm alone may be able to develop a remedy quickly enough beating the resource-rich `big-pharma’ and the nimble Chinese players. Else the virus will pass and so be the opportunity for Indian firms.
Mahesh Singhi is the Founder & MD of Singhi Advisors. Views expressed are the author’s own.