Trump's Pharma Tariffs: The Hidden ₹Billions Opportunity For Indian Drug Makers | Business News

[00:00:00]Nandan Kulkarnney of Bernstein. He's director India healthcare and senior research analyst at Bernstein. Great having you Nandan. Uh let me first start off. You you've got a slightly different angle to this. You're saying that uh in general there's been an underpricing in the generic market in the US and this could well be the trigger which the industry is waiting for. First off, give us that perspective. Uh and and I'll ask you a couple of follow-ups. It's a very interesting one.

[00:00:28]>> Sure. Sure. And and you're right. I mean, everyone has been simply talking about the short-term triggers as cost and how much difficult it is to make in US and so forth. Number one, a few months back, we have already seen that the drug shortage in acute categories has already started impacting US markets. We believe this trigger is going to amplify it even further in the near to midterm. One of the drivers being any potential tariff conversation which tries to move manufacturing onshoring will require a massive ASP upside revision to be able to sustain the economics. Economics in terms of labor, economics in terms of running the plant and economics also in terms of getting the site transfer and filing the the product with the FDA with the new site. All of that is going to trigger a intense revision of ASP number one and number two massive competition which will unfavor the smaller players barring the exits and that shortage is something that we believe is going to be an important detriment uh for the US patients and therefore will have a substantial uh interesting earning opportunity as well for a large Indian bioarma companies >> and and this you believe Nandan is going to play out over the next one year itself that's that's the indication I'm getting >> roughly 12 to 18 months because uh if you see from a broad headline today we understand that maybe the tariff will come in effect after 2 years however the preparation or stage towards it will be set much ahead of time number one and that window is about 12 to 18 months.

[00:02:07]Number two, if the tariff really has to come through in that effect over the next 12 to 18 months, the negotiations with the payers and the pharmacy benefits will start for every single company who wishes to operate in US market including the ones who have the capacity in US and therefore these dialogues are going to take effect in terms of shortage, prices, newer market structure over the next 12 to 18 month rather than waiting for the entire tariff to unlock after 2 to 3 years >> and therefore Nandan uh how should one look at uh if at all the tariff were to come through first off the next two years will it be led by one is of course supply chain getting ironed out as you are suggesting and the second is also stocking up right because it'll be at the end of President Trump's term whether that tariff actually sustains or not will also be something which will be in question.

[00:03:09]>> You're absolutely right and and I always give an analogy of a moving chessboard, right? Uh so number one uh some of these advanced stocking and what we call strategic reserves will start becoming more of a policy narrative even for benefit operators the PBMs in the US and that will actually be a short-term trigger for improved demand for a large scale generic manufacturers. That's first number point. So it's it's a it's a pent-up demand before some event is anticipated. Number two, given that this appears at least from a prime of AC a policy at a broader sense and not any section specific investigations, uh there is a enough chance of litigations and legal battle following through and therefore any outcome which is against proposing such tariff will again favorably support Indian biioarma not to commit a substantial capex at the beginning to go and onshore the products. So it might be a strategy of stocking uh critical products getting onshored for some time to balance out the supply chain risk and at the same time waiting and watching uh as it is the of the term as you rightly said to see what are the real fallouts uh beyond the narrative in terms of policy implementation. So I think that's how the equilibrium is going to move. uh and last point that we also alluded in our report is it's going to accelerate innovationdriven value in US further especially for the large ones who will start continued focus on innovation centric drug supply may be 55B2s orphan drugs that are those are the pathways that will get further protected by the US FDA and that is where the play will continue to double down so I think that's how the variables are going to stack up >> interesting and and uh uh you know I want to understand two things is one two years realistic and enough for onshoring of manufacturing and rewiring of supply chains for some of the Indian players that's one and and this is uh this is obviously subject to the fact that they should have the available cash to do the kind of capeex that will be required so so but let's assume that they have that the second piece is who structurally gains therefore and who structurally loses if you can give us some color on that >> certainly uh number one um uh in the report that we explained I think uh 70 to 80% of generic volume that is in the US market today is simple tablets or solid orals in a technical term onsuring that is relatively a simple task compared to complex injectable or complex generic products now at the same time these 70% products are also operating on extremely thin margin and therefore beyond the cash the question is sustainability of those operations on US consuring uh irrespective of who is trying to do it from that perspective companies such as Sunfarma Dupin Zidus who are actually present on the US soil today and having running certain plants at certain capacity will find it incrementally attractive enough number one and come through reasonably fast pace to do certain select uh tech transfers and I believe within the two years that is a reasonably achievable task given last 20 30 years of rich legacies that Indian bioarma and these companies have been operating in this market so from that perspective structurally I like these fox size group in zida sun pharma who have this presence ability and the two-year time frame seems [clears throat] to be sufficient for these simple generics case by case basis the second broader question to you who might be in a in a not so perfectly wellplaced end. One of the answer of course is uh to contemplate about bioon because bio similars by nature is not so straightforward as a business. Uh site transfers are more time consuming.

[00:07:13]rewiring supply chains are not easy and biopon's presence on that large category as of today uh more is more centered from supply from Asia and those will be a little bit challenging to navigate if the policy has to really material into tariffs in the full form that we are seeing today so that's how I would look at the stack uh at this point of time >> uh and nan will the US digest this kind of tariff because there has to be it's not realistic to expect Indian companies with niche products where where you may not have alternatives in the US in terms of the supply uh to be uh to be saddling a 100% duty uh in that case do you believe that some burden will actually get passed on to consumers in the US which will actually put pressure to the fact that this this entire rhetoric of tariffs on the pharma industry and generics is is unsustainable.

[00:08:14]>> Right? I think that's a that's a that's an important policy question which of course will get debated over the next 12 months as I said once the pharmacy benefit managers the PBMs will start rolling new wave of uh acquisition packages. But number one uh certainly there will be a substantial portion we believe that will get passed on given the margins are so thin in many of these categories that manufacturers will have no choice but to exit the market which is not a win-win outcome for anyone in keeping the patients and the US FDA.

[00:08:46]Number two in the pass on of these costs out of pocket cost that will rise will also be kind of the factor that will have to be uh considered by the policy makers. Uh and number three, therefore most likely uh fallout that if may have somebody has to look at it maybe selective tariff policy as what happened in the MFN policy for branded drugs or companyto uh contract signatures where certain products are incentivized selectively to be oned at a company level rather than a blanket or a complete basket. So I think those nuances will start emerging. uh but there will be certain cost uh to the consumers that is inevitable if tariffs of these nature in this form today were ever to be conceived that's our broad view >> and just talking about some stocks right Nandan difficult to avoid counters and and go stock specific you know sun zidus lupin they all have facilities in the US right so they're far better placed >> uh right >> uh who's the best place to kind of capture market share and and take opportunity from everything that's playing out if at all tariffs were to be implemented of course >> right uh I think if they were to be implemented there is a manufacturing lens where I think we like these names but beyond just the manufacturing there is also an element of managing the channels in the new tariff era if it had to come and that will pretty much depend on ability to go grassroot in terms of market uh create a differentiated branding positioning And I think that's where Sun is going to have in our view a substantial uh uh uh a good head start given its massive organ on acquisition which gives it a very strong footprint in the US in terms of channel and channel synergy a good basket and therefore I think sun be one of the important and best place stock to kind of play on this momentum uh in terms of uh reach out to the market.

[00:10:50]one is obviously Oruro bindo Nandan um right >> uh the understanding is you're neutral on the stock but give us a sense if if I've got that wrong and uh what what would it take uh for you to get more constructive with regard to an ORO give us a sense >> uh I believe has been doing phenomenally good job as a company to supply a massive amount of generic volume to the US and Europe for last many years and one of the important company to have built structural chemical uh setup with backward integration serve those markets where pricing is as we said very tricky.

[00:11:28]Uh that strength is definitely going to be an important catalyst for Orurabindo in the case of tariffs especially given that now they have lanet in their basket uh in terms of manufacturing and then a large uh manufacturing facility back in India. I think they are one of the important uh leadr runners to speak on doing things faster taking it to the US market on your form of tariff. However uh one of the only caveat where I would be a little cautious on Orurabind though is ability to turn around products on time which has been a consistent problem and observations. So I think while there is a manufacturing capacity uh a time to realize it in the market on time getting that basket approved with consistency is where it's it's a it's a continued struggle in some sense and once that system gets bottom up transformed uh once we see more of first time right products coming getting approved in andas from LANet or some of these facilities I think that will be a good important point for Orurabindo to to kind of transcend into a new category of of a specialtity complex generic player.

[00:12:38]So from that sense the view is little neutral positive sides but little bit cautious on execution apart from quality sense.

[00:12:46]Nan we spoke with the management of granules they seemed very comfortable.

[00:12:51]Now granules is a company where nearly 50% of revenue comes from the US right and therefore there's that dominant US revenue. Um but they seem very comfortable. They're saying we will pivot. How easy are are some of these pivots in terms of having a US facility, diverting some of India production to the US, expanding the US facility, capeex balance sheet and the like. How should one think of of those pivots if at all Indian companies have to make it?

[00:13:22]>> Right. Uh I will give you my comments more as an industry expert because the group you mentioned is not yet in my coverage universe.

[00:13:30]having spent significant time in industry there are two important uh observations or insight number one as I was explaining the the solid orals to be one of the predominant categories 80% by volume on these generics uh majority of these transfer require uh uh simple batch structure in vitro data and an increased ability of invitro invivo correlation I think those three things broadly are well placed for Indian bio pharma today uh in a larger sense given last 20 years we have been navigating US FDA policies we have been making batch after batch we have seen the recalls and then continuation of quality programs from that lens my comfort is that Indian biioarma's intrinsic ability to navigate tech transfer is far superior today and that's the confidence that I would get for an industry lens that's number one second my comment from industry perspective will be that when you think about balance sheet Majority of this capex we believe is going to be incremental in nature and therefore partly supported by these ASP revisions that we were speaking about.

[00:14:38]So when the new waves of manufacturingdriven supply will come in uh assume a post uh tariff era, I think the newer ASPs because of the shortage will start kind of funding some of these site transfers and I think that is a catalyst which gives comfort to many managements moving forward that a we know how to do it and b the cash is not going to be fully strained and consumed from the balance sheet alone. there is certain element of market rewarding to do so and that's where the comfort will start coming in.

[00:15:10]M >> last off Nand if we're sitting in 2030 do you believe this is actually a positive catalyst from an Indian farmer standpoint or negative and therefore by extension is the fall today an opportunity to actually go out and buy from a 3 four year perspective >> I believe this is a very positive catalyst and it is on a very two differential different dimensions why it is positive number one it's going to hardwire Indian bioarmmeras continue to be on the path of operational excellence in these uncertain world of supply chain which makes balance sheets healthy adoption of technologies digitization AI much improved that was our view for last many months and therefore it gives better rigor on generating margins that's number one in terms of positivity >> number two as we have been vocal Indian biioarma is pivoting towards innovation a very different incremental innovation and this catalyst is going to accelerate ated even at a policy level like 55B2s, orphan drugs, uh complex injectable peptides, all of those capacities and associated strategies will start getting renewed and fresh view from the management and from execution standpoint. So when I extrapolate all of this in 2030, our view is Indian bioarma is going to compound in term of its innovationdriven earning and this trigger may actually accelerate it rather than decelerate it. So I believe it's a very structured way uh to be along on on this sector as a whole and that's our view consistently for last week.

[00:16:46]>> Excellent. Thank you so much Nandan. Uh thanks for joining us giving us that perspective long chat. Thanks for taking on the time. Uh, all right.