Tariffs On Generic Pharma | Indian Biopharma Well-Positioned To Capture More Market Share: Bernstein

[00:00:00]Let's keep it going and actually talk about a pharma company. A 25 to 30% increase in manufacturing cost is likely if generic drug production shifts from India to the US and that's the word coming in from Granules uh Granules India's management and the comments uh come as US President Donald Trump has announced a timeline for imposing tariffs on a generic pharmaceutical imports. Listen in to the conversation we had with what Granules management had to say in terms of the feasibility of the manufacturing shifting towards the US side as well.

[00:00:33]>> Granules is well positioned uh to tech transfer a lot of products to the US as needed um if needed. And Granules from our US position is also uh has three two facilities right now and we're also uh embarking on our journey for the third uh facility there. But to answer your question straight up, I think it's going to be a huge task um if that is actually implemented, but I see that to be a um close to being impossible at this point because purely because of the cost differential. You're talking at least a 20 to 25% increase in costs. And passing that on to customers will be extremely difficult. Two years is extremely short especially for the kind of products that are going there. But the medium and low volume products, there's different sets of products if you talk about generic pharma, right? So the large volume products which are extremely dependent which the which the US is extremely dependent on will take a long time.

[00:01:28]Yes, we have um one manufacturing site, one packaging site, and now we're also um starting our uh logistics division over there. Our our warehouse situation.

[00:01:38]And if needed, we always have the capacity and the flexibility to increase uh the manufacturing space in our existing facility. Well, you'll have to look at at least uh at least like you said 50 to 70% increase in costs for the business to be sustainable.

[00:01:54]>> Okay, so that's the Granules India management talking the impact of President Trump's steps towards Indian generic farmer and to take that conversation forward and to get a more granular view, we have Nandan Kulkarni who's the director India Healthcare Bernstein who's joining in. Nandan, well it's been a very very busy morning for the entire pharma industry and analysts as well.

[00:02:15]But your report interestingly says that there is an opportunity to scale up generic production in the US relatively quickly if in case you know these steps are taken by the US government. Just take us through that.

[00:02:30]>> I think there are three important points to look at when you think about this whole tariff proposal. Number one, uh 70 to 80% of generics in US that India supplies are broadly on solid orals, the simple tablets and capsules of the world. Where number one, what will happen as the as the deadline starts nearing through is there will be shortages because the current economics of moving to US are unsustainable.

[00:02:58]We believe that is going to lead to a much better consolidated view of the market which will revise the prices substantially upward. And against that backdrop, Indian biopharma will have a much lucrative position to site transfer the products in the US market. So that's number one, most crucial driver of new price equilibrium.

[00:03:17]I think second point which many on on so far have also alluded is a 50 to 70% kind of a rise in cost and price. Indian biopharma is well positioned given its large manufacturing network in US already present. And we are talking about leading players like Sun Pharma, Zydus, Lupin that we like who have these established networks where that site transfer is possible.

[00:03:39]And number three, US FDA has been relatively conducive by its policies and guideline framework on how quickly you can do this transfer for solid oral products and how efficiently can you do.

[00:03:50]So with all of these three levers together, we believe Indian biopharma has an opportunity uh to capture a much increased pie if the tariffs have to come through.

[00:03:59]>> Okay. So, you were saying this is an opportunity and Indian biopharma companies maybe could catch a larger pie uh after Nandan, but what about the pricing then as well, right? Obviously, uh US is much more expensive in terms of uh pricing and manufacturing over there as well. So, obviously, the prices are expected to go up. Uh your thoughts on how do we manage that as well? And obviously, drugs becoming more expensive then, likely.

[00:04:23]>> You're right. Uh I believe at a policy level, it's going to lead uh or two things. Number one, because of increased prices and therefore out-of-pocket cost, uh US FDA is going to become uh uh significantly conducive to innovation pathways, like 505b2s, orphan drugs, uh which are more protected, more better in terms of margin structure. And again, here Indian biopharma and the names that we like, like Zydus, Lupin, Sun Pharma, will start benefiting from this trend.

[00:04:52]And this is a massive opportunity because 505b2 orphans are a very ignored category in the past. So, that way the policy will start shifting here to adjust towards the mix of payers and towards the mix of uh you know, the prescriptions that are coming out. That's first and important point. Second, I believe is the rationalization of these higher prices will start happening by some form of incentives to be rolled out for manufacturing in US. Because the massive problem will continue to be the the labor cost in US and overheads on running a plant. So, some form of incentive subsidy, some form of tapered view or cashbacks will start being offered uh to mitigate some of these rising prices.

[00:05:34]Uh but both of these are pretty long-term in nature. I think in the short term, there will be a pass-through cost, certain pain on the payers and therefore some form of shortages are expected uh if this framework >> Okay. Okay.

[00:05:52]All right. So, there could be a possibility that there could be drug shortages if in case this policy is executed as is.

[00:06:00]Nandan, just wanted to talk about specific stocks now.

[00:06:04]Which do you think the likes of Aurobindo, Sun Pharma, Cipla, all of these companies which have anywhere between 25 to even 40% exposure to the US will be impacted because of this because they have been making these little inroads into the US getting more aggressive in the past 1 to 2 years.

[00:06:23]Lupin announced a $250 million investment.

[00:06:27]You know, Aurobindo acquired Lanett. We have Sun Pharma which has acquired Organon.

[00:06:32]So, they are making their presence felt in the US. Do you think they'll come out unscathed?

[00:06:39]>> That's an important point to ponder about and there are two specific things that we have to separately talk. Number one, what happens between now and 2028?

[00:06:48]Broadly, hardly anything except minor side transfers because the tariff continues to be zero in that policy framework till more certainty emerges. So, I think short-term, nothing immediate to be seen and felt.

[00:07:01]Second lens of that is in the medium to long-term precisely beyond the tariffs.

[00:07:06]This supply chain disruptions drove the names like Sun Pharma, Lupin to start investing increasingly in the US on-shoring as a structural hedge. And I believe that's a great mode that is going to emerge in this uncertain period because number one, most of these investments are in complex generics. For example, the case of Lupin that you mentioned is in complex generics, respiratory. All of these are well-margined products.

[00:07:33]Number two, the acquisitions are also towards innovation basket which means it improves margin. There is a more room for pairs to accommodate, more room for companies to absorb the cost. Both of these are going to therefore provide a significant de-risking to stocks like Sun, Lupin, Zydus over the next medium to long term from any of this impending tariff.

[00:07:56]Aurobindo is going to be at broadly at a neutral stance, in my belief, because it has a very large exposure to simple generics, and therefore pure onshoring is not going to be fully economical, at least in term.

[00:08:11]So, that's how I would stack up. The one who are moving to innovation like Zydus, Lupin, Sun benefiting the best. Somebody like Organon will be at a broad neutral, partially mitigating the impact because of Plan B and other acquisitions that they have done.

[00:08:23]>> Nandan, thank you so much for joining us on the show, explaining us the impact, the opportunity that comes in for Indian Indian biopharma companies as well. So, thanks so much for that.

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