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Disproportionate reaction to US freeze on foreign aid

* The US State Department has frozen all existing and new foreign assistance for 90 days to reevaluate if the aid is aligned with President Donald Trump’s foreign policy, according to news reports. In this report, we have analyzed the total funding assistance by the US for certain indications, such as human immunodeficiency virus (HIV), anti-malaria, tuberculosis (TB), etc. globally..

* The US provided 27% of global funds available (USD19.8b) for antiretroviral (ARV)- related health initiatives in FY24 through multiple channels of assistance. Domestic resources of respective countries meet about 59% of the total funding requirement.

* About 45% of the total spending is related to treatment/medicines, implying the maximum US assistance of ~USD2.6b.

* Notably, the US contributed USD12.3b across indications in CY23.

* Considering the chronic nature of HIV and the maximum shortage of funds (USD2.6b if the temporary freeze turns into a complete stoppage), the recipient countries will have to look for alternatives to continue the treatment program, implying a business opportunity for ARV medicine manufacturers.

* Interestingly, Mr. Trump is considering U-turn with respect to withdrawal of US from WHO as per news reports. While we await clarity on changes in the funding structure, we highlight, in this note, the proportion of business from institutional agencies to certain companies across indications.

Limited scope for recipient countries to stop HIV treatment programs despite US review of financial aid

* Globally, spending on ARV-HIV indication has been stable for the past five years at ~USD20b. The funding gap for HIV responses has also been steady at USD8b. The financial resources are used for prevention (18% of total funding), care & treatment (~45% of total funding), and governance (32%) and mitigation impact (5%).

* The US has been a major contributor in bridging the funding gap; hence, the reduction of assistance from the US will affect the ARV-HIV program.

* Having said this, the care and treatment would be the least impacted, based on the resource reprioritization by recipient countries. Effectively, the funding gap for medication can be maximum about USD2.6b at the global level.

* Given that there is no effective cure for HIV and that ARV medications are used to slow the progress of the disease and prevent secondary infections/complications, respective countries would continue to re-prioritize the allocation for healthcare expenditure toward HIV program.

US provides ~USD12b in financial aid across health programs

* We have analyzed the total funding of USD12b by the US for other health initiatives, with USD5.4b for HIV, USD1.7b for a global fund, USD1.3b for mother and child health, and USD1b for malaria.

* The financial assistance by the US has been at the similar level (USD12b)across therapy level on an annual basis for the past decade, except in FY21, when it rose to USD21b due to Covid-19.

Gradual de-focus across companies for HIV/ARV/anti-malaria business

* With potential growth levers being added/scaled up by companies, the dependency on HIV/ARV/anti-malaria has reduced for companies like Laurus/Ipca/Ajanta Pharma/Cipla/Aurobindo Pharma.

* Specifically for Laurus, given that ARV accounts for 45% of sales, PEPFAR-related ARV business would be ~INR5b, forming 9% of consolidated sales.

* ARV business is relatively less profitable than other segments of Laurus. We believe that if the pause turns into a complete closure, the maximum impact on EBITDA could be 4-5% of FY26E EBITDA. During 9MFY25, the contribution from institutional anti-malaria business stood at 3.5% for Ajanta, 5% for Ipca, 2.4% for Cipla, and 2.8% for Aurobindo Pharma. Given that profitability is lower than the corporate level, EBITDA contribution would be further lower than revenue contribution.

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