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The global pharma CRDMO (Contract Research, Development and Manufacturing Organization) sector is at a crossroads, wherein the hegemony of the ~US$28 bn Chinese innovator CRDMO market is being tested. Even as global R&D outsourcing trends remain healthy, innovators are looking at alternate sources to de-risk their dependence on China. Indian CRDMOs, backed by skilled talent, lower cost and strong small molecule capabilities, are well-poised to capture a meaningful chunk of this ongoing shift. We add to our existing CRDMO coverage and initiate on Piramal Pharma and Syngene with BUY, and Sai Life Sciences with a REDUCE.

Initiate with BUY on PPL and Syngene, and REDUCE on Sai Life Sciences

Our DCF-based FVs for PPL, Sai and Syngene are Rs300, Rs700 and Rs875, respectively. Within these, at CMP, we prefer PPL (~37% upside), followed by Syngene (~22% upside). In our view, PPL’s diversified CRDMO presence with niche capabilities holds it in good stead. On the other hand, Syngene offers a healthy blend of best-in-class small molecule expertise in discovery and attractive valuations. While we believe Sai is well poised to deliver a strong earnings trajectory backed by its solid capabilities and opportune expansion, we are cognizant of the relatively high valuations.

Rising R&D outsourcing and shift from China augur well for Indian CRDMOs

The pharma innovator R&D outsourcing mix continues to inch up (42% now versus 18% in CY2005), led by rising R&D costs, increasing drug complexity, declining IRR on R&D spends and others. Simultaneously, biotech funding by PE/VCs, which largely powers R&D outsourcing for smaller pharma innovators, is also recovering gradually after a couple of years of slowdown. India offers a unique blend of small molecule expertise and quality at a lower cost and is in a sweet spot to benefit from innovators looking to lower their reliance on China since Covid. Our detailed global CRDMO capability benchmarking (Exhibit 5,6) reveals leading Indian CRDMOs are not materially inferior to global peers.

Indian innovator CRDMO market to almost quadruple over the next decade

Well-established Indian companies are poised to capitalize on the tectonic shift in the global pharma CRDMO industry, driven by higher outsourcing and supply chain de-risking by innovator companies. Despite factoring in no benefit from the US Biosecure Act, assuming China stays relevant (Chinese CRDMO market to still grow in double digits), and baking in the benefit of de-risking with a lag, in our base case, we expect the Indian CRDMO market (currently at ~US$3 bn) to almost quadruple over the next decade (Exhibit 2).

Key risks: Slow funding pick-up, regulatory changes, threat from GCCs

While biotech funding has been recovering, geopolitical uncertainties have led to prolonged decision-making by clients. Delay/annulment of the US Biosecure Act could slow the pace of diversification. Indian CROs are also exposed to the increasing trend of global capability centers (GCCs) by big pharma companies. Reciprocal tariffs could also pose an indirect risk for Indian CRDMOs.

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