Why Indian CROs and CDMOs stand to gain from the US Biosecure Act

The US Biosecure Act, if passed, is set to create substantial opportunities for Indian contract development and manufacturing organisations (CDMOs), according to pharmaceutical analysts.

The Act aims to reduce US biopharmaceutical reliance on China and restrict technology transfer. Specifically targeting five Chinese giants—WuXi Apptec, Wuxi Biologics, BGI, MGI, and Complete Genomics—the Act bars firms collaborating with these companies from receiving US government grants, loans, or contracts, though existing contracts may be honoured for up to eight years.

Analysts Niharika Agarwal, Yogesh Soni, and Praful Bohra from InCred Equities emphasise that this legislative move will deter US pharmaceutical companies from outsourcing to China, thereby promoting significant opportunities for Indian CDMOs.

Major US players such as Merck, Vertex, and Gilead have already disclosed potential disruptions in their Securities and Exchange Commission (SEC) filings. With approximately 120 US biopharmaceutical drugs currently developed in partnership with Chinese CDMOs, the Act could lead to higher drug prices and extended development cycles, the report said.

The CDMO market, growing faster than the global pharmaceutical sector, is seeing robust demand from emerging biotech and biopharmaceutical enterprises that lack the resources to establish their own manufacturing units. Leveraging cost advantages and government incentives like the production-linked incentive (PLI) scheme, Indian CDMOs are expected to benefit immensely in the medium to long term, according to the InCred analysts.

The Indian CDMO market is valued at approximately Rs 18,800 crore in 2024 and is expected to see substantial growth to reach Rs 37,200 crore by 2029, expanding at a robust CAGR of 14.67%. Globally, the CDMO market stands at approximately Rs 2.03 lakh crore in 2024 and is projected to grow to Rs 2.77 lakh crore by 2029, at a CAGR of 6.41%. India’s CDMO sector is outpacing global growth, according to market research firm Mordor Intelligence.

Similarly, India Ratings and Research (Ind-Ra) also projects a surge in orders for Indian companies in the CDMO and contract research organisation (CRO) segments from US pharmaceutical firms over the next 12-18 months following the potential enactment of the US Biosecure Act. The shift is also anticipated to disrupt the supply of numerous trial drugs and essential raw materials, presenting Indian companies as viable alternatives.

Vivek Jain, Ind-Ra’s Director of Corporate Ratings, highlighted that the downturn in capacity utilisation over FY22 and FY23 due to heightened capital expenditures has rebounded in FY24. Companies are now reaping the benefits of operating leverage, which improves margins and cash flows, despite consistent debt levels, per Ind-Ra. “We have upgraded three entities in the past year as their credit metrics improved,” Jain said.

Over the past two years, Indian companies have ramped up investments in capital expenditures, leading to higher leverage ratios. However, Ind-Ra predicted these ratios will stabilise as the advantages of operating leverage continue to enhance financial performance.

Signs of this positive trend are already visible, with more than 60% of listed pharmaceutical firms reporting increased business enquiries. Furthermore, 33% believe the enactment of the Biosecure Act could significantly drive their business, the agency said.

Ind-Ra’s analysis indicated that while the CDMO sector benefited from global China+1 diversification during FY24, the CRO sector faced challenges, particularly due to weaker biotech funding. Both sectors, however, have seen substantial capital investments, supported by government grants and interest-free loans aimed at North American onshoring initiatives.

Although the debt levels of these firms may remain elevated due to substantial forthcoming capex, improved capacity utilisation and enhanced credit metrics are expected to substantially strengthen their financial standing in the coming years, Ind-Ra report said.

In June, GlobalData, a data and analytics company, raised alarms over the US Biosecure Act's potential to impact more than 120 biopharmaceutical drugs developed in collaboration with Chinese firms flagged as "companies of concern." As these biopharmaceutical giants scramble to diversify their supplier base before the 2032 deadline, CDMOs based outside China are set for substantial growth, the firm said. “Indian CDMOs such as Cipla, Syngene, and Aurobindo may be well-positioned for increased growth due to their cost-effectiveness and highly skilled workforce. However, growing concerns about US dependency on offshore suppliers may also result in a shift towards US companies selecting domestic CDMOs,” said Alison Labya, a Business Fundamentals Analyst at GlobalData.

As of now, the Biosecure Act continues to be under consideration.