India’s contract research, development and manufacturing organisation (CRDMO) sector, which serves global pharmaceutical companies, could see its revenue grow 13-15 per cent this fiscal after an estimated ~11 per cent growth in fiscal 2025 as supply chains worldwide diversify amid geopolitical uncertainties.
The CRDMO sector, which researches the chemistry of, and develops and manufactures, small molecules (1), is expected to sustain higher operating margins of 26-28 per cent. Resultant strong cash flows will enable Indian CRDMOs to continue capital expenditure (capex), with limited reliance on debt funding, and sustain their healthy credit profiles.
The criticality of the healthcare industry to the US, increasing dependence on CRDMOs for manufacturing complex intermediate and active pharmaceutical ingredients (APIs) (2), will help the sector withstand potential imposition of tariffs by the US (3). An analysis of 19 Indian CRDMOs, accounting for ~50 per cent of the sector’s estimated revenue of Rs 70,000 crore last fiscal, indicates as much.
India accounts for less than 5 per cent of the global CRDMO (4) market, which is dominated by the US, Europe and China. The segment comprises contract development and manufacturing operations (CDMOs) that focus on drug development, clinical trial stage services and commercial manufacturing (accounting for ~55 per cent of revenue), and contract research operations (CROs), which provide services related to drug research and discovery (accounting for ~45 per cent of revenue).
Aditya Jhaver, Director, Crisil Ratings, explained, “The domestic CRDMO sector will continue to outpace the high single-digit growth seen globally. Many US and European pharma majors are looking at alternatives to China to diversify their value and supply chains, hedge risks, and ensure business continuity. India’s skills in the chemistry of small molecules, operational experience, a raft of manufacturing plants approved by the US Food and Drug Administration (USFDA), and relatively lower cost of research and development and manufacturing give it a competitive edge.”
Domestic CDMO revenue is set to grow 14-16 per cent this fiscal versus an estimated 13 per cent in fiscal 2025, led by new orders and increasing enquiries that highlight the growing recognition of Indian players’ development and manufacturing capabilities. Domestic CRO revenue could grow 11-13 per cent this fiscal, compared with an estimated 9 per cent last fiscal. This, however, is dependent on venture capital funding, which could see delayed recovery amid geopolitical uncertainties. The double-digit growth in revenues, coupled with the focus on high-margin complex products, is expected to support healthy operating margins and capex plans.
Joanne Gonsalves, Associate Director, Crisil Ratings, said, “The Indian CRDMO sector will continue to expand manufacturing capacities and enhance technical capabilities, increasing its potential for growth. That said, reliance on incremental debt to remain limited, amid expectations of strong cash generation and equity support extended by private equity investors and/or equity market, with debt-to-earnings before interest, tax, depreciation and amortisation as well as interest coverage ratios remaining healthy at 1.3-1.4 times and 9-10 times respectively this fiscal.”
All said, overall credit profiles of domestic CRDMO players are expected to remain strong, despite vulnerability to regulatory changes in the US. Their ability to scale sustainably, especially for large molecules, will depend on enhancing workforce quality amid competition. In addition, over the long term, the sector could also gain in revenues and cash accruals if the Biosecure Act5 is implemented in the US.
References
- Small molecule drugs account for over 65 per cent of global pharmaceutical consumption, as they are easy to administer and are affordable
- Outsourcing of APIs/intermediates accounts for over 70 per cent of the global small molecule CRDMO industry
- North America and Europe are the major revenue contributing geographies for the Indian CRDMO industry
- As per external industry data, North America, Europe and China are the large contributing geographies
- The Biosecure Act is designed to reduce the US pharmaceutical industry’s reliance on certain foreign countries, particularly China and is currently under consideration in the US Senate before it becomes a law
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