Why are pharma giants looking to spin off their API business?

Recently, news reports said that pharma giant Lupin might be looking to spin off its active pharmaceutical ingredient (API) vertical. Whether it would be listed as a separate entity or sold off is yet to be seen. Lupin’s shares hit a new 52-week high after reports of the potential demerger were published.

This is soon after Glenmark Pharma announced plans to sell its API business. In May 2019, a new entity was set up for the API business and in August 2021 it was listed as Glenmark Life Sciences. Sekhmet Pharmaventures and the Nirma group are reportedly competing to buy the subsidiary. Additionally, experts reckon that other pharma companies such as Aurobindo Pharma have also hinted at looking to separate their API verticals in the next few years.

Why are pharma giants looking to demerge their API business?
India imports 70 percent of its API requirements from China, particularly vitamins and antibiotics, according to industry data. Which is why there is an increased focus from the government on incentivising API production in India, via the Production Linked Incentive (PLI) scheme.

“This is also contributing to the trend of spin-offs. The key benefits envisaged in this process are the increased focus on profitability for APIs and leveraging the scale of API manufacturing to cater to a wider set of customers than captive consumption,” explains Antony Prashant, partner, Deloitte India.

One similarity that experts find between Lupin and Glenmark is the fact that they have debt on their balance sheets. Glenmark has clearly stated that they wish to get rid of the debt, but as for Lupin, “If they look at separating the business, and list it separately, they can realise a lot more value out of the business, and repay debts as well. This would also enhance value for shareholders,” explains Vishal Manchanda, senior vice president, Institutional Research, Systematix Group.

Selling vs listing: What’s the better option?
For pharma companies that have APIs as part of their core business, such as commodity generics, listing it as a separate entity looks like a good option. Says Manchanda, “Pharma companies who want to continue in the generics business and be a part of the volume game, need to be backward integrated to be the lowest-cost producer.” However, those such as Glenmark Pharma who clearly have ambitions on the innovation front, would look at selling off the business.

Even Lupin seems to have aggressive plans for its API business. In their 2022 annual report, the company stated: “We are developing a robust portfolio of new API products to meet the needs of numerous therapies. Introducing new products to different markets will pave the way for sustainable growth of the API business over the next five years.” The vertical contributed around 6 percent—about Rs 990 crore—of the total sales of the firm, as per the report. The company is also looking at initiatives to expand API production capacity in response to the government’s PLI scheme, to reduce imports of key products. Experts believe, in such a scenario, listing the API vertical as a separate entity might be the best option for Lupin.

Challenges in Indian’s API market
The Indian API market is witnessing a high CAGR during the forecast period of 2020-2026, and it is expected to be around 8.5 percent, according to Deloitte India. “The growth of the industry has been driven by adopting global standards and setting up large scale plants in the country,” says Prashant.

Despite the initiatives for indigenisation of APIs, India is still largely dependent on China for key starting materials (KSMs), the building blocks for APIs. “China has recently increased the prices of KSMs by 10 to 20 percent, which is impacting domestic manufacturing of APIs. It has been reported that the cost of APIs produced in India at present would be about 20 percent more than those produced in China, if an attempt is made to scale up to Chinese levels,” adds Prashant. China is dominant in APIs that are made through a fermentation process. Earlier, reckons Prashant, India had a strong presence in this sector, but after the Drug Price Control Order (DPCO) was initiated in 1995, Indian companies had to resort to China for import as APIs were cheaper there.

The original article was published in Forbes India on 4^th July 2023.