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Indian CDMOs reel under pressure as biotech funding dries up

With venture capitalist funding for the biotech sector being muted for the past few quarters, analysts predict pressure on the contract development and manufacturing organisations (CDMOs) for a major part of this year.

Indian CDMOs are focusing on big biotech clients, and going forward, they believe the funding issues will not last long.

CDMOs are firms that typically do the development of contract manufacturing work for other clients, which could be small molecule manufacturers (chemical molecules usually) or biologics.

In a January report, UBS analysts noted: “VC funding for biotech was muted in the past few quarters, leading to fewer early-stage discovery projects. Given the tough macro environment, we expect this pressure to persist for most of 2024.”

“Our US bio-pharma analysts see challenges for large pharma companies in 2024 given the increased risk of additional measures on drug pricing in an election year. Further, the Inflation Reduction Act (IRA) is likely to come into focus to lower drug prices, which is likely to impact pharma companies’ profit,” the analysts added.

Companies like Syngene International, Biocon arm, have already felt an impact of this slowdown in the third quarter.

“We expected the quarter to deliver growth, but at a softer level, when compared to the previous growth rates. I think it reflects the impact the industry is seeing from the reduction in funding flows into the US biotech segment. This, in turn, is feeding through into our biotech clients’ near-term spending behaviours,” Syngene’s managing director (MD) and chief executive officer (CEO), Jonathan Hunt, said during the third quarter analyst call.

Hunt added that trends outside of biotech, animal health, big biotech, and regions apart from the US are much less affected.

While the slowdown in the US biotech funding has impacted Syngene’s discovery services vertical, it has been doing steady business in the small molecules space.

Syngene’s revenue exposure to medium-sized and small biopharma firms is generally 15-20 per cent and it is likely to face significant revenue growth pressure.

“Like others, we are also navigating through a period of demand adjustment in Discovery Services due to shifts in the biotech funding landscape, we believe that general industry conditions remain positive. Biotech funding is beginning to settle down at levels prevailing before the onset of the pandemic, and this is likely to lead to improved demand growth for our industry in a few quarters from now,” Sibaji Biswas, Syngene’s chief financial officer said in an analyst call.

Syngene’s small molecule development services demonstrated a steady growth attributed to repeat orders from the clients and an expansion of our clinical formulation business, the company said.

Dr Reddy’s Laboratories (DRL) also felt that small molecule contract manufacturing and development work is steady.

“The CDMO space is relatively new for us, and we are in the small molecule segment. Biologics CDMO work we started about 10-12 months back. We see traction primarily because most of the relevant activities in this space are related to biologics. For us, most of the revenue is coming from people (clients), who want to use our capabilities in some form,” Erez Israeli, CEO of DRL said.

He added that discussions with clients are also going on well. Since it’s a small part of our business, we don’t see a major impact on their top line.

Israeli feels the funding winter will not last long.

“This is where the focus of science is. I think whatever funding issue is there will last for the long term,” he explained.

Laurus Labs Q3 sales were largely impacted by a 67 per cent decline in CDMO business owing to a high base.

“Exclusion of high base of the CDMO business, sales grew by 6 per cent year-on-year (Y-o-Y). The decline in CDMO business and higher other expenses dragged down the Ebitda margin to 15.2 per cent (845 bps below our estimate of 23.6 per cent),” noted Sharekhan analysts.

“Company continues to invest in a diversified portfolio where CDMO sales are driven by human health, animal health, and crop-science products which support growth momentum in FY26E. The management expects new capacities added in FY23 to get commercialised from FY25E,” the Sharekhan analysts added. Business Standard

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