US Biosecure Act Offers No Visible Benefit To India In Near-Term, Says Quadria's Amit Varma
Amit Varma said that the effects will only be visible after two to three years.
The US Biosecure Act is unlikely to have an effect on Indian pharma companies in the near term, according to Quadria Capital’s managing partner Amit Varma.
Speaking to NDTV Profit, Varma said that the effects will only be visible after two to three years.
The Biosecure Act aims to reduce the United States' dependence on Chinese companies for biopharma manufacturing.
It prohibits US federal agencies and companies from procuring services and equipment from “biotechnology companies of concern”.
“The US Biosecure Act is about the hype around China plus one. There is a lot of commentary around China plus one and everybody believes that the next thing that will happen is suddenly India will be on the map and things will change,” Varma said.
He believes that these kinds of big events take time.
“While the Biosecure Act is still running through the final stages through Congress, I think this has a medium to long-term benefit to India but you are not going to see any changes in the next 12 to 24 months,” Varma explained.
His observations were in sync with the assessment of InCred Asset Management fund manager Aditya Khemka who also said that the move would take two to three years to show any impact on the Indian pharma sector.
“Pharma is a regulated sector – you have dossiers, so many files, so many compliances to be met before you can produce the first commercial batch. It can take two to three years to get the file transferred from a Chinese CDMO or to add an Indian CDMO to a Chinese CDMO product,” Khemka told NDTV Profit on Monday.
Amit Varma further noted that Indian pharma companies needed to step up as well to prove that they could fill in the gap left by the imminent exit of Chinese CDMOs.
“But again, when it comes to manufacturing and that too specialised manufacturing it is a 24 to 36-month cycle and you will start to see changes thereof,” he said.
Indian pharmaceutical companies, in the last two days, have faced scrutiny from the United States Food and Drug Administration (USFDA). Pharma players like Biocon and Lupin have received up to six observations from the USFDA.
Commenting on this ongoing development, Varma said that more scrutiny and inspection are required because this is how quality begins to play out.
“The flurry that we are seeing is because a lot more pharma outsourcing is moving into India, we would expect the FDA to make sure that they are maintaining certain quality thresholds,” he said.
The analyst also noted that the enhanced scrutiny was the new normal and was here to stay.
Watch the full conversation here:
We were speaking to Aditya Khemka yesterday for a brief conversation on pharmaceuticals. Just so much that has happened in the recent past that it calls for a slightly longer conversation. The case for the chat today: do FDA inspections and the flurry of FDA inspections pose a risk or is this routine in the long pharmaceutical cycle? Biosecure Act, and we have spoken about it with Syngene, but what is the investor's view on the impact on Indian companies and, of course, multiple other conversations about unbranded generics versus branded drugs and what to do with all of those, what to do with hospitals and diagnostics, and we couldn’t ask for a better voice, Dr. Amit Varma of Quadria Capital with us on the show.
At the outset, I must say, last evening and this morning, I was trying to research about what have been your recent exits and entries in order to pose better questions. I couldn't figure out too much by surfing the site. So I'll depend on your insights on the same. But I first want to start Dr. Varma with something that has been talking about the last 48 hours, which is the flurry of U.S. FDA activity on multiple sites across the world for Indian Pharma companies, routine or worrisome, because so many of them are found wanting offlate?
Amit Varma: Our answer is very simple. We have always been in favour of more scrutiny and more inspection because, quite frankly, this is how quality begins to play out. We just passed the inspection at one of our companies, NQ, and our belief is it makes us better. I think the flurry of activity that you've seen is that a lot more of Pharma outsourcing is moving into India. You would expect the FDA to be doing its job, which is making sure that they are maintaining a certain quality threshold. To cut a long story short, we believe that in India, we should be getting used to a higher amount of scrutiny, and that for us, fortunately, is going to separate boys from the men.
It's been there for a while. Just trying to understand if this is flurry; do you think that's routine as well? It's welcome, sure, but is it a routine matter or do you think Indian companies are suddenly getting tested or bursting at the seams? I mean, for the talk was that one of the companies actually tore apart one of the papers as well. Just trying to understand how you looked at this recent flurry of activity?
Amit Varma: I think we need to get away from this persecution complex and believe that this is the new world, and this is here to stay. I also believe that the FDA works on a certain cadence, and it seems like it's coming at the same time. But it also talks about their on-ground presence having gone up and the fact that, as we start to look outside X China, India is the next largest market that they have to be looking at. So my sincere request is to view it as the new normal and expect that there will be a lot more inspections by the FDA.
If that is the new normal, sir, are you based on the cycle that we may be in? Are you constructive on some of those pure-play Indian Pharma companies having the U.S. and other geographies as their export hubs, if you will?
Amit Varma: We've always looked at Pharma in India as having a two-prong strategy. One is Make in India for India, and the other is Make in India for the world and we continue to support pharma companies in both streams. So to give you an example, we recently took Akums Pharma to market about four to five weeks ago; fortunately, the market has rewarded the company very well. We're up almost 30% or maybe even higher now after listing, and then we've done Concord Biotech the year before, which is basically manufacturing in India for the world. So again, that company is up almost double to where we have started off. So quite clearly, the market is in the mood beyond the clear hype around what's happening in the marketplace to reward quality, and that is what we are seeing within our firms.
Okay. So supporting across that sphere as well. Just that the common feedback that I get when I talk to people about markets at large is to avoid global cyclicals or outward facing companies, including I.T. right now, and look at the inward facing companies. Does that hold true in the pharma space as well? I know you mentioned that you look at both, and you have probably bottom-up constructive on both, but as a top-down approach, could that hold true for pharma as well or not necessarily?
Amit Varma: Yes and no, and I tell you why; I give you a wishy-washy answer. It is not usually my style. The reason I say that is that most Pharma contracts are sticky in nature. It's very hard for global MNCs to change the suppliers at a women’s fancy. It requires some amount of mega event or a major event to make that happen because, as you know, it has to go through a full cycle of compliance and regulation. So I continue to believe that unlike the I.T. sector, where contracts occasionally get written on an annual basis, there are easier ways of changing vendors. On the supply side in Pharma, it is very hard for global manufacturers to change a woman's fancy. So our belief continues to be and you've heard me say this before: Stay specialised, stay focused, stay niche, and still hold on to longer-term contracts. We do not see a change in our strategy.
Okay. Fair point. The other aspect is this whole Biosecure Act and you know, I was talking to Jonathan Hunt and Syngene’s CFO on what the longer-term implications might be. So the longer-term implications seem very solid. Somehow, I didn't quite get a sense after a 20-25 minute conversation as well about whether there is a near term and by near term, I don't mean one, two months; I mean in the next 12 to 18 months. I didn't get a definitive sense of whether there is a near-term 12-18 month benefit starting as a result of the Biosecure Act in the U.S. for Indian CDMO-CRO players. How have you thought about this if at all?
Amit Varma: So it's around the hype around China plus one. There's a lot of commentary around China plus one and everybody believes the next thing that will happen is suddenly India will be on the map, and things will change. I think these kinds of big events take time, and while the Biosecure Act is still running through the final stages through Congress, I think there will be a medium- to long-term benefit to India, but you're not going to see a change in the next 12 to 24 months because of the reasons that I elucidated earlier. It will take time, and then we also need to step up to the plate and demonstrate that we can fill in those gaps. But again, when it comes to manufacturing and that too specialised manufacturing, it's a 24 to 36 month cycle, and you'll start to see changes thereof.
Noted. Are valuations permissive enough for you to look at Indian CDMO companies for this plus cyclical uptick kind of an aspect, Dr. Varma? Do you like the Indian CDMO-CRO?
Amit Varma: Let me say, and I've said this before, Indian healthcare is insanely valuable, so at some point in time, there is a gap between ground reality and what you need to pay for it. We stay committed to the idea of Indian CDMOs because we have a firm belief in the potential of what can be done. I genuinely do believe that Indian CDMOs are also upping the game and upping the scale and specialisation, which works really well for the industry. We continue to work with niche players, and we do intend to continue to invest in the sector.
Okay. One small understanding from you that I would love to have. In a lot of private conversations, some investors tell me that these Indian CDMOs at large, or Indian CDMOs as well, will have an extended period of consolidation/llull, not as stocks but as businesses and then there is a J. Cole effect that could come into place into companies that have gotten their act right from the onset. Do you think about this in a similar fashion, or no, not really?
Amit Varma: No, clearly, you hit it on the nail. I genuinely believe that in the next three to five years, you're going to see consolidation in all forms and shapes, not just in the Pharma sector but in all subsectors of healthcare, and that's because now how big you are and what your capacity is going to define everything that you do. So without a doubt, consolidation is going to take place, not just to buff up revenue and volumes but also to acquire specialisations. So you are going to see consolidation to improve the quality of what we're doing...
Okay, noted, what other subsectors do you believe will see consolidation? I would reckon hospitals could be it because you've spoken about that with me in the past, and we've seen some signs of that now?
Amit Varma: Services, so it's going to be diagnostics and hospitals; you're certainly going to see that and the consolidation is taking place outside the metros, in tier two and tier three cities. Again, Covid taught us, in some ways, that scale and size, especially from a supply chain perspective, are fundamental and we will start to see that. I also see this on the domestic pharmaceutical side. There is going to be a host of what I would call suboptimal-sized players who are right for consolidation and actually can grow if they don't get too caught up in not wanting to consolidate.
Okay, it's happening at tier two and tier three, so cheaper acquisition targets, I reckon, but the average revenue per operating bed may not necessarily be as high as would be in metros in tier one. Do you reckon that well-priced acquisitions could actually be earnings and valuation accretive for larger hospital chains as they continue to gobble up some of the smaller players?
Amit Varma: So I just want to caution that just because it's tier two and tier three, they don't make it very cheap. They're relatively cheap. So I just want to clarify that, especially if you are in the larger market, state capitals or other larger ones. Having said that, I genuinely am a firm believer in the volume game of ramping up volume and revenue, even if my R POBs are not as great in these centres. But there are ways now of making ourselves more efficient, especially from a cost perspective, which should then flow down to the bottom line, enabling all the numbers that you are talking about, which include PAT and EPS.
The interesting twist, Dr. Varma, is, I mean, two or three things that happen. One, Dr. Devi Shetty and his firm are doing that insurance in addition to their services, and two days or four days ago, PB Fintech said that they want to invest in a company that could be the HMO model and then provide healthcare, while PB FinTech or some of the other insurance companies could be insurers. We were speaking to Ashish Dahiya yesterday, and he went at length to explain how it will be a win-win for both heads. At the same time, I heard other people come in and say, It's a model that's not tenable, and they didn't think it would see the end of the day or light of the day. What do you think about this aspect of a bit of a co-joint entity joined at the hip, and in some fashion, each of these tentacles, or two of its tentacles, providing both healthcare and simultaneously providing insurance?
Amit Varma: Dr. Devi Shetty is far smarter and far more tenable than I am, so I have to be careful of what I say. I think it's going to be a very hard challenge to bring insurance and hospitals together for two reasons. Number one, the inflection point that we are in in insurance requires massive and rapid growth, and tying yourself up to a particular chain where your consolidated market share is actually very small becomes harder. I also do believe that between the regulators, they will keep a very close eye on any kind of consolidation that could take place through hospitals and lastly, at this point in time, the benefit of having an insurance arm attached to a services industry is unproven. Actually, nowhere in the world did you see a situation where the insurance companies controlled that much of where they could direct their patients. So I think the jury's still out on it. I still have my doubts as to whether this can be pulled off at least in the near or middle term.
Okay, I remember a conversation that we had maybe a year back wherein you mentioned that you subscribed to the theory that branded hospitals and branded diagnostic chains could do very well in India. I reckon you still are of that opinion, and which is why you believe that this consolidation play might actually work as well. So I heard your answer for hospitals. Would you believe the same holds true still for diagnostics as well?
Amit Varma: My fundamental philosophy has always been that healthcare in any form or shape and all forms of healthcare that we do is about credibility and belief, and since this is life and death, unlike a lot of other industries, your belief is that if you're going to consume something or you're going to get something done or a procedure, you want to go to something that has credibility. Credibility can be built, obviously, by reputation and by showing your results, but it takes a brand to give you trust, and I think the trust is built over time. So when I talk about branding, it's not about the quality of your advertising and the quality of what you communicate on your pricing strategies. It's building trust over time, and that's where I think if you can make your brand synonymous with trust, that is going to play out.
Noted Dr. Varma, one final question, really, and that is around this whole belief that tech-enabled disruption for diagnostics, pharmaceutical supplier or medicine sales will come out and change the industry. Now to my noice/novice mind, everybody's still coexisting. Maybe the numbers look slightly different. You might have a better insight. What is your view for the rest of the next 3–4-5 years, and when you look out at 2030, do you believe that technology will seriously disrupt diagnostics and medicine supply, or do you think both models could coexist and that shareholders can make money in both? That was my principal question.
Amit Varma: The tech disruption in all the subsectors that you talked about is inevitable. It is just a matter of time. However, I do not think it's going to play out in the near term that people keep talking about. Again, we are talking about disrupting an industry that has existed for a huge amount of time, and as we've seen around the AI hype in general, in the first half of the year, anything AI was soaring, and then suddenly you started, people realise, wait a minute, we're throwing billions of dollars into this, but what are we getting out of it? I think you're going to see the same thing when it comes to tech disruption in our industry. There are changes taking place, but they're incremental and gradual. So there's not going to be that one watershed moment that, from tomorrow, the whole industry changes. So if you ask me, within my five- to 10-year lens, without a doubt, it will be majority tech-led and less traditional, but for the first five years, it is going to be more traditional and less techy.
Well, Dr. Varma, thank you so much. I'm just wondering before I thank you, though, actually, just one last question: any recent tuck-ins or major acquisitions or exits, and the reasons for the same, sir?
Amit Varma: Akums, was the last one that I told you; we are taking an IPO and we are in the process of doing another exit in our Indonesian hospital, which we own. Apart from that on the India side, looking at a lot of subsectors, sectors haven't closed anything in the recent past. But as something starts to fructify, I know whom to call.
