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00:00All right, Aditya Khemka is joining us now. He's Fund Manager in Credit Asset Management and
00:04tracks the space very, very closely. Aditya, great to have you on, especially on a day when
00:08you know we've had so much action come in over the last couple of days, 48 hours or so on companies
00:15and you can help us break it down. Let's start with Biocon Lupin Jubilant because these are the
00:20ones which have seen action in the last few days. Do you think that these are big negatives for
00:25these companies? So, good morning and thanks for having me. To begin with, let's talk about
00:31Biocon. I think Biocon's Malaysia facility is really important for them. It's a facility that
00:36can produce insulin and other products. It's a facility where they've done very meaningful
00:40CAPEX and if the US FDA observations escalate, it would be a difficult issue with Biocon. They
00:48will probably not be able to show significant earnings growth, which is expected out of them
00:52as of now and that will create a problem for the company's stock price and future earnings growth
00:57trajectory. On Jubilant Pharma, I think the facility is insignificant in the scheme of things.
01:02The facility was already under OAI, so another sort of OAI label on the facility doesn't change
01:07anything for them. So, I don't see any significant impact on Jubilant Pharma from the impact that
01:13they had. Lupin, again, they have so many facilities and so many of their ANDAs are
01:18diversified across facilities. I would imagine a very limited impact on Lupin's revenue trajectory
01:24and margins trajectory because of this issue. Standard disclosures, of course, viewers,
01:30keep in mind. This is just a view and not a buy-sell-hold recommendation from Aditya.
01:35Great having you. Thanks for joining in, Neeraj. So, Aditya, just a broad talking point. Do you
01:40reckon the US FDA scrutiny has intensified in recent times? Are companies doing something
01:47wrong or is this a normal cycle which follows because at times lapses may happen? How do you
01:53read into this? So, I don't think the US FDA scrutiny has intensified or otherwise. I think
01:58it's a regular act of the regulator. They have to keep auditing these facilities from time to time.
02:04I think the problem really lies in the economics. So, the end market is not giving you good pricing,
02:10good margins, and the regulator is sort of increasing the bar for compliance time and again.
02:16And if the company sort of, you know, do the whole compliance, but maybe the cost economics don't
02:22work out. And hence, maybe at some level, you know, I'm not blaming the top management or the
02:28company's promoters or something like that. I'm just saying at some level, people just take
02:32shortcuts to, you know, sort of keep the cost low or accelerate the dispatch of material or
02:36production lines or whatever. And I think that sort of gets caught in the net with the US FDA
02:41because they don't like people taking shortcuts. They like to be thorough with the processes.
02:46And I think that has forever been the case with Indian Pharma now. I think for about 10-12 years,
02:50we have seen this now. It's disheartening. But again, the only way out of this is to keep
02:56training, to keep sort of your personnel updated about the regulations, to keep training them.
03:01And, you know, sort of that's the only way out of it.
03:04You say that some of these businesses have had a material, the recent developments and, you know,
03:11over the weekend. So I thought that Lupin's Pitampur facility was a key one for its US
03:17supplies. But I heard you say that Lupin has ANDA spread across and therefore it may not be
03:22as big as I, would it be safe to say it's not as damaging?
03:26Yeah, that's correct. I think majority of Lupin's ANDAs have dual filing sites.
03:31At least that's what they tell us. So, you know, even if this, let's say this facility
03:35were to come under a warning letter or something like that, Lupin would probably be able to get
03:40the approval of those ANDAs from alternate sites.
03:43Okay. So, Aditya, thanks for this first piece of information on this. The other one is
03:50this whole passage of the Biosecure Act and how people took a bit of a liking. But I thought it
03:56was long drawn. I was talking to Syngene and they mentioned that there is nothing in the near term
04:00that's going to happen. How do you look at this? Is it one of the many things or is it really
04:06a big material development for Indian CDMO players?
04:10Yeah. So, look, it's a material development from the standpoint that it gives the stance of the
04:16Western countries and Western companies towards Chinese suppliers. From that context, it is
04:23material. From that intent, it is material. But for the pharma companies of India, which have
04:28the potential of replacing those Chinese suppliers, it's going to take time. Pharma is a regulated
04:34sector. You have dossiers, you have so many files and so many compliances to be met before you can
04:40produce the first commercial batch. I mean, it can take two to three years sometimes just to get
04:45the filing transfer from a Chinese CDMO or to add an Indian CDMO to a Chinese CDMO product.
04:50So, it's a long drawn process. So, I don't, I mean, I understand the streets enthusiasm at this
04:56point in time, but I think a lot of the future growth in some of these companies is getting
05:00discounted in their current valuations, which makes us slightly uncomfortable because if then
05:04the growth falters for even a year or two, maybe sometimes even just a couple of quarters,
05:08you have a lot of volatility in stock prices, which obviously investors do not like.
05:13Aditya, just, you know, among the lot that we've spoken about, and let's get some of those
05:20picks in because you had one more news in the pharma space recently, which was the CDSAO
05:25saying that the quality checks that they usually conduct saw some very key brands and very popular
05:32brands not passing muster. And then you had various, you know, some companies coming and
05:36saying that this is not ours. Then there was a version saying that these are not made it to
05:40market yet. Is this quality check business going to become a problem? If yes, for which companies?
05:50So, I think, look, if you look at the Indian pharma market, there are close to 16,000 companies
05:54that sell products in India, you know, under their labels. And there are many, many, many
05:58contract manufacturers. I think it turns into, again, tens of thousands of contract manufacturers,
06:03but there are only 3, 4, 5 large contract manufacturers who account for a substantial
06:08portion of the market. And a lot of the good companies that we talk about, a lot of the large
06:12companies that we talk about, they either manufacture their product themselves or they
06:16outsource to these 3, 4, 5 large CDMO players, where I don't expect any quality issues too much
06:21out of those 4, 5 CDMO players, because these are WHO GMP certified players and all of their
06:26facilities are WHO GMP audited. So, they are not sort of probably going to fail on that.
06:32Remember, WHO GMP is not as, sort of, not as difficult to pass as, let's say, a US FDA
06:38inspection. The rules are relatively more relaxed. So, I think from that standpoint,
06:42I wouldn't believe that many of these large pharma companies that we invest in or we talk about,
06:47they will have issues with their product quality. So, I am inclined to believe when they say that
06:52some of our brands, which have been sampled by the CDSU and flagged off as substandard,
06:56isn't really our product. It is a spurious product, which was being labeled as our product.
07:00India has the problem of spurious drugs for a very long time. It is our regulators,
07:05it is whose job it is to figure out where those spurious drugs come from and to stop the flow.
07:09So, if you're finding substandard drugs, it is probably the next step to take is to find the
07:13origin of the substandard drug. Is it the company that owns the brand or is it just a spurious
07:18company which is putting the brand on the product? So, I don't think this is going to be an
07:22everlasting situation. I think this is just a blip and there are definitely spurious drugs available
07:26which sell under the popular brands and it is up to the regulators to figure out how and where
07:31that happens and to plug the loophole there. I'm just wondering, Aditya, if you've been
07:36tracking what PBFintech is doing and I know it's an insurance company, you don't really track that,
07:41but we spoke with Yashish this morning and his concept of HMO to solve a problem of insurance
07:50as well as hospitalization, bills for the individual, as well as conflict of interest.
07:57Insurance company wants lesser bills, hospital wants higher bills. Do you see any real impact
08:03if this takes off for hospitals and other space that you do track?
08:08So, look, I think this is a new trend we are observing. So, we are observing PBFintech
08:13talking about opening a hospital. We are also observing Narayana Hudayalai talking about
08:18opening a health insurance arm. So, sort of a new trend where we are noticing that these
08:24companies want to integrate between insurance and hospital space. On the face of it, in the
08:30near to medium term, doesn't seem like a good idea because for an insurer to run a hospital,
08:35it's a different animal altogether. And similarly, for a hospital company to run an insurance arm,
08:40again, sort of a different animal altogether, it will definitely have implications in terms of the…
08:47Aditya, sorry, Aditya, may I just… So, Yashish Daya said that they are not going to run that
08:51business. They said it's an investment into that business, could have investment from other
08:55insurers as well, but it is a separate unit and it's an investment from them. But I think
09:00the question that probably Tamanna was trying to ask, but let me ask my version of it as well,
09:04maybe Tamanna will agree with that, is that if indeed there is interest aligned between an
09:10insurance business and a hospital business, one hospital or set of seven, eight hospitals,
09:16which was Yashish Daya was saying, can it have an impact on the existing hospitals wherein there is
09:20a conflict between the hospital and the insurance company? So, I actually don't agree with the
09:26premise there. I don't think there is a conflict of interest between the hospital and the insurance
09:31company. You may think it's about the bills. I am thinking it's more about the volumes.
09:37So, if an insurance company gets a good rate negotiated with the hospital
09:41and can send patients there, they can ensure higher occupancy, the model works.
09:47Okay. So, let's talk a bit about the hospitals space and the outlook that we are seeing over
09:53there. Is that looking robust now going into the rest of the financial year?
10:01Absolutely. So, I think hospitals for the past four, five years have been phenomenally aware in
10:05terms of RPOG growth and occupancy growth. We don't see the trend changing anytime soon.
10:10So, we expect all hospitals companies to come out with sort of low team to mid-team top line and
10:17slightly higher bottom end growth throughout this fiscal. And that's sort of a significant
10:21growth number given that the overall Nifty 50 earnings grew 9% in 1QFI25. So, you clearly have
10:27a subsector within the market, which is going significantly faster than the broader market index.
10:32All right. Thank you so much for coming in and speaking with us, Aditya Khemka.