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00:00Thanks so much for tuning into Talking Point. I'm your host, Neeraj Shah. The last 10 days,
00:17pharma has made its presence felt and how. From being a defensive sector to actually having a
00:25good performance in 2023 as well. But more importantly, this whole murmurs and then the
00:30subsequent passage of the Biosecure Act brought the CDMO players in focus. A virus here, a disease
00:38there keeps diagnostics and healthcare in focus as well. So we thought it best to try and get
00:43somebody who probably eats, sleeps and breathes pharmaceuticals and healthcare in terms of money
00:49management on the show to try and understand from him, how does he think of the space currently
00:54and the various pockets or subsets within healthcare. Chirag Dagli, Fund Manager of the
00:59DSP Healthcare Fund joins in right now. Chirag, great having you. Thank you so much for taking
01:03the time out. Good morning. Thank you so much for having me. Now the pleasure is entirely
01:08ours. And Chirag, your fund's performance has spoken volumes about how well you guys
01:12have managed this space. I'd love to understand how do you think about the things now. So
01:17first up, I'm going to bucket my conversation into two or three spaces, Chirag. And I'll start
01:22off with the recent news flow on the US Biosecure Act. A lot of chatter around this, a lot of talk
01:29about how albeit while it's long term, there is a massive opportunity for CDMO, CRO players.
01:35Do you agree? How do you think about this? So clearly there is an opportunity. Indian players
01:43are at the forefront of this opportunity. We've been very good at chemical synthesis for a very
01:49long time. And if you see why this opportunity has always been there, it is only a very gradual
01:58process that, you know, this increase happens. And what the Biosecure Act will do is that it
02:04will essentially accelerate that change. If you see through COVID, everybody has been trying to
02:12de-risk their vendor supply chain. In COVID, we saw a lot of, you know, challenges through. So all
02:20innovators have been trying to do, if they are largely in China, then China plus one. If they're
02:24largely in Europe, then Europe plus one, and so on and so forth. And clearly India is at that center
02:30of whether you want to do Europe plus one or China plus one. So this has been going on for a while,
02:36you know, below the seams while the litigation, you know, the legislation has now come.
02:43But this has been in the process, in the progress, in discussions, in boardrooms for
02:50better part of the last 12 months. And which is why you see most of the CDMO players in India
02:58reporting very, very strong inquiries, you know, very strong numbers in terms of
03:05the RFPs, the proposals that they're actually seeing.
03:11Okay, so, Chirag, okay, now, just trying to understand again, and maybe it's a repeat
03:15question, but I'm just trying to understand, do you reckon that the benefits of something
03:19like this potential benefits could come in soon? Could it be delayed? And, and a lot of people
03:28were saying that the second half of the current fiscal will probably start seeing some green
03:35shoots for the CDMO, CRO space. In fact, the companies were saying as well, that forget the
03:40first half, but the second half will be very strong. I'm just trying to understand, could the
03:45biosecure act passage lead to that? Or are there other factors? And do you also believe that while
03:52they have kind of lagged in the last six to nine odd months, that the next six to nine odd months
03:57could be constructive for them? No, a hundred percent. And this is irrespective of the biosecure
04:02act, right? The biosecure act is just, it is just still in process of getting official and so on and
04:08so forth. Any which way companies were talking about a very sharp recovery in the second half,
04:13and typically for all CDMO companies, second half is much better than the first half.
04:19So a little bit of that is seasonal, but also their own order books, their own pipelines were
04:25such that the second half of this fiscal was expected to see a very strong recovery of the
04:32low base of the first half. Okay. And final question on this, Chirag. Again, I know it's a
04:38very difficult one, but as investors or as an investor or fund manager, you're building out a
04:43hypothesis and then hoping for it to work. My question is, is your hypothesis or strong growth
04:49for the next few years based on biosecure, RFQs, et cetera, et cetera, for this CDMO CRO bucket,
04:57is it possible to predict two, three years out, or are you playing it by the ear?
05:02No, I think it's a little more longer term, kind of a long, strong runway to grow. That's what,
05:08you know, whether it is biosecure or it is China plus one strategy that innovators have been
05:13following for post COVID, it basically paves the way for a very strong opportunity for Indian
05:21players. We've been very strong at chemical synthesis historically, and this is basically
05:26displaced to that strength. The opportunity is now present for a very long time. We can
05:33keep growing at that double digit kind of, that kind of opportunity is present, is what we're
05:39saying. Okay. So, so you reckon that it's, it's maybe a five to seven year runway of growth
05:44possible because of all of these factors. And, and could it be like above mid-teens growth or
05:49higher than that? Or is it difficult to call? What companies are effectively saying is that,
05:55that is how they're thinking about the growth opportunity. Whether that, see, it can be
06:01anything. There can be many things that can go wrong. Their clients' products have to do well
06:05in the market. So there are lots of ifs and buts, but the opportunity certainly is present.
06:12All right. Just a segue, because some of these companies are also manufacturers of APIs,
06:18right? What about, what about that bucket? Because there is this hope that API growth will pick up,
06:25I mean, granules has mentioned that in the last few conversations, the numbers have looked okay
06:29too. Some of the other companies have shown that too. Is that looking okay or, or, or is it very
06:35seasonal in nature per se? So today what is happening in API is that margins are under a
06:41lot of pressure for the generic API business, you know, in some sense, the commodity part of the
06:47business. Margins are under pressure across the board. Prices were correcting. But what we've
06:54seen of late, maybe over the last couple of quarters has been that for many products,
07:01prices on the lows have now stopped falling further and stabilized in some sense. So API
07:09margins are at, I would imagine such lows that I think they can only, they will trough out over here
07:16and probably pick up from here on, you know, as we go along, but clearly margins are under
07:22pressure for the generic API business. Okay. Fair call. Now, Chirag, the other aspect is
07:31what to do with some of the recent developments that have happened in companies, you know,
07:38kind of specializing in that, speciality drugs. I mean, suddenly we saw moves, policy moves around
07:44cancer drugs and some of the companies in that bucket have done really well. There have been
07:49other examples as well. Do you believe speciality drug makers could actually have a stronger runway
07:55now that insurance is also percolated or health insurance is percolated and people might have
08:01access to expensive treatments, which was not a case maybe 10 years ago. So just trying to
08:09understand could speciality drugs of all kinds be showing a strong runway of growth and are
08:15Indian companies there to benefit from this? So speciality opportunity in India, right? Let's
08:23break the two pieces, right? One is in the developed market like US and Europe, etc. And
08:27then there's obviously in India. In India, I think we've seen most of the multinationals actually
08:34prioritize new product launches in India along with the developed market. So this is a big change.
08:43I mean, it's a gradual change that has happened. But, you know, 10 years back, this was probably
08:48not there. Five years back, a little bit of this was there. Now, increasingly we're seeing most of
08:52the multinationals actually launch their new products, their patented products in India along
08:59with the developed world. So that's clearly something they see the potential for India.
09:04And, you know, this is such a large market, right? 140 crore population, whichever way you slice and
09:10dice this, there will be a small market like Switzerland or France that will just pop out of
09:14that. So, you know, the opportunity is clearly there. Companies appreciating that, multinationals
09:20appreciating that and certainly launching products, you know, on patent products along with
09:27the rest of the world in India. Now, so that's the India piece, right? In the meanwhile, you know,
09:37incremental innovation and a little bit of, you know, innovation that has been going on,
09:43that has been going on for a very long time and that continues in the Indian market.
09:47Now, coming to the speciality part in the developed world, some of our larger companies
09:53have actually shown the way that this is, see, this is a very, this is not a small,
10:01this is a very, very balance sheet heavy, very means a lot of cash flow, a lot of big long
10:05gestation period, et cetera, to do well in the speciality piece. But some of our leaders in
10:12India have actually risen up to that opportunity and shown the way of how, you know, they can
10:18succeed of, you know, selling speciality patented drugs in the developed world. And more of this
10:27will happen, I think, as some of our, you know, as some of the companies lower down also,
10:35you know, reach a certain threshold of financial cash flows, they will also look to enter some of
10:42these markets with own speciality products. So, but that's some time away before we start seeing
10:49some, you know, where we can say that Indians are now doing very well in speciality in the U.S.
10:56That I think today we are only seeing a couple of companies as a trend, it might take some time
11:04for it to develop. Okay. Now, Chiran, where within this whole healthcare construct or the healthcare
11:12space are you the most constructive on? Because there are various buckets here. Where are you
11:16most constructive and why? So, as I always say, you know, healthcare is not just one sector,
11:23there are multiple buckets. You put the India formulations, the export formulations, APIs,
11:29CDMO, hospitals, diagnostics, and, you know, now we have retail pharmacies as well. So,
11:36multiple of these buckets, each of these have opportunity to grow in a double digit kind of
11:44range is how we are kind of thinking about this top down. Now, as far as, you know, capital,
11:52generally, these markets, these businesses don't have too many cycles per se, right?
11:58Sure, they will go through a little bit of, you know, RM prices, volatility, some bit of
12:03seasonality in demand, etc. But by and large, businesses are not very cyclical. If you look at
12:09a long term chart of demand of these products, of each of these, you will see a secular kind of,
12:16you know, increase. So, that kind of continues. But capital markets have their own cycles of,
12:21whether they prefer this versus that, depending on news flows and so on and so forth. So,
12:26capital markets have their own cycles within these buckets. The businesses themselves don't
12:32have too many cycles. The only piece which is cyclical in the entire, you know, basket of
12:40multiple segments is commodity US generic business, which goes through a bit of a cycle.
12:47And last 12 months, we've seen a little bit of an up cycle from the lows, we've seen a little
12:54bit of an up cycle in the US generic business. And that I think will continue for some time.
13:03So, that's just the, you know, lay of the land. And if you say, if you ask me, where is the
13:09opportunity? I think the opportunity is across the board in each of the buckets. There are stocks,
13:15there are opportunities to, you know, invest in. But if you just, you know, kind of list down
13:23the multiple buckets in terms of growth, then clearly CDMO API will be up there in terms of
13:30the, in terms of, you know, mid-teens kind of growth potential, whereas hospitals diagnostics
13:37will be somewhere lower, maybe in the 12 to 14% kind of range. And then you'd have the Indian
13:44pharma, which will be in the 10-11% kind of range. So, that is how the growth, you know,
13:50will stack up. That's how we broadly kind of look at it.
13:54But Chirag, relative to the valuations existing, would the higher growth companies still be the
14:03favorites? Because they might be trading expensive. I mean, I look at the valuations of a
14:08Cingene, a Loras, etc. They are very, very expensive companies. So, do they still remain
14:14favorites? Or, I'm not saying they are your favorites, but I'm just trying to understand,
14:18in the pecking order, would they, some of them might be expensive as well. So,
14:21valuations versus growth perspective, what would stand to be the favorites?
14:28So, I mean, I think across the board, most sub-segments have seen a big
14:34re-rating. Even India businesses, which used to trade at a premium to, you know, export businesses,
14:41even on higher multiples 12 months back, those businesses have actually re-rated much higher.
14:49So, tough to call, you know, separate out a section where, you know, you will see that this,
14:58as an entire space, the valuations are very attractive. Within spaces,
15:03you have to keep looking for opportunities, is how we think about this, Neeraj.
15:09Okay. So, I'll try and pick up one by one. We've spoken at length about the Biosecure Act and CDMOCR,
15:15also leave that out. Now, hospitals. Let me try and come to this. A lot of chatter around
15:22new bed addition, consolidation within this space with the larger chains gaining over some of the
15:29others. That's the other piece that I hear. And then I hear, of course, about the fact that,
15:34or about the possibility that branded chains would stand head and shoulders above the others
15:41and therefore gain both in revenue growth and valuations. I'd love to understand how you think
15:46about hospitals. So, clearly, what we've seen in the last three years is that most hospital
15:55companies have reported double digit R-POP growths. And clearly, that's not something that's
16:03sustainable. A part of this is a mix of both case mix improving the maturity profile of the hospital
16:10overall improving. Clearly, that sustaining double digit R-POP growth looks unlikely as we go along.
16:20I think a more reasonable expectation could be a single digit R-POP growth and probably a
16:28single digit kind of patient volume growth. And that blended into an overall 12% kind of,
16:3512-13% kind of growth is how, is the construct in the hospital space.
16:43When you think of the larger chains, the listed ones, clearly, they're getting market share.
16:49Clearly, we're seeing that there's a lot of potential for these companies to, you know.
16:57So, two things are happening. One is that in their core markets where they have a very strong brand
17:01name, they are expanding brownfield capacities at existing locations. The other thing that is
17:09also happening is that there's a lot of M&A that is happening that, you know, standalone hospitals
17:15are actually getting corporatized in some sense, you know, selling themselves out to
17:23corporate chains. And this works well for both, right? So, let's say if there's a doctor run,
17:29you know, hospital, 100, 200 bed hospital in a city, a doctor can, you know, take it only so
17:37much because he's doing both the administrative work as well as the clinical practice.
17:43When they get attached themselves to a corporate structure, the admin part just goes out, right?
17:49The corporate structure manages the admin part, whereas doctors can just focus on their clinical
17:55practice. So, it's a win-win for both. And that structure we're increasingly seeing a lot more
18:01come through. And I think as far as the opportunity to grow on their own, this whole
18:10brownfield expansion in cities where they're already present and have a very strong presence,
18:17that also seems to be continuing. So, the opportunity is certainly there.
18:22Most companies are talking about doubling of bed capacities over the next four to five years,
18:28at the very least. Okay. And between hospitals versus diagnostics, a lot of people tend to
18:38make that comparison. We're trying to think whether we want to buy either or. Do you kind
18:43of look at them that way? And do you have a favorite between the two? So, look tough to
18:49compare the two businesses. Hospital security, asset intensive business, high entry barriers.
18:58You need almost about 100 licenses to start a hospital, right? So, if you and I decide to put
19:04up a hospital in a location today, the hospital will come up in three years. It will run at a
19:09beta losses for another two, maybe three years, and then start making money. So, very high entry
19:14barriers in hospital. Diagnostics, on the other hand, there's hardly any capital required in the
19:19business, very low entry barriers, et cetera. So, the two businesses are very, very different.
19:26Both offer similar growth, I would say, maybe plus minus, you know, some bit, but similar growth.
19:34But capital efficiency is much higher in diagnostics. So, to pick favorites, difficult,
19:41I would say, valuations across the board are high. Within pathology, or rather within diagnostics,
19:52much easier to pick up a radiology business because it's just difficult,
19:57much more difficult to disrupt a radiology business. And within hospitals, just much easier
20:05to pick up a multi-speciality hospital chain, which can, you know, which can deploy the capital
20:15that its existing beds are generating, the cash flows that its existing beds are generating to
20:21grow and, you know, build more beds. So, that's how we think about this rather than comparing
20:26diagnostics with hospitals. You try to compare within hospitals, which are the hospitals that can
20:33potentially, you know, grow through internal approvals and from the existing beds that are
20:39there in their base, the capital that is generated from there, can they deploy into newer markets,
20:46newer geographies to grow, is how we kind of think about this. Are you constructive hospitals,
20:52are you constructive diagnostics currently? Constructive, but I mean, valuations are a
20:59little bit punchy, clearly. And, you know, one of the things we've seen in diagnostics is that,
21:07is that, you know, pre-COVID, all of these companies used to grow in the
21:12mid to high teens range. Through COVID, there was a lot of challenge, you know, etc. And growth
21:21x of the COVID business had actually come down to very early double digits, 10, maybe 11%,
21:28that kind of a number. And that now is inching back up to 13, 14% is what we are seeing. We're
21:35seeing a little bit of growth acceleration come back in the diagnostic companies. That's one
21:42change that we see. But that said, clearly valuations are punchy. Okay, valuations remain
21:48punchy, indeed. Okay. The last couple of pieces, Chirag, that I would want to understand from you,
21:57where is it that you believe the next triggers of growth come in? Again, very wide bucket. So it's
22:03a bit of an open ended question, because you yourself counted about seven or eight buckets.
22:07So no one trigger will work for each. But I'm still trying to understand, because you probably
22:11look at the whole space, or from within the buckets that you look at, where is it that the
22:16next big trigger is likely to come in? Like for CDMO, the biosecure act was supposedly the big
22:21trigger in the minds of people. Where do you think the next big trigger comes in for any of the
22:25buckets that you are looking out for? I think the next big negative trigger can be
22:33the next big negative trigger can be some regulatory action. Clearly, that's one of the
22:39big pieces that worries us a little bit. And this is across businesses, whether it is in
22:47pharma manufacturing, whether it is the USA FDA, or it is hospitals, or the
22:56domestic market, price control, and so on. So that is something that is a little bit of
23:04uncertainty there. Apart from that, in terms of growth triggers,
23:12I think this business across the board just keeps chugging along.
23:18CDMO, while today we talk about biosecure act, etc. But the underlying trends of doing this
23:26de-risking away from China or away from Europe, these have been around for better part of the
23:31last 12 to 18 months. So I'm not sure if I can identify the milestone that this is going to
23:37happen. And that's going to lead to the next big move, etc. I'm not sure if I'm able to identify
23:43any such events or triggers. My final question to you, Chirag, and that is on the big pharma
23:52out of India, which have this large US exposure or global exposure. And I'd heard enough people
23:59talk about how the pricing pressure might go off, then talks of the pricing pressure coming back,
24:05then Revlimid helping some of these players in posting very strong revenue. And then conversation
24:12now starting to come in of generic Revlimid or some of the drugs, probably ending the massive
24:19revenue boost that they gave to two or three companies in particular, but maybe a lot of others
24:24too. So I'm trying to understand what happens to the Sun Pharma's, Reddy's, Cipla's, Lupin's of the
24:29world, Aurobindo's of the world over the course of the next 24 months. How do you see that picture?
24:35So two things happen. One is that the US based business, right, which is the
24:40traditional commodity, fully generic kind of business, that continues to chug along.
24:47Price erosion remains fairly benign and that prognosis that we have that price erosion will
24:53remain benign, that will continue over the next 12 months for sure. As far as the big
25:00products are concerned, and Revlimid is just one of them, as far as the big products
25:05are concerned, some of these will just stop off, right? So Revlimid will become a fairly
25:12commodity product starting January 2026, maybe earlier as this is a date certain and
25:22it's a market so players may behave differently. So that's certainly happening.
25:29The way we are approaching this is that companies where there's a very high profit
25:37contribution from a couple of products and where valuations are also a little punchy,
25:42we're staying away from such companies is how we are kind of thinking about this. Wherever
25:49there isn't very high or not as high product concentration, those companies
25:57still we continue to own. So a combination of higher multiples with higher product concentration
26:05is an absolute avoid, is how we are kind of today thinking about this whole US
26:12business across multiple players.
26:17Okay. Well, it's a difficult space to invest in. Some pockets have triggers,
26:22some pockets have future triggers, maybe some negative ones as well. Chirag Dagli,
26:26they're laying it out beautifully for us. Thanks so much Chirag for taking the time out and being
26:29with us. Really appreciate it. Pleasure. Thank you so much.
26:33That's the view on Talking Point today viewers. Thanks so much for tuning in.