Lupin may look to separate the API business

What exactly is this API business

API in the pharma industry stands for active pharma ingredients. The general understanding is that an API is a raw material that goes into the manufacture of formulations, the final medicine forms you buy from the pharmacy. However, APIs are a bit beyond being just raw materials. An API is a biologically active component used in a tablet or capsule. The other ingredient in the medicine is the excipient. The excipient is chemically inactive and delivers the effect of the API. The amount of API included in medicine shows the potency of the drug as represented in MG. As the name suggests, APIs are intermediates made from chemical raw materials. So, APIs have to go through a manufacturing process before they can be used in the manufacture of the final medicines

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Lupin plans to hive off its API business

Hiving off the API business into a separate unit is nothing new. Glenmark had successfully done that by hiving of its API business into Glenmark Life Sciences and even listing that stock. The API unit of Glenmark has delivered good returns in the last 3 months. While Lupin is yet to confirm the separation of the API business, there are several factors that are likely to drive the growth of the API business in the coming quarters. While announcing the Q4FY23 results, the Lupin management highlighted that their API business had grown by 14.6% on a sequential basis. The growth came from the domestic market and the US market. Large pharma companies are increasingly trying to focus on their core formulation business and outsource API procurement. That is likely to be the next big opportunity for the API business.

What had gone wrong with the API business?

In the last few years, the API business had been under a lot of pressure. There were several reasons for the same. Even prior to the pandemic, the US markets were organizing on the buy side and that put a lot of margin pressure on the API business with most API companies reporting lower price realizations. Then the pandemic came in late 2019 and from that point the post-COVID de-stocking led to weak demand for APIs. Then came the supply chain problem since most of the API manufacturers depended directly or indirectly on China. When the supply chains from China got severed, it hit the API business badly as there were few other countries that could supply such volumes at such short notice. However, with most of these issues stabilizing and companies likely to increasingly outsource APIs, the potential appears to be quite huge.

How significant is APIs for Lupin?

At about Rs1,100 crore for the latest fiscal year, the API sales of Lupin account for about 8-10% of the total sales of Lupin. Definitely, that is a significant proportion and is large enough to drive growth in the coming years. Lupin already has a robust portfolio of API products and it also plans to enhance the portfolio further. There are also other advantages that Lupin sees in separating the API business. One of the main aims of the Product Linked Incentive (PLI) scheme is to achieve self-reliance in the API space. That gives an incentive to the Indian API manufacturers like Lupin to expand their API franchise to make the best of the incentives offered by the PLI scheme. Clearly, for Lupin, API is going to be the big growth focus, having grown sales at just 2% CAGR in the last 8 years. It surely needs a break-out and API can provide that.

What will be the API story at Lupin

In the case of Glenmark, the parent wanted to eventually monetize the API business to reduce the debt of the group. Lupin has no such compulsions. Its debt is about a third of its equity and its interest coverage is more than 3 times. For Lupin, the focus of API would be purely to drive growth and derive the full benefits of PLI scheme. We now await the action points from Lupin.