What is Pharma APIs and what API stocks to invest in

Active Pharma Ingredients (APIs) are the raw materials that go into the manufacture of medicines. Currently, China is the world largest API manufacturer followed by the US and India. However, the gap between them is not too much. The big advantage for India is the potential growth opportunity. 

India’s API industry is estimated at Rs.79,800 crore as of 2020 but it is likely to grow at 8.57% CAGR over next 5 years to Rs.131,000 crore by 2026. Chinese API industry will grow by just 6.5% in the same period. These refer to the merchant API business which are non-exclusive in nature.

Broadly, Indian APIs cater to 7 major therapeutic applications.

• Oncology
• Diabetes
• Cardiovascular Diseases
• Pain Management
• Respiratory Diseases
• Communicable Diseases
• Central Nervous System issues

In recent times, 3 factors shifted the game in favour of Indian API manufacturers. Firstly, most countries believe that China did play a role in supressing details of the pandemic and hence would prefer to diversify from their overt API dependence on China. Secondly, the Chinese government has clamped down heavily on environmental lapses and API industry has come in for a lot flak, disrupting supply chains. That opened a new window of opportunity for India. Lastly, to promote APIs, government of India also offered Product linked incentives (PLI) scheme for APIs. Here is a look at some major API names in India and thematic investment ideas.

Also Read: Glenmark Pharma IPO Information Note

What API stocks to buy in India?

Some of the major API players in India include Divi’s Laboratories, Aarti Drugs, Neuland Laboratories, Solara Active Pharma, Granules India etc. In fact, the forthcoming IPO of Glenmark Life Sciences is a pure API play as it gets 90% of its revenues from API sales. Here are 3 API stocks to take a close look at.

1. Divi’s Laboratories: is a pure play API company which caters to innovator companies. It reported 50% top line and 81% bottom line growth in Jun-21 quarter. With a market cap of over Rs.90,000 crore, Divi has emerged as the second most valuable pharma play.
2. Aarti Drugs: made its mark as a key paracetamol API maker, which has been a China domain for long. The pandemic saw a huge demand shift in favour of Aarti Drugs, making the stock a multi-bagger. Its APIs for antibiotics like Ciprofloxacin have seen heavy demand. Despite the rally, it remains a solid play on Indian API.
3. Solara Active Pharma: was formed by demerging the API divisions of Strides and Sequent. It has a huge portfolio of over 50 molecules manufactured across six of its facilities. The stock has doubled in the last 1 year but remains a niche play in APIs.

Glenmark Life Sciences IPO: A low hanging fruit, it is the API division of Glenmark Pharma. It promises growth and pedigree to investors along with valuations that are among the lowest in the API peer group. 

API, along with CDMO, is emerging as the big story for Indian pharma. India has the expertise and the companies to make the best of the opportunity.