The pharmaceutical industry is as complex as any, if not more. With innovator products, generics, branded generics, API etc on one side and Para IV filing, limited competition products, FDA warning letters on the other, analysing the sector can be quite cumbersome. However, as Indian companies in the sector continue to make headway globally, ignoring opportunities in the sector due to inherent complexities may not be a good option. So, in this article, we attempt to declutter facets of the industry to provide a base for those looking for opportunities in the sector.
We elaborate on the innovator economics and the conditions required to make strides in that segment, the several layers in generics that add value despite competition, the newfound impetus in the CDMO segment and the base metrics that determine success in research outsourcing.
Innovator
In the pharma industry, innovators are at the top of the value pyramid. These companies undertake significant capital risk ($500 million – $1 billion to develop a product) and duration risk (process spans seven-eight years), all while facing a small probability of success. Going by past data in the US, for every 100 molecules beginning Phase-I, only eight can expect to cross the finish line. The remaining 92 ($25 billion in investment on a conservative estimate) are sunk costs, with very little salvage value. Phase-I (evaluating safety) has a 52 per cent chance of success, Phase-II (safety and dosage) – 29 per cent and Phase-III (establishing efficacy) – 58 per cent.
Patent protection of 20 years (including the seven-eight years in development) is the incentive for undertaking the risk. Companies can price their product monopolistically before generic competition nearly flatlines innovator revenues.
Roche, the leading innovator, reported a 30 per cent PAT margin in FY24 on revenues of $60 billion, which include R&D expenses at a staggering 20 per cent of sales. Innovator economics imply that several commercialised and patent-protected products at the top line are necessary to fund the many development candidates in R&D to run an innovator company.
Indian pharma is sustained by generics, which would be insufficient to sustain a large basket of innovation. But being the top prize, there are modest beginnings led by Sun Pharma, which now has a self-sustainable innovation programme. The innovative medicine segment of Sun has 11 products, of which the leading product Ilumya for plaque psoriasis has reported sales of $680 million (₹6,000 crore) in FY25. With the Ilumya patent expiry hovering around 2031, the company has launched Leqselvi for alopecia areata in July 2025 with peak sales estimate matching that of Ilumya and several smaller, but significant, products ramping up their sales.
Glenmark Pharma funded its innovative platform under Ichnos Glenmark Innovation (IGI), which recently reported a major milestone for the company and Indian innovation. IGI entered a licencing agreement with AbbVie ($56 billion in FY24 revenues) for its ISB 2001. The molecule is in Phase-I studies and yet received $700 million in September 2025 as part of the $1.2-billion milestone payments agreement. This should allow Glenmark to fund IGI, which has several other candidates in clinics. The company, which endured several years of innovator funding issues despite pressure of earnings expectations, has come a full circle with this announcement.
Zydus Lifesciences pursues innovation beginning from India, where the development costs are manageable, before exploring the larger regulated markets. With a wealth of studies generated in India, the all-too-important clinical trial design, target and therapy identification and trial management will have an improved probability of success with this approach. Saroglitazar, Zydus’ lead candidate, is approved in India for NASH and other adjacent therapies. The molecules is currently in Phase-II trials in the US for NASH and Phase IIb/III trials for Primary Biliary Cholangitis. There are two other candidates the company is developing: A host of studies in India driving the new drug applications in the US, Europe and China.
Generics
Indian pharma’s primary operations in any market are generics, which are products launched after a molecule loses patent protection. The economics of the generics business is primarily dependent on the level of competition. In a plain generic, on the first day of a launch a molecule with one, two, five, eight or 20 competitors may result in the price of the molecule getting a 20/30/80/90/98 per cent discount, respectively. Essentially, beyond three competitors, a price decline of 80-90 per cent should be expected. A $1-billion product at the innovator level, with eight competitors launching on day one, with 80 per cent discount and a conservative 60 per cent penetration should yield a revenue of $7.5 million in the first year or ₹66 crore for a generic company.
From the second year, the optimistic case is of a 5-6 per cent further discount. Price erosion is a constant in generics, sometimes reaching 10-12 per cent per year as well, as was the case in 2018 to 2021-22. With a development cost of $2-10 million, the economics are razor sharp but still viable. But this applies to plain generics and Indian pharma has a few other nuances within generics to garner higher value.
Branded generics
The domestic market is essentially a branded generics market. These are still generics but are backed by brand power, developed primarily by promotions at the doctor level. Compared to regulated markets where prescriptions are based on the molecule or generic name (paracetamol, for instance), Indian prescriptions carry brand names (Crocin). With the right traction built, companies can generate portfolios with ₹100-500 crore per annum products with minimal trail investments after the initial push.
A large and efficient sales force, with the right portfolio mix, is the key for this market as evidenced by growth of Mankind Pharma (16,000 sales personnel with ₹6.5 lakh per month productivity) or Torrent Pharma with a similar force but ₹8 lakh per month productivity. While pharmaceutical manufacturing can be therapy-agnostic, the necessity of sales force approaching doctors/specialists is where therapy focus gains prominence in pharma, branded generic or innovator product.
In international markets that are similar to India in market maturity or regulations including Africa (Cipla, Lupin), South America (Caplin Point), Russia and CIS (Dr Reddy’s), companies have developed a strong branded business reaping strong yields from these markets.
At the other end of branded generics are trade generics, a segment gaining prominence with Jan Aushadhi stores where the generic name is key, not branding. Cipla, Torrent and other firms are securing a share in the evolving segment.
Complex generics
Complex generics hold the value proposition in regulated markets where branding is not cost efficient. Complex could be based on either technical know-how or IP-driven complexity. Lupin’s generic Spiriva or Cipla’s soon-to-be-launched gAdvair are prime examples of technical complexity. The two respiratory compounds’ patents expired in 2018 and 2019 respectively. Despite blockbuster sales of more than $1 billion each, there are not many generic options in the US. Technical complexity is driven by device combinations, need for clinical trials despite being a generic, peptides or high potent injectables and, most importantly, a very high bar for approval. These segments enjoy strong revenue streams with above-average margins, as discount is limited to less than 50 per cent even on increased competition. More importantly, the molecules do not face the same generic threat of redundancy in 8-10 years.
Intellectual property or IP-driven complexity is when the company challenges the patent itself. Natco Pharma first challenged the patents of Revlimid – a $8-billion-per-annum drug in a Para IV filing. A Para-IV filing challenges the patent for market access compared to a Para III filing which targets launch on patent expiry. A string of companies — Dr. Reddy’s, Aurobindo, Sun Pharma and Cipla — followed suit and gained an unusual launch settlement with the innovator. According to the confidential settlement with the challengers, the innovator agreed to a volume-limited launch with volumes increasing sequentially till 2026. Against an open competition which would have crashed prices, a volume-limited launch allowed prices to erode measurably for everyone.
Even in case of a patent expiry launch, US regulations allow the first filer to enjoy a 180-day exclusivity. In May 2025, Lupin launched Tolavaptan with a 180-day exclusivity, as it was the first filer for the generic. With innovator-level sales of $1.5 billion per annum, Lupin should be expected to generate sales of $200 million in the 180-day period.
Biosimilars
Biosimilars are technically not generics, but as the name suggests are similar to biologics — drugs derived from living organisms. They have a highly-complex molecular structure of 1,50,000 daltons (small molecules are under 1,000 daltons); owing to such complexity, the generics can only aim for similarity.
Biosimilar approval process involves clinical trials to establish similarity in efficacy with the innovators. This increases the cost of a biosimilar development to $200-300 million and the timeline can stretch to seven-eight years, with multiple rounds of regulatory oversight. Biosimilar revenue potential is dependent on the innovator’s market size and the level of competition, but a biosimilar should be expected to yield $50-70 million per annum from the US and European markets. Interchangeability is a further addition, whereby based on the prescription, the retailer can switch innovator with a biosimilar. This should drive higher market shares and more revenue. Longevity or shelf life of biosimilars is expected to be higher, as the barriers to entry are higher. The field of biosimilars is still nascent with less than a decade of operations and the US FDA is considering easing regulations for far more entries and interchagability as it gains confidence on biosimilar adoption. While Biocon is at the forefront, several other large Indian pharma companies have developed a portfolio and are eyeing the segment.
CRDMO
Contract research and development and manufacturing outsourcing (CRDMO) is the segment that secures a portion of the innovators’ drug development process by utilising its scientific and technical pool of talent and pilot to commercial-scale labs. The scope of outsourcing in discovery (target identification, drug design, lead optimisation) and pre-clinical work is referred to as CRO; CDMO starts with clinical to process development including supplies of pilot to commercial-scale product under development. Divi’s Labs, Anthem Biosciences are some of the full-stack CDMO operators.
The CRDMO business economics is dependent on the innovators’ commercialised molecules at the end of the development funnel. For instance, Anthem Biosciences has 242 projects, but 54 per cent of FY25 revenues are from 10 commercialised molecules. These 10 molecules would likely have emerged from the discovery to clinical stage projects. While the bulk of revenues is from supplies to commercialised molecules, a large basket in clinics is crucial for revenue visibility. The innovators, typically, sign a multi-year supply contract with a few CRDMOs that were involved in product development.
China+1 and US Biosecure Act, which limits Chinese firms’ involvement in pharmaceutical supplies, are strong tailwinds to the sector. The firms are scaling up capacities to benefit from the gradual shift from China. Aurobindo Pharma has planned a ₹1,000-crore capex to develop a large-scale mammalian cell culture bioreactor lines that will be contract manufacturing for an American pharma major.
API
The API business is largely commoditised, where the product is compensated on the tonnage. While speciality chemicals retail for $12-20 per kg, APIs can fetch upto $25 per kg or more, depending on complexity of the process.
High-potent APIs, complex manufacturing process or APIs supplied to innovators are segments which can fetch higher margins of 25-30 per cent EBITDA margins; this otherwise would be limited to 20 per cent at the upper end.
As is evident, the scale of manufacturing is crucial to compete on price in this segment. China, with large API product-specific capacities, has taken the lead in this segment, even as generic formulation development is led from India. But with US Biosecure Act, the realisation of supply chain security and developing competencies, India has focused on API development with its PLI schemes. In early signs, Aurobindo has established Penicllin-G and key intermediate facilities, which are crucial precursors to many antibiotics produced domestically and approved under the PLI scheme.
Investor takeaways
The right mix for a trail-blazing growth while operating from India should be a strong branded generic base, supplemented by a wide innovator portfolio. Refer chart to gain a perspective on areas in which the top 10 pharma companies (by market cap) generate value from operations. This is based on our qualitative assessment of business segments and prospects.
While complex generics have delivered strong growth bursts, valuations cannot capture the incidental nature of such growth — cash boost, if happens, but consistent value addition is suspect. The other emerging sector is CRDMO and essentially biopharma-focused CRDMO. The share of small molecules is matched by biologics, which will face patent losses soon. With China+1 and the US Biosecure Act as tailwinds, the large volume requirements can be met with the large personnel and manufacturing base India provides.
Published on September 13, 2025