When WuXi AppTec [HKG:2359] agreed to divest the US and UK operations of its cell and gene therapy unit to New York-based healthcare investor Altaris in December, it was widely interpreted as a pre-emptive response to an impending regulatory clampdown in the US.

The Biosecure Act, proposed in early 2024 and intended to ban federally funded entities from doing business with “foreign adversary biotech companies of concern,” has yet to take effect. The messaging around it, however, seems clear: de-globalisation created by US-China tensions has landed in pharma services, prompting multinationals to reevaluate where – and with whom – they do business.

WuXi AppTec, one of the world’s largest contract development and manufacturing organisations (CDMOs), is in the political crosshairs. The company was named in the legislation alongside genomics specialist BGI Group and their respective subsidiaries, and members of a House select committee called for an investigation into alleged Chinese military ties. WuXi AppTec denied the allegations.

The fallout is not restricted to China. India’s pharma services industry, which is already plotting a course up the value curve from active pharmaceutical ingredients (APIs) to CDMO to early-stage clinical research work, is expected to benefit from big pharma introducing more geographical diversification to supply chains. And private equity is already seated for the journey.

“Pharma services wasn’t thriving 10 years ago – the mix of deals was largely focused on domestic branded generics or going after players serving the global generics market,” said Pankaj Patwari, a managing director at Advent International. “The industry has become a lot more investable with the emergence of scale assets and favourable macro tailwinds.”

Divergent trajectories

Advent has made two significant platform investments in pharma services, but these barely register amid broader sector-level activity. Hari Buggana, chairman and managing director at local sector specialist InvAscent, estimates that pharma accounted for one-quarter of India’s approximately USD 200bn life sciences space in 2024. Pharma services was about USD 2bn of the USD 50bn.

Despite a relatively disappointing year for PE and VC investment in the sector, the amount of capital deployed since 2021 is nearly twice that of the prior four years, according to AVCJ Research. The total for biotech and pharmaceuticals alone is flat over the two periods, an annual average of around USD 920m disguising relatively high peaks and low troughs.

Biotech and pharmaceuticals in China attracted nearly four times as much as India in 2024, but this marked three years of consecutive declines. Regulatory uncertainty in pharma services is piled on a heap of existing woes involving global valuation resets, inaccessible IPO markets, and geopolitics.

“The Biosecure Act shook up the industry last year, and even without it, there is so much uncertainty as to what the new administration will do,” said James Huang, founding managing partner at China and US-focused Panacea Healthcare Venture Capital. “US dollars aren’t going into China; they are being redirected into India, and people are saying maybe it can replace China as the CDMO powerhouse.”

Several industry participants noted that, at the big pharma level, there is no evidence of an exodus from China, rather a rebalancing of exposure. Indeed, international – and domestic – demand is strong enough to instigate what Huang described as a fierce battle between China’s second through fifth-largest CDMOs over any business that WuXi AppTec may lose because of its supposed pariah status.

With biotech companies running out of capital, they are selling the non-China rights to their pipeline products for a combination of cash, milestone payments, and royalties. Some of these assets are being dropped into commercialisation pathways overseas. This is reflected in recent big pharma M&A in China and in an assortment of new deal structures that often feature private equity.

“Companies are setting up legal entities in other countries or they license out assets to third parties, especially multinationals with commercialisation capabilities,” said Colin Yu, head of life sciences at KPMG China. “In other cases, they establish new companies with private equity for joint ventures in overseas markets and license out assets for future R&D, drug development, and commercialisation.”

Meanwhile, in pharma services, investors that financed the build out in China are pursuing investments overseas. For example, Hillhouse Investment’s CDMO deals include supporting a take-private of WuXi AppTec in the US in 2015. In the last two years, the firm has picked up George Clinical, a contract research organisation (CRO) in Australia, and multiple sources claim it is pursuing CDMO assets in India.

Evolutionary path

This redirection of capital has accelerated a transition that was already afoot. India’s pharma services story began with generic drugs, which leveraged domestic chemistry expertise. Gradually, the country emerged as a global hub for outsourced active pharmaceutical ingredient (API) manufacturing, helped by the US Food & Drug Administration (FDA) opening a local office in 2008 and issuing more approvals.

Quadria Capital, a healthcare specialist active in South and Southeast Asia, made its first API investment in 2016, backing Concord Biotech [NSE:CONCORDBIO]. According to Abrar Mir, a managing partner at the PE firm, Concord evolved from being a supplier of fermentation-based cancer APIs to manufacturing end-products. This helped set up a domestic IPO in 2022 through which Quadria made a full exit.

“It’s not straightforward. You start by having a good relationship with one or two big pharma companies, and you put in the capabilities to start manufacturing. Then you must get FDA approvals not only for the product but also for the process,” he said, adding that pure-play API suppliers can expect a bump in margins from 20%-plus to 30%-plus through expansion into end-products manufacturing.

“The writing has been on the wall for a long time. We could see there was increasing demand for pharma services in Asia – initially towards China – and so investment started early on.”

APIs took on new impetus in the wake of COVID-19 when global pharmaceutical companies fully embraced the need to diversify China-centric supply chains. This prompted Advent’s acquisition of India-based RA Chem Pharma in 2020, but an investment thesis built on a geographic rebalancing within the generics space soon encompassed a wider set of services.

Advent acquired ZCL Chemicals in 2021 and Avra Labs in 2022, the latter comprising API and CDMO competencies. They came together under the Cohance Lifesciences a year later. Meanwhile, the GP bought CDMO player Suven Pharma [NSE:SUVENPHAR] in 2022 and made three bolt-ons under that platform.

The second and third of these – Sapala Organics and NJ Bio – underline the shift into technology and more complex modalities. They brought to the platform antibody-drug-conjugates (ADCs) and advanced drug conjugates (XDCs), which are typically used in targeted therapeutics, as well as competencies at the pre-clinical stage. US-based NJ Bio also helped expand Suven’s global presence.

“We realised the combination of the two [APIs and CDMO] made a lot of sense. Back-end capabilities are very similar with customer sets being different. While one is steadier and more stable, the other provides you with the opportunity to scale up,” said Advent’s Patwari. “Moreover, most global services players also have a mix of both generics and services.”

An Indian WuXi?

Advent is not alone among large-cap private equity firms in tracking the pharma services evolution. PAG, for example, picked up API specialist Anjan Drug in 2020 and CDMO Acme Formulation in 2021. Advent is distinct, however, in trying to create a single platform. Last year, it announced that Suven – which remains listed – and Cohance would merge to create an end-to-end service.

Asked if Advent is looking to build an Indian version of WuXi AppTec, Patwari demurred, observing that Suven-Cohance is at the beginning of a 10-15-year journey.

WuXi AppTec calls itself a CRDMO in recognition of its competencies in research chemistry as well as development and manufacturing. The company’s smaller subsidiaries, WuXi Biologics [HKG:2269] and WuXi XDC [HKG:2268], focus on specific drug types. They generated CNY 59bn (USD 8.1bn) in revenue in 2023. This compares to INR 27bn (USD 312m) for Suven and Cohance in the same financial year.

While no one suggests emulation will be fast, there is an expectation that it will happen. “There will be Indian versions of WuXi, that’s what many financial investors are betting on,” said Vikram Kapur, head of the global healthcare and life sciences practice at Bain & Company.

Estimated timelines, however, vary markedly – and gravitation of business from China is a decisive factor. Some industry participants see little movement at all. Ashish Agrawal, a partner at EQT Private Capital Asia, observed that the notion of China-plus-one strategies might be “at the back of customers’ minds across the world, but it is not getting as articulated in as many words.”

According to Quadria’s Mir, India is already taking market share from China in the CDMO space for generics, and he expects this to extend into research as well. The push for geographic diversification is enabling the trend, but US and European customers outsourcing more of their processes to lower-cost markets and India’s increasing ability to address this demand are its foundation stones.

Quadria recently backed a CRDMO player it believes can become the WuXi AppTec of India, paying USD 100m for a minority stake in Aragen Life Sciences at a valuation of USD 1.4bn. The company generated INR 17.5bn in revenue in 2023, more than 80% coming from North American and European customers. Quadria plans to help the company expand organically and through M&A, including overseas.

“If Pfizer [NYSE:PFE] has a promising preclinical compound, Aragen would conduct early-stage research to see if it could have any impact on a therapy area or disease area. It would then continue working through the clinical trials period, and by phase three, it would manufacture the drug,” said Mir.

Competitive dynamics

While India has accumulated sufficient talent and experience building out capacity to deliver CRDMO, obstacles remain. Navjeewan Khosla, a partner at Novo Holdings, which manages the wealth of Denmark’s Novo Nordisk Foundation and invests in life sciences globally, noted a lack of balance in the aspiring end-to-end players: Aragen is skewed towards CRO; Sai Life Sciences [NSE:SAILIFE] to CDMO.

To some extent, this reflects holes in the Indian ecosystem. Khosla pointed to challenges involving clinical trials, given religious principles mean most animals cannot be used as test subjects. The country also lacks indigenous innovative biotech capabilities, which means breaking into clinical research is dependent on external demand.

China achieved this, but its expansion from service provider to innovative drug developer was smoothed by billions of dollars of investment – from government and private sector sources – in the pharma services ecosystem. This took place over approximately 20-plus years, most of which coincided with benign macroeconomic conditions.

“The inflection point for WuXi was around the global financial crisis, and for the next decade-and-a-half rates were zero or close to zero,” said InvAscent’s Buggana. “A lot of capital was available and a lot of it went into China. How much of the scale and growth can be attributed to pharma customers and how much is a lot of capital flowing into China looking for investment opportunities?”

In addition, China’s CDMOs have continued to innovate. According to Panacea’s Huang, if taking a new antibody through development cost USD 15m 10 years ago, it’s USD 5m today with no deterioration in quality. Improvements in yield and reductions in cost have come not only through gene-editing technology but also through the use of disposable facilities for smaller batches of more personalised drugs.

The slowdown in China biotech is also contributing to the cost-and-competition dynamic. Companies are sitting on human and physical infrastructure that cannot be sustained by current funding, so they are converting facilities into CDMOs.

“I question the economics of building new capacity in places like India unless there is a geopolitical storm that’s worse than what I see today. CDMOs in China are gaining customers outside China, including from Japan, Korea, and Taiwan, partly but not wholly because of pivots away from WuXi,” said Huang.

“Funding for biotech in the US hasn’t improved, so every dollar counts. If someone can do it for USD 3m-USD 5m when Lonza [SIX:LONN] is charging USD 12m-USD 15m, what would you do?”

The lack of investment in differentiated technology resonates with Advent’s Patwari as well, who cites it as a reason why India’s turnaround times still trail those of China – a key consideration for international customers when assessing outsourcing options. “There’s a lot of excitement, a lot of customers are looking at India, but there’s a lot of hard work ahead,” he added.

Great expectations

This untapped potential is keeping private equity committed to the cause. According to Frost & Sullivan, India’s compound annual growth across APIs and CDMO will outpace those of the global market. APIs are expected to be worth USD 22.1bn by 2027, nearly twice the 2021 level, while small molecule CDMO – domestic and export segments – will climb from USD 3.3bn to USD 7.7bn between 2021 and 2028.

However, some investments are already starting to pay off. Quadria-backed CDMO Akums Drugs & Pharmaceuticals [NSE:AKUMS] and Sai Life Sciences, a TPG [NASDAQ:TPG] portfolio company that positions itself as a CRDMO, debuted on domestic stock markets last year. Anthem Biosciences, a CDMO that sold a minority stake to True North Managers in 2021, filed for an IPO earlier this month.

InvAscent is invested in two of what Buggana describes as next-generation CDMOs. Maiva Pharma, which was added to the portfolio last year, is expected to bypass late-stage private equity and move directly to a listing, such is the demand for fresh issuance in high-growth sectors.

Scale isn’t necessarily top priority for these businesses. Emerging CDMOs globally are becoming more specialised, focusing on specific therapeutic areas. This lends itself to integration – into clinical research and beyond – and ultimately allows pharma services players to get more customer wallet share.

“Once you get more tech into the mix, you can be more efficient picking up patients for clinical trials, you can optimise clinical trials, you can do the protein structures more easily and consume less time and cost,” said Novo’s Khosla. “Technology, especially AI [artificial intelligence], can optimise processes.”

This movement along the pharma services value chain also creates opportunities in the broader services landscape. Healthcare IT is an obvious target area, with multiple investors tracking specialist software-as-a-service (SaaS) providers. Still, big pharma outsourcing could conceivably extend to downstream functions like sales and marketing and customer relationship management.

“We are seeing strong capabilities in APIs, manufacturing, and increasingly on the research side. Over time, there will be more investment in early-stage research,” said Quadria’s Mir. “We also see that whole ecosystem going all the way from the pharmaceutical side to all the other ancillary areas of the pharmaceutical lifecycle.”