How Granules India transformed itself from a company making commodity APIs into one making formulations

Chigurupati, a second-generation entrepreneur, said the company has both long-term and interim strategies in place to beat the pricing pressure in the US market and build a sustainable generics business.

Launch of products by leveraging upon backward integration into active pharmaceutical ingredients (APIs) with gross profit margin of 50-55 percent would be the long-term strategy.

The interim plan is to launch limited competition products with a shorter lifecycle but with more financial benefits due to competitive reasons. This, the company says, will help generate cash flows.

“We have shifted from P&L to a more cash flow-focussed company,” Chigurupati said. Currently, the US business contributes about 52 percent to the company’s revenues.

For Granules, Q1FY21 has been particularly strong. Consolidated sales stood at Rs 735.60 crore – an increase of 23.57 percent from Rs 595.27 crore in Q1FY20. Net profit in Q1FY21 stood at Rs 111.45 crore – a rise of 33.89 percent YoY.

Granules stock also had a good run, giving a return of 150 percent in 2020. The BSE Healthcare index rose 44 percent during the same time. Shares of Granules rose 1.76 percent and were trading at Rs 315.10 at 2 pm on Thursday, while the benchmark Sensex gained 0.31 percent to 39,191.40 points.

Granule’s history and how did it pull off?

Granules was founded in 1984 by Krishna Prasad Chigurupati in Hyderabad to make Paracetamol or Acetaminophen as it is generically called.

Paracetamol is one of the most commonly used medications against fever and pain. Paracetamol has attracted hordes of entrepreneurs, during the 80s and early 90s, considered to be the period of India's bulk drug boom.

Over the years, Granules expanded its portfolio to Ibuprofen (pain relief), Metformin (anti-diabetic), Methocarbamol (pain relief), Guaifenesin (anti-cough), among others. By the late 90s, many have perished, due to cut- throat competition, price controls and little margins.

Also, the shift of bulk drug manufacturing to China hastened the process. Those who survived shifted gears to formulation and highly regulated markets.

Granules kept churning out the same old commodity molecules and that could be one reason why it hasn't been able to catch up with larger rivals despite having a head start.

However, to survive in such a low-margin but high-volume market, Granules started investing heavily on expanding APIs and pharmaceutical formulation intermediate (PFI) capacities, focussed on manufacturing, cost efficiencies and reliability. PFI is a stage before the making the finished product.

For Granules, Paracetamol contributes about 25-30 percent to its total production. Granules has both the finished dosage formulation and the API, and it has one-fifth of global share.

Interestingly, Paracetamol, Ibuprofen, Metformin, Methocarbamol and Guaifenesin are old molecules, but are the first line of treatment, and they are difficult to be replaced that easily. The market size for these products is small, but are relatively stable.

US expansion

But still, this isn't enough for the next leap of growth. This is when Granules decided to directly enter the lucrative US generics market, leveraging upon its backward integration into APIs.

The company started with ANDA filings for its key molecules such as Metformin and Ibuprofen, coupled with in-licensing deals and acquisitions to quickly expand its portfolio basket.

The company has invested Rs 600 crore on setting up formulations manufacturing facility in Virginia, US. In India, too, it has expanded capacities across facilities and added APIs to its portfolios.

As of March 31, 2020, Granules has filed 44 ANDAs in the US, out of which 26 are approved. Till the closure of financial year 2020, the company had filed 20 US DMFs. Chigurpati says the focus would be on choosing the right molecules for the US market.

"We picked a basket of products, for which scaling up was an issue (for competition.) We took those products, and processed them efficiently. We took exhibit batches at the sizes of commercial batches with proven consistency, and it is those products we are filing," Chigurupati said.

"Strong demand for key products  such as Metformin, Paracetamol, and Ibuprofen due to COVID-19 has translated to a robust Q1 for Granules. Ahead, we expect launches in formulations and additional capacity in PFIs to be key growth drivers,” said brokerage firm Anand Rathi in its recent report.