Have markets jumped the gun on CDMO stocks?

The initial public offering of Bengaluru-based Anthem Biosciences, a contract research and innovation provider, has thrown the spotlight on India’s Contract Development and Manufacturing Organization (CDMO) space. On Day 1, the IPO was subscribed 0.7x overall. Among non-institutional investors, bids above ₹10 lakh were subscribed 1.37x, and those between ₹2 lakh and ₹10 lakh saw nearly 2x subscription, NSE data showed. In the grey market, Anthem shares were quoting at ₹679—about 19% above the issue price, according to IPO data platform Investor Gain. The excitement isn’t limited to Anthem. Shares of CDMO players have been surging. From July 2023 to mid-July 2024, Divi’s Laboratories gained 49%, Aarti Pharmalabs rose 53%, Piramal Pharma climbed 38%, and Cohance Lifesciences advanced 22%. In contrast, generic pharma majors underwhelmed. Sun Pharma is up just 7%, Cipla and Dr. Reddy’s have slipped 2% and 7% respectively, while Torrent Pharma posted a modest 15.5% rise and Aurobindo Pharma fell 14%. Also read: Anthem IPO: High growth, low R&D—is this a long-term bet or a risky buy? The China factor There is an opportunity for CDMO players, and that could expand further due to ongoing geopolitical shifts, particularly the global move to reduce dependency on China, highlighted Dheeresh Pathak, senior fund manager - equity, WhiteOak Capital AMC. A Goldman Sachs report dated 23 June also pointed out that firms such as Syngene, Neuland, and Divi’s are converting a rising number of RFQs (request for quotations) into pilot contracts—though the full financial gains may take time. “Geographic supply chain diversification is likely to play out over the next 3–5 years, if not more," the report said. The report added that most corporates acknowledged that their clients are actively building strategies to reduce their dependence on China. Global opportunity, Indian gap The global CDMO market is worth $200 billion, while India commands just $7 billion, said Bharat Celly, pharma & healthcare analyst, Equirus Securities. The gap signals significant room for Indian players to scale. Divi’s Labs and Laurus Labs are already making headway, steadily capturing global market share, he added. Also read: Torrent Pharma bet big on JB Chemicals, but can the acquisition deliver? CDMOs vs generics India’s CDMO space is emerging as a long-term outperformer, driven by stronger fundamentals than traditional generics, according to market experts. CDMOs have delivered ~13–15% annual revenue growth (ex-outliers), compared to ~10% for generics, with steadier execution and less pricing pressure. Their average operating margins hover around 30%, higher than ~27% for generics, supporting their premium valuations, said Krishna Appala, fund manager at Capitalmind PMS. CDMO stocks currently trade at steep multiples — often above 50× earnings and, in some cases, over 100× — compared to 18–35× for generics. Valuations: Headroom or overheat? “While much of the optimism is already baked in, the potential risks haven’t quite caught up in the pricing," Appala noted. US trade threats could drag sentiment and offer better entry points for long-term investors, he noted. Indeed, trade tensions are heating up. US President Donald Trump recently threatened a 200% tariff on pharma imports, months after his administration initiated a trade probe into the sector, where Indian manufacturers have a sizeable presence. A tariff announcement is unlikely, says Celly, but in a worst-case scenario where tariffs do come into play, he believes it could have a noticeable impact on valuation multiples across the sector. Also read: Four Indian pharma stocks that may be hit by US pharma tariff threat To justify their rich valuations—some trading at 30x EV/Ebitda on FY27 earnings estimates—CDMOs must deliver strong numbers consistently, , Celly said. That means 20–25% CAGR in revenue and at least 25% Ebitda growth annually over the next 4–5 years. Challenges ahead But it’s not all smooth sailing. “New drug discovery isn’t just time-intensive–it is also a costly affair," Pathak cautioned. He explained that some of the challenges include the need for strong processes and guardrails to protect client intellectual property. Revenue and cash flows can also be volatile and uneven, driven by product concentration and inventory stocking or destocking at the client’s end. This depends on how successful a molecule is during clinical trials or after commercial launch, Pathak said. There’s also the need to keep investing in capacity and cutting-edge technologies, often before demand is fully confirmed, he added. A February 2025 Boston Consulting Group report flagged longer regulatory timelines in India—3–10 months more than in the West—and dependence on China and Western nations for 60–70% of raw materials as key hurdles. Also read: The market is punishing Piramal Pharma. Is it an overreaction?