Aarti Pharmalabs: Lending a Lifeline Through Clean-ical Trials

You have heard of clinical trials for life-threatening diseases, and sometimes, when a close one needs it, you become more interested. However, what would be your guess about the earliest drug trials or clinical trials? Before researching the topic, I thought they might have originated in the nineteenth century (after 1800), and mind you, I score slightly above average on the general awareness tests. In any case, you may know better, more so if you are from a biosciences background. Why? Because I will be very wrong in this case, as clinical trials can be traced back very long ago.

So the thing is that the first known recorded instance of a clinical trial may be attributed to the Biblical Babylonian king Nebuchadnezzar. As his name suggests, the dude was a Chad. He would test two diet forms over a set of two types of people, and see which seemed healthier afterward. Now the details can be a bit vague, but this seems to be the first recorded instance of such a medical trial.

Scurvy is a disease that is very rare today, but it was very common in sailors during the 18th century. It caused feelings of tiredness and weakness all the time, with joint, muscle, or leg pain. It led to swollen, bleeding gums (sometimes teeth can fall out) with skin that bruised easily. This led to the eventual death of a large number of sailors. It took nearly a century for medical professionals to understand the reason behind it. But in that century, it was a dreaded disease, much like cancer today.

So a Scottish guy, James Lind, who was a physician/doctor aboard a royal ship, was very intrigued with finding a cure for this disease, and he divided 12 people into six pairs and gave them different combinations of cures, one of which included lemons and oranges. Surprisingly, people who ate citrus fruits (family of lemon and oranges) recovered in a week and went on to work.

What happened was that sailors on longish tours did not receive enough vitamin C as lemons or citrus fruits, and even other land-sourced vegetables finished after some time out in the sea. This led to scurvy, which initially was considered a disease due to lack of citrus fruits, but was later considered a disease caused due to lack of vitamin C. In fact, vitamin C was discovered much later in 1928. Vitamin C is also known as ascorbic acid because it prevents scurvy. So now let’s come back to the modern era and see how things are done.

More often than not, you might have come across news regarding the phases of drug development and how each drug or vaccine passes through different stages/phases in the development, before it can be sold commercially. This process is time-consuming and needs significant clinical expertise and R&D. All in, it can take anywhere between 12-15 years from the time a molecule/substance is discovered to the post-approval studies phase.

Among these stages, clinical trials evoke the most interest as they test the drug for use on humans. During these phases, drugs would be tweaked, and processes to manufacture them may change a number of times. A lot rests on these trials as the years of investment in time and money are involved. A large number of terminally ill patients also sign up for these trials, but sadly, not all are selected. This is their chance to get their hands on life-saving drugs much before they hit the market.

A large majority of these trials, nearly 90%, fail due to low efficacy or high toxicity/side effects. When 9 in 10 trials fail, companies receive zero return on their investments. This is where companies look to cut costs and outsource this to low-cost countries such as India and China, or others. New drug development can be outsourced to a Contract Development and Manufacturing Organization (CDMO), a company that oversees it from start to finish. A large number of US and European companies outsource the same to China and India. Aarti Pharmalabs is one such company that is betting large in the CDMO space.

The pharma industry in India generally sees a growth that is above the mean GDP growth rate in India, which can go into double-digit percentage growth. A 9%-11% growth rate is expected for this fiscal. CDMO growth rate expectation is higher at 14%-15%. In the past two years, Aarti has enhanced its capacity in the CDMO segment to enhance its valuation.

Aarti Pharmalabs, with its base in Mumbai, Maharashtra, and Gujarat, is engaged in three major business segments:

• Xanthine Derivatives/Allied Products: The company holds nearly 15%-20 % of the market share in this segment worldwide. Xanthine is a precursor to important drugs, including caffeine, nutriceuticals, bronchodilators used in Asthma, and some cancer drugs too.
• API & Intermediaries: It manufactures Active Pharmaceutical Ingredients (APIs), which are drugs that can be readily used in medicines. Aarti also manufactures corticosteroid and oncology medicines under accreditations from the US FDA and EU GMP. They can make their own raw materials and also provide documentation services for the US and European markets.
• CDMO/CMO: The Company provides start-to-end services for new drug development, including phases of clinical trials. This is a lucrative division, and the company has been focusing on this recently as the margins are high.

From the recent investor presentation, it is clear that Aarti has started enhancing its revenues in the CDMO segment.

The geographical presence of the company is well thought of. It has its head office in Mumbai, while its manufacturing units and R&D centers in Maharashtra and Gujarat sit well on the arterial highways and railways, or the Golden Quadrilateral of India. This helps reduce transportation costs and provides fast movement of medicines that need to be temperature-controlled. Even major ports in Mumbai and Gujarat are nearby to facilitate fast sea transportation for exports.

The company works lean, with only 2100 employees, and a significant portion of these include research scientists. This has led to the company filing 58 patents for over 220 products. Now the good part is that since the company has been in operation for over 25 years, the employee turnover is not high.

The financials of the company need to be looked at subjectively because the company has recently seen a significant uptick in the CDMO revenue and has also undergone changes in accounting standards. But before we go deep into the financials, we need to look at two important metrics.

• Net Debt to Equity ratio of 0.19
• A credit rating of A+, which is hard to come by for a smaller company.

Solvency for Aarti is not an issue, as seen by the net debt to equity ratio and the fact that lenders have significant faith in their ability to repay the loans. Let’s jot down and analyze some important metrics and see how they behave:

Market Cap of ~7500 crores, which places it into higher percentiles for a small-cap company. Larger market caps are usually more stable.

The PE ratio of 28 would suggest a higher than industry average ratio, but the recent earnings have been depressed due to changes in sector allocation and changes in accounting standards. We cannot be very sure that the stock is overvalued using this metric.

Due to lower revenue, the operating profit margin of around 25% is also depressed and below the industry median.

The ROE and ROA are at 13.7% and 9.4%, which are above the industry mean and are likely to rise when revenues pick up in the next quarters.

Since the Q1 FY 2026 cannot be easily compared to other quarters due to changes in standards and new segments, we will update this post when Q2 FY 2026 becomes available. However, there are some financial positives that we will discuss at the moment:

• The operating profit margin is better QoQ, 25.35% against 21.26% which shows enhanced efficiency.
• PBT has increased to 67.2 crores against 63.2 crores, even when the revenue is lower.
• Net profit for the last four quarters (261.4 crores) has seen an increase over the previous quarters (200.2 crores), and the momentum has been retained.

The company is seeking to enhance its operational efficiency and increase its share in the CDMO space. The sector comes with more efficient operations and finances. Betting on Aarti Pharmalabs can be a good strategy and would provide diversification even in the pharma sector, as the characteristics of the company are different from usual drug manufacturers.