Can Indian CRAMS firms cash in on the global slowdown?
This article was originally published in Scrip
Will the global economic slowdown brighten short-term outsourcing prospects or would it cast a pall over India's custom research and manufacturing services (CRAMS) segment that is projected to touch $7.6 billion by 2012? While the jury is still out on the segment's prospects amid the turmoil, experts say that Indian CRAMS firms may have to offer more than mere cost arbitrage to rake in the moolah.
Dr Ajit Dangi, CEO of Danssen Consulting, said that while multinationals (MNCs) are rationalising their inventories, the comparative advantage that India offers such as cost efficiency, abundance of scientific and technical manpower and a large patient pool will certainly impact the Indian CRAMS business positively. "To sustain this advantage, though, India will have to move from cost arbitrage to intellectual arbitrage as many countries such as Russia , Brazil, Korea, Poland etc are competing aggressively to acquire a share of the CRAMS market," a former director general of the Organisation of Pharmaceutical Producers of India (OPPI), which represents large multinationals in India, told Scrip.
He adds that the depreciation of the Indian rupee will also add to the outsourcing prospects. Lokesh Kumar, general manager (exports) at the Mumbai-based Centaur Pharmaceuticals, shares Dr Dangi's optimism and says that the global slowdown has "forced" MNCs to look towards India for cost effective supplies and research. "[The] generic business in the West has become fiercely competitive due to budget constraints. The CRAMS business has prospered in this era," Mr Kumar noted.
Not everyone, though, sees the ensuing few months to be easy for Indian CRAMS firms. Utkarsh Palnitkar, executive director of Centrum Capital, believes that the going continues to be tough for contract research (discovery assistance, chemistry services and the like, he specifies), an area where he anticipates no rapid change. "As far as contract manufacturing is concerned, it seems to be lesser impacted. However, prices are going to get more and more competitive. The recent fall in rupee/$ parity will aid exports, but since solvents etc. are imported (largely from China) some part of the rupee depreciation will be lost," Mr Palnitkar, a former partner at Ernst & Young, told Scrip.
Others such as Navroz Mahudawala, managing director of Candle Partners, a boutique investment banking firm, suggest that while the longer term would witness 'greater prospects' for CRAMS, in the near term (next two-three quarters) a go slow approach was likely. "Biotech sector funding and R&D spends globally are in a state of distress and unlikely that’s going to improve in a hurry," Mr Mahudawala noted.
The global outsourcing market is expected to grow at a compound annual growth rate (CAGR) of 12.6% during FY10-12 to touch $85 billion by FY12. Earlier this year, rating agency, ICRA, said that the Indian CRAMS segment would grow at a CAGR of 41.4% during 2010-12 to about $7.6 billion, up from $3.8 billion in 2010, with custom manufacturing leading the show. The outsourcing opportunity, it said, was being propelled by the loss of patent protection to the tune of $97 billion over 2011-2015; a steady erosion in new product launches in relation to research spend and new launches not matching up to the earlier block-busters drugs (or medicines that gross sales of over $1 billion).
large firms insulated?
But would large Indian companies, which provide integrated drug development, research, and manufacturing outsourcing services - a kind of one-stop-shop - be relatively insulated from the market turmoil compared with smaller CRAMS firms?
Mr Palnitkar says that large companies will also be impacted and will have to look at models that share 'risk and reward', though contract manufacturing would be the area less impacted. "Fresh engagements are likely to be in terms of specific projects as opposed to long terms FTE-based contracts," he said.
Others believe that mere size may not be enough to ride the storm. Mr Kumar said that larger companies have their own 'inherent' problems in 'churning out things' in the lowest possible time, whereas, smaller CRAMS firms "stick to timelines very well".
Jubilant Life Sciences, India's largest custom research and manufacturing services company, declined to comment on its business prospects. Last year Jubilant had reported a short-term slowdown of order flow from the pharmaceutical industry due to consolidation of large pharma companies, stringent regulatory environment delaying new product approvals and de-stocking of vaccines on account of fall in demand, but maintained that its order book position was healthy and increasing. Last month Jubilant reported a 16% growth in income from operations to Rs9.48 billion ($191.8 million) for the first quarter of 2011-12 and said that it was confident of continued delivery of' robust' growth in sales and "substantial" growth in operating profit in the following quarters.
Dr Dangi said that with most regulatory authorities in the developed world becoming more stringent with the approval process, large and 'experienced' CRAMS companies offering end to end solutions are likely to be relatively insulated from the market uncertainty. "Smaller firms unable to come up to international quality standards will be under pressure resulting in consolidation," he said.
Mr Palnitkar, however, suggests that consolidation would at best reduce marketing costs, but was unlikely to ease present problems. "There is no shortage of capacity. In terms of business models, the outsourcing model will have to evolve. Manufacture and product development of bio-similars will see stronger demand. Some production could move to India," he said.
Interestingly, Dr Dangi also believes that the recent US FDA-industry agreement on generic drug user fees (GDUF) could provide an additional dimension to the prospects of CRAMS business. "The bill, if it goes through, will have dual impact. MNCs will face increased competition due to the early entry of generics in to the market due to fast-track approval and generic firms will have to bear the burden of additional expense although this can be recouped due to increased sales through early market entry," Dr Dangi explained. He said that both factors will compel companies to look for cost optimisation via the outsourcing route. The yet-to-be adopted Generic Drug User Fee Act is to be cleared by Congress.
CRAMS IPOs
Significantly, the slowdown and turbulent markets, in addition to consolidation and growing regulatory vigilance, is also likely to dampen investor enthusiasm, if any in current market conditions, for pipeline initial public offerings (IPOs) of Indian firms like Arch Pharmalabs and Calyx Chemicals and Pharmaceuticals, both with interests in the CRAMS space. Both firms had announced IPO plans earlier this year.
Mr Mahudawala points out that most [firms'] models in India are "broad based" and don't rely on a "singular geography or business model". Companies like Arch and Calyx, he explained, also have a sizeable domestic exposure (supply of active pharmaceutical ingredients) and hence the impact would be limited. "The success of IPOs would largely be contingent on the state of primary markets and unlikely we are going to witness any IPO in the next two-three months," he added
Mr Palnitkar declined to comment on any particular individual enterprise, but added that the time is still not right for IPOs in the CRAMS segment. "They shall have to wait a while," he said.