Slowdown a boon for Indian Crams players

Indian contract research and manufacturing companies (Crams) such as Divis Laboratories, Jubilant Organosys, Piramal Healthcare, Biocon and Dishman Pharma may to benefit from the global slowdown as MNCs step up outsourcing to cut costs.

These players, which reported over 37 per cent growth in revenues from Crams business in the second quarter of this financial year, may post over 30 per cent growth in the coming years. The softening of input prices imported from China, which spiralled during Olympics, will also help these companies improve their operating margins, said an analysis by Reliance Money.

India is an attractive destination for global companies for cost-effectiveness without compromising on quality, as drug development and manufacturing can be done in India at 40 per cent of the expenses in the US and Europe. India’s total CRO market in 2007 was about $323 million and is expected to grow at around 49 per cent CAGR up to 2010, according to a study by PricewaterhouseCoopers (PWC).

Global innovator companies such as Pfizer, BMS, GlaxoSmithKline, Astra Zeneca, Merck, Eli Lilly and Pfizer are already facing issues such as spiraling research and development spend, declining number of new products, fall in brand revenues due to patent expiry, and increasing generic competition. While GSK is planning to cut 1,000 sales jobs, BMS has announced to cut costs by $2.5 billion by 2012. Aztra Zeneca is trimming its workforce by 9,000 people and Pfizer is closing down several manufacturing units and downsizing its workforce.

“Experienced Indian Crams players are now acquiring better technologies and developing expertise in niche segments that offer higher margins and have higher entry barriers, thereby creating a niche for themselves,” notes a KPMG-CII study on Crams.

YES Bank estimates contract research business in India will grow to $3 billion by 2015. It notes that the Indian contract research industry touched around $430 million in 2007-08 with a CAGR of almost 75 per cent over the past six years, compared to a CAGR of 17.8 per cent worldwide for the past five years.

The Indian drug discovery services market, which includes biology and chemistry-based services and pre-toxicology services are estimated to touch $820 million by 2013, according to a Kotak Institutional Equity report.

“All Indian Crams majors except Jubilant Organosys have no major capex plan in recent future, since large capex has already been executed in last couple of years, helping to improve the margins,” said analysts with Reliance Money.

India’s chemistry skills, availability of labour, strengthened intellectual property rules and capabilities in pre-clinical development are likely to help cause of India’s Crams interests.

Asian countries such as China and India are expected to account for about $3.3 billion of the total projected $23 billion contract manufacturing market by 2010, noted the PWC study.