The global economic slowdown may help boost pharma outsourcing to India but not just yet. Industry watchers say that contract research and manufacturing services (Crams), in which companies such as Piramal Healthcare and Dishman Pharmaceuticals and Chemicals are major players, is likely to see a slowdown in the coming 1-2 quarters. In the long run, however, the economic headwinds are likely to boost the Crams business.
Crams refers to the outsourcing of research and manufacturing activity to make active pharmaceutical ingredients (APIs) – the raw material used to manufacture drugs, or formulations – to lower-cost countries such as India.
A February 4 report by financial services provider Enam Securities said that inventory rationalisation by innovator companies may lead to a fall in the growth of the Crams space over the next couple of months. This is because multinational drugmakers' distribution cycle for formulations has been impacted by the slowdown. This, in turn, has affected the manufacturing of APIs and formulations outsourced to Indian companies, said analysts.
Bhavin Shah, an analyst with Dolat Capital Market, sees Crams growth trending downwards till the second quarter of financial year 2009-10. "But long-term growth remains intact," he added. This is because rising costs and low productivity from research and development activities have made outsourcing a cost-effective option for global pharma companies.
According to estimates, such outsourcing helps multinationals cut costs by 30-50% due to the availability of cheap labour in India.
VVS Murthy, chief financial officer of Ahmedabad-based Dishman Pharma, admitted that a short-term impact on Crams growth is expected. "But we are confident of doing well in the long term," he said. Crams contributes about 75% to Dishman's turnover.
But by March, this contribution is expected to fall to 71% of turnover, which may touch Rs 1,000 crore, said analysts. Murthy sees the company's Crams business growing just 25% in the coming months from over 40% earlier.
An official from Mumbai-based Piramal Healthcare echoed his sentiments. In an earlier interaction with DNA Money, Swati Piramal, the director of Piramal Healthcare, had said that the tight situation abroad would force global companies to outsource more to India. According to estimates, by March, Crams would contribute about 31% to Piramal's estimated turnover of Rs 3,300 crore, down from 35%.