Pharma companies worldwide are seeking to reduce production and research costs and Indian companies, with their strong chemical engineering capabilities and low costs, offer these advantages. Sapna Dogra finds out more about the growing business of CRAMS
CRAMS—Contract Research and Manufacturing Services has emerged as a huge opportunity for a low-cost manufacturer like India. It is certainly a profitable venture for focused and competent companies dealing in patented or generic bulk drugs, intermediates and fine chemicals.
An emerging trend
|“There are emerging innovator pharma companies who do not have resources to evaluate capabilities in Asian market and would prefer to partner with well-established companies”
– S Vimal Kumar Joint Managing Director
Shasun Chemicals and Drugs
The trend for off-shoring or outsourcing pharmaceutical products like bulk drugs, drug intermediates, and formulations by big pharma has been gradually gaining momentum for the past decade. With companies shifting focus to high-end value-added operations like marketing, they are passing on the now, less lucrative manufacturing (Contract manufacturing, also known as third party, or toll manufacturing) tasks to outsiders; in this case, countries like India. Says S Vimal Kumar, Joint Managing Director, Shasun Chemicals and Drugs, “Going forward, the innovator companies will concentrate on drug discovery and brand marketing. Also, there are emerging innovator pharma companies who do not have resources to evaluate capabilities in Asian market and would prefer to partner with well-established companies.”
According to N D Shah, a Senior Official in Dishman Pharma, the pressures on global pharma companies to outsource to countries like India are growing. This is because an ageing population in the West is straining healthcare budgets and the US, European and Japanese governments are thus looking for cheaper generics and lower cost drugs. Also, with new drugs becoming more difficult to develop, pharma companies cannot sustain large R&D spending unless new blockbusters are developed cheaper. This is where, Indian outsourcing and CRAMS come in.
|The labour cost advantage and growing pool of skilled talent in the country are critical factors driving growth in CRAMS. CRAMS has already become an important part of the overall business model of big players. Some of the big names in CRAMS include Nicholas Piramal, Dishman Pharma, Jubilant Organosys, Divi’s Laboratories and Suven Lifesciences.
The entry barriers are high. However, Indian companies are gradually working towards gaining a substantial slice of the CRAMS pie. For instance Shasun has recently acquired the custom synthesis and contract manufacturing business along with assets of UK’s Rhodia Pharma Solutions. Kumar reveals, “The revenue of the UK business is to the tune of $62 million, which is expected to grow at 10 percent YOY. The share of CRAMS revenue in the total estimated revenue of Shasun for this financial year would be 45 to 50 percent. He prophesises that this would also help Shasun to grow their business in CRAMS space at a faster pace. For Shasun, in 2006, CRAMS business grew by 43 percent with revenue from this segment reaching Rs 43 crore.
Likewise, Jubilant is also planning to increase its volumes of CRAMS through capacity increase. Says Rajesh Srivastava, Business Unit Head, CRAMS and Fine Chemicals, “During fiscal 2006, we have set up two new multipurpose plants to increase our capacity for fine chemicals and also expanded pyridine and its derivatives capacities. This current fiscal, we also plan to further increase our capacity in these products to meet growing global demands.”
According to Bhartia, the company has already signed contracts worth $68 million with leading pharma and life sciences companies in the field of CRAMS. “We are the second largest manufacturers of pyridine and its derivatives globally. Our pyridines and its derivatives are used in 229 APIs (187 off patent and 42 going off patent by 2010) and in 11 agrochemicals actives,” claims Bhartia. Jubilant’s long-term growth strategy includes a strong focus on acquisitions in the international markets, especially the regulated markets of North America, Europe and Japan, and a thrust on both organic and inorganic initiatives. The CRAMS business, which has been witnessing higher volumes and better price realisations, recorded a growth of 42.2 percent and 46.6 percent for Q4 FY 2005 and FY 2006 respectively. International sales contributed 71.9 percent of the net sales of CRAMS in FY 2006 as compared to 69.2 percent in FY 2005.
Hikal has four custom manufacturing sites at Bangalore, Panoli, Mahad and Taloja. All these sites are going through upgradation, reveals a company source and adds that a kilo lab and pilot plants are being added at Bangalore and Taloja. Hikal also taken a minority stake in a Chinese company called Sinochem (subsidiary) which will cater to its custom manufacturing needs cost effectively. Though it is not looking at any acquisition, it is open to a long-term agreement with innovator companies like the one it had recently with Degussa. Right now the company’s contribution from CRAMS is less than three percent of total revenue but going forward it is going to take off, particularly when their Pune R&D centre becomes operational by 2007.
Suven Lifesciences made a foray into CRAMS in 1994 with the aim of aligning with innovative pharma for the supply chain during the clinical phase of drug development for NCEs. “As far as Suven goes, we have always been in the supply chain with innovators and now we have added DDDSS (Drug Discovery and Development Support Services) with the onset of patent regime in India,” says Venkat Jasti, Managing Director, Suven Lifesciences. “With this we have services in every aspect of pharmaceutical life cycle management from discovery, development including clinical trials and manufacturing to keep Suven growing substantially in the future,” adds Jasti.
Dishman Pharma, which started the trend has grown well on the back of the CRAMS model. Dishman also has a long-term supply contract with Solvay Pharma, a Belgium company. In February, Dishman had acquired I03S of Bern in Switzerland, through its wholly-owned subsidiary, Dishman Switzerland. In April 2005, the company had struck another deal in the UK, when it acquired the Manchester-based contract research company, Synprotec. The acquisition was done through its wholly-owned subsidiary, Dishman Europe.
The advent of the patent regime has renewed the interest of global pharmaceutical giants in India. Off patent products face compet” says Dr Shirali Raina, Associate Director, Clinical Operations at Neeman Medical International.
As for contract manufacturing, large global pharmaceutical companies are finding it profitable to outsource production. To cash in on these opportunities, many large production houses in the country are becoming USFDA compliant. India has the highest number of USFDA-certified manufacturing facilities outside the United States; there is increasing opportunity for large Indian manufacturers, CROs, and private tion from generic companies, which makes it imperative for innovator companies to explore the low-cost option.
Given the low-cost high-quality advantages, Indian companies are poised to benefit from contract research business on behalf of multinationals
“Given the low-cost high-quality advantages, Indian companies are poised to benefit from contract research business on behalf of multinationals,hospitals and clinics. Lower wages in India also provide efficiency for increasingly cost conscious multinationals.
Company after company are entering the contract manufacturing and research business in India. “With the patent regime, foreign companies can trust us on IPR and confidentiality of the product that we would be working for them,” says an official at Hikal, adding that this will in turn create a positive atmosphere to bring more business to India.
|“We have also signed annual CRAMS contracts worth $40 million for calendar year 2006 with various global life sciences companies”
– Shyam S Bhartia Chairman and Managing Director
The patent regime has encouraged global pharma firms to take up collaborations with Indian players to leverage India’s advantage in discovery chemistry capabilities and contract manufacturing for Intermediate APIs and dosage forms. “Recently Jubilant Organosys entered into a contract with Eli Lilly for drug discovery services,” reveals Shyam S Bhartia, Chairman and Managing Director, Jubilant Organosys and adds that “We have also signed annual CRAMS contracts worth $40 million for calendar year 2006 with various global life sciences companies.”
“With the product patent regime, one can now custom manufacture products which are still under patent overseas, and also those, which are under development,” says Bhartia.
The numbers speak
Globally, pharmaceutical manufacturing and R&D outsourcing services are estimated to be worth $32 billion and are set to grow to a whopping $64 billion by 2010. Contract manufacturing is still a nascent industry in India with deals worth $100 million till date. It is a very big opportunity for Indian pharma, expected to generate $2.5 billion in revenue in 2010.
As per a report by Ernst & Young, Unveiling India’s pharmaceutical future, India’s contract research market is growing at an estimated 20 to 25 percent annually. It was estimated that the market reached $100 million in 2004, growing to between $250 million and $300 million by 2010.
|Source: Presentation on outsourcing by Dr Frank Fildes & Kotck report, March 2005|
India’s strength compared to other emerging markets is its large number of manufacturing, including some CRO facilities that have received USFDA certification. Pharmacos have little incentive to build new manufacturing facilities; some companies that stayed in the market over the past two decades have decided to consolidate their manufacturing capacity and rely on third parties, the report says. India is emerging as an outsourcing destination of choice for global pharma companies across the value chain. With local third parties playing a significant role in the multinational pharma company’s (MNC) business model, the MNCs are intent on developing goals and strategic objectives that span the value chain.
A large pool of scientific manpower, discovery chemistry capabilities, liberal government policies with introduction of patent regime, reverse engineering skills, fast ANDA and DMF filings with USFDA and cGMP plants, and respect for IPR have made India a cost-competitive supplier of quality pharmaceutical products. A United Nations Conference on Trade and Development (UNCTAD) investment report said that drug companies could reduce costs 20 to 30 percent by moving R&D activities to India.
This is because wages for clinical researchers, nurses and IT staff are less than a third of those in the West. By 2003, an estimated 200 Phase III trials and 50 Phase IV trials were conducted in the country. That number is expected to increase dramatically in the near future.
While China also enjoys most of the cost advantages that India does, the latter scores over China in terms of advanced chemistry knowledge, regulatory capabilities, language skills, transparency and financial infrastructure. Industry analysts believe that the Chinese presence in outsourcing is likely to be restricted largely to intermediates and low-end APIs, while Indian companies are likely to be present across the value chain. However, India could face strong competition from Eastern Europe, China and Korea.
|“In order to sustain the competitive edge, Indian companies need to take a structured effort at avoiding beating down prices in the market and focus on projecting a more quality oriented approach,” says Vimal Kumar. Confidence in the ability of CROs to conduct high-quality clinical trials continues to grow. The improvement in IT and telephony are key enablers of this trend, as is the recognition of GCPs and GLPs.
The Indian cost advantage extends well beyond low labour costs and ensures that the cost reduction process is a continuous process. The factors that drive India’s cost advantage include:
Capital efficiency: Indian companies are able to reduce the upfront capital cost of setting up a project by as much as 25-50 percent due to access to locally fabricated equipment and high-quality local technology or engineering skills. Indian companies have been able to establish USFDA standard plants at approximately 50 percent lower capital costs as compared to US or Europe based manufacturing units.
Lower filing costs: Generic filings require complex technical and legal documentation, which takes about eight quarters. The cost of filing DMFs and ANDAs is at least 50-60 percent lower for Indian companies as compared to their US or European counterparts.
Process engineering: The highly competitive local market and lack of pricing power force Indian companies to continuously work on the molecule even after a product is launched. This often results in gains in the form of improved yields and more cost-effective manufacturing processes. The customer and supplier generally share such benefits in a pre- determined ratio, thus providing the benefit of continuous cost reduction.
Manpower cost advantage: India has a huge talent pool of skilled scientists, available at a fraction of the cost in developed countries like USA. Labour costs in India are around a seventh of the levels in developed countries and offer an obvious cost advantage.