India-will it be the next super power?

The market is abuzz with CRAMS. Arshiya Khan tracks the trend

Its not news that the pharmaceutical business is flourishing and that one of the most significant contributors in this giant industry is Contract Research and Manufacturing Services (CRAMS).

Consider this - Over the last five years the CRAMS industry has been contributing close to eight percent of the Indian pharma business and earned revenues of approximately $895 million in 2006 with an impressive annual growth rate of 43 percent. The industry is already on the fast track and over the forecast period of 2007-2013 it is expected to sustain a growth rate of 33-34 percent.

The market can be broadly segmented into:

• Contract Research
• Clinical Research
• Contract Manufacturing

Contract manufacturing with 71 percent, currently, accounts for the maximum share of the market and offers the biggest opportunity. At present, its global market size is estimated at $20 billion, and is expected to grow to $31 billion by 2010. The global opportunity in contract research in 2006 was pegged at $14 billion. This is expected to grow to $24 billion by 2010.

Source: Frost & Sullivan

India Shining

Chetan Tamhankar Chief Operating Officer SiroClinpharm

According to domestic brokerage firm ENAM, in the case of pharma, setting up a US FDA approved plant in India would cost 30 percent lesser than in the US; running the same plant would be about 45 percent cheaper; the cost of labour would be only 7 percent of that in the US; and manufacturing cost in the country would be 35 to 40 percent cheaper compared to the US and 25 to 30 percent compared to Europe.

Apart from the number advantage there are many drivers leading the growth of CRAMS which is driven by availability of large and diverse gene pool; especially with lifestyle diseases like diabetes, coronary artery diseases, obesity and cancer which are currently the 'hot' areas in drug development in western countries. 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.

In addition, improving medical infrastructure in India, large English speaking population with technical expertise and talent to conduct clinical research is an added advantage. While India is getting young the same is not the case with the West. Research firm MCKinsey estimates that by 2020 there will be a deficiency of population in the working age group in almost all the western countries, while India will have a huge surplus, thus the work will naturally flow to India, which will further drive the growth of this segment.

Trends

Indian companies have moved from contract research for the non-IP based intermediates into IP based pre-clinical intermediates and API's with the introduction of IP regime. There are more opportunities in full synthesis of pre-clinical molecules. In addition to that, value added services like method development, impurity profiling and characterisation and stability studies plus formulation development and regulatory support with clinical trial supplies are some of the new opportunities happening since January 2005 which will eventually result in full-fledged collaborations.

Companies have moved from CRAMS to CRAMS i.e. Contract Research and Manufacturing Services to Collaborative Research and Manufacturing Services. An increasing number of global pharma companies are outsourcing to India because their R&D pipeline is drying up, their approval process is becoming time consuming and expensive, their R&D cost is rising and there is price pressure. As a matter of fact, outsourcing has increased considerably for big pharmal companies, and it is gradually moving from being just a tactical or opportunistic option to a more strategic one, to sustain the demand from markets moving into the generic phase.

"The long term relationship between the Indian pharma companies and the MNCs, leading to a preferred vendor status for Indian companies is another trend," says Chetan Tamhankar, Chief Operating Officer, SiroClinpharm. The other trend is that most of the CRO's are focusing on FTE's i.e. (Full time equivalents) or in simple terms, lending technical hands for the work to be done as dictated by the big pharma.

Source: Frost & Sullivan

Bottlenecks

The value proposition in CRAMS is slowly loosing its relevance since many players are cutting prices indiscriminately. In general business volume is going up but value to the country or to the company is very low. The benefit is for those who outsource to India and retain most of the profits for themselves by pitting one CRAMS player against the other.

Apart from this, full service CROs are seeing a downward shift in presence by the big players who are now focusing on functional experts to further leverage the cost advantage. But industry players feel that the decision of a company to engage a full service CRO or several functional experts depends on the kind of coordination capability available with the company. It requires tremendous amount of management effort and time to coordinate with multiple functional players.

Further, when companies are outsourcing clinical research projects they are mainly looking at speedy completion and quality deliverables than cost. "We feel that functional experts might be approached for quality or other expertise reasons and not for cost advantage," says Tamhankar. With a full service CRO, companies look at optimising the entire project cost and time rather than try to cut costs on individual components. There is a benefit due to decreased management and co-ordination efforts, costs and time savings. "Hence it is incorrect to presume that by approaching functional experts cost advantage can be further leveraged," he adds.

Besides, while providing functional expertise, Indian players are competing unnecessarily and offering prices at one fifth the cost of European or American companies. With this kind of business model and with the very low margins for Indian players, there is little or no innovation. Neither foreign nor Indian companies are happy because it does not bring any value proposition for both of them.

"Hence the trend is moving from FTE business to Fee for Service (FFS) where in the payment is done only after delivery of service or product," informs Venkat Jasti, Vice Chairman and CEO, Suven LifeSciences. In this aspect functional players will play a major role i.e. delivering quality service and innovative product and the value proposition for both the parties are much better. With functional players, the activity is moving from FFS to Collaborations, which is the future for Indian companies.

Also, while a number of IT companies are entering data management in a big way, they are mainly stuck with the low-end bulk processing work, rather than deep analysis. There might be scope for these companies to deliver cost efficiencies over CROs; however the scope of their use and understanding is limited by their inherent focus and core competency.

India versus China…

Industrial India has always been close to its allies and closer to competition. And with close competition comes constant comparison. Every Indian achievement is being looked at as what China could achieve in the future! And when it comes to India vs China, the global industry is betting cautiously. Many do not agree that India will lose the cost advantage in the next five to six years. But Jasti feels that, "Cost competitiveness of India will go away eventually because with the rising costs we may not be able to sustain for long. To create value we need to be compensated equitably."

What is lacking at this stage is that there is no value creation. Because we can not attract decent return hence it becomes difficult to employ top line people. While China also enjoys most of the cost advantages that India does, 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 believes industry players.

As we move from FTE to FFS and with value creation which eventually leading to collaborations, "India can really become a discovery R&D hub which China also can become in due course of time say five years, he adds.

Opportunity areas

While India has enough expertise in areas such as chemistry and drug delivery systems, “It doesn't have enough expertise and enough trained manpower in biological services such as protein structural analysis or expression profiling. This is a large untapped opportunity,” says Tamhankar.

In addition to manufacturing, India can also move into preclinical arena, do hit generation, then a lead and lead optimisation and total preclinical activity which leads into clinical activity for development of that compound and later move into formulation development, API development and finally manufacturing. Besides drug discovery research, custom chemical synthesis services, high throughput screening at early discovery stages, pre-clinical and early discovery research, bioinformatics, medicinal chemistry and regulatory filings, Phase IV clinical trials and pharmacovigilance will prove opportunistic.

Source: Frost & Sullivan

Moving ahead

The CRAMS market is geared to become approximately US $ 6.6 billion by 2013. The ‘India Advantage’ makes it a preferred destination for outsourced services. However, this is expected to change, as outsourcing is emerging to be a strategic move rather than a tactical one, participants will therefore have to offer value as a strategy rather than cost. The industry will see participants offering a gamut of services for sponsors to choose from.

Partnerships between service providers will exist in an effort to offer sponsors one-stop solutions. Even nascent markets such as Phase I and pre-clinical toxicology will see growth due to industry pressure on the government and the former's need to become a one-stop solution to its clients. Leaving no two thoughts on the fact that India is becoming a favourite stop for the West, yet there are many things that India has to learn from them. While Indian pharma and biotech companies take a partnership plunge with international companies, the question that remains is-will India become the leading CRAMS player!

arshiya.khan@expressindia.com