Business is booming in India’s custom research and manufacturing services (CRAMS) industry thanks to the country’s strong process chemistry skills, low operational costs and the availability of a skilled workforce.
Frost & Sullivan values the Indian CRAMS market at $890m, and expects it to expand by 40% in 2008. It estimates the market for outsourcing in the pharmaceutical and biotechnology industries at $100bn in 2006, which is likely to reach $168bn by 2009. Manufacturing of active pharmaceutical ingredients (APIs) was the largest contributor, followed by clinical research and drug discovery.
But the rapid growth has created many challenges that are testing the management skills of the 25 or so Indian companies in the CRAMS space.
Wages are rising by 15-20%/year and are likely to continue at that pace for the next two to three years.
Despite India’s large pool of skilled labour, getting the right people is a big problem. An even bigger problem is retaining them. This is a major issue in the contract research area, as it can impact sponsors, says Shivani Shukla of Frost & Sullivan. Knowledge management has become critical.
In addition, global acquisitions in the last few years have resulted in the need for a new breed of managers – those with a global vision and the ability to understand different cultures.
With job-hopping becoming common, companies are being forced to hike salaries to retain employees rather than reward them for performance, says Jai Hiremath, vice chairman and managing director of Hikal, which recently signed a deal with the US’s Pfizer for manufacturing APIs.
The government needs to invest more in education while industry, too, must make chemistry an attractive choice for university students. A recent research study showed that only 15% of school students chose to pursue science in 2006 – down from 32% in 1950.
The other issues confronting Indian companies include the appreciation of the rupee, rising costs, and managing the supply chain, particularly from China. Many India companies rely on China for supplies of intermediates and the supply chain was badly hit last year after the Chinese government introduced a number of new policies.
There is also a fear that Indian companies may be getting overconfident.
If one company slips up on quality, resulting in product recalls, it could create a backlash similar to the one China experienced last year. There are people waiting to say that India supplies cheap products by cutting corners, says a second source.
Despite global success and around 80 US Food and Drug Administration-approved plants in India, there is a still a perception that Indian quality is not good and that operations in the country are too bureaucratic. Companies have to fight it out, advises Shukla.
Industry players are clear that they can no longer rely on cost arbitrage for growth.
“To some extent, the US and European companies understand the cost structure of the service providers – quality and project management are critical,” points out Bharat Shah, president of Calyx International, a manufacturer of APIs and intermediates that entered the CRAMS space in 2001.
Comparisons with China are inevitable as China is picking up faster than expected and Indian companies better watch out.
China’s strength in contract manufacturing of APIs is likely to continue. But Chinese companies are also extending their reach by building capabilities in biologics, bioinformatics and molecular biology. As Chinese companies do not face regulatory issues on the use of higher animals for tests, Shukla expects China to play a big role in supply of biology-based services.
However, one industry source points out that China has its own share of problems.
“The country has good process chemistry available and companies are strong in running their plants. But there is a lack of financial clarity. What will happen if the government subsidies go away?”
He believes contract manufacturing for products with low value addition will go to China, while companies seeking value addition will make their way to India.
Despite these challenges, the overall mood is one of optimism.
Shukla foresees expansion in new areas, including contract manufacturing of injectables, which is currently a minor segment because of the need for sterile facilities and specialized technical knowledge.
And biology-based services are gaining momentum as is evident in the rapid rise of companies such as UK gel documentation firm Syngene, integrated systems biology platform company Avesthagen and biotech firm Reliance Life Sciences, both of India.
The next three years will be good for the industry, says Shah of Calyx.
“There is significant room left [for growth]. The R&D [research and development] budgets have not been fully exploited by India and China,” he says. “There will be competition and Indian companies will have to figure out a way to differentiate.”
Some strategic shifts are already evident, with Indian majors moving up the value chain and entering into partnerships involve early-stage licensing and risk sharing.
Nicholas Piramal India Ltd (NPIL) signed an agreement with US pharmaceuticals giant Merck last November to carry out an integrated drug discovery program that would give the pharma giant an option to advance the most promising drug candidates into late stage clinical trials and commercialization.
NPIL will be eligible for payments on completion of certain milestones and royalties on sales of any products resulting from the collaboration.