Clinical Research and Manufacturing Services (CRAMS) is emerging as a fast growing segment in the pharmaceutical industry. The KPMG-CII report on Indian pharma industry identifies Crams as the industry’s key growth driver. Outsourced manufacturing activities by global pharma firms are an estimated $20 billion now and are projected to increase to $31 billion by 2010. By maintaining lean cost structures and standing up to intense rivalry in the global generics industry, Indian firms have become a part of the global pharma manufacturing value chain. While spiralling research and development costs have induced global firms to engage in contract manufacturing, increasing number of products going off patent is also expected to fuel the growth of contract research.
Are we ready for it?
Contract Research Organisations (CROs) are into a highly capital-intensive business. They require sophisticated instruments for evaluation of drug substances and trained clinicians. But only 1% of clinicians in India are properly trained. Site and data management, clinical research, logistics support and storage management also need skilled personnel. The government and private organisations need to participate in clinical trials in a big way. More fund availability and strongly supported first-rate university research and dissemination of knowledge on clinical testing procedures through certification programmes can create a positive environment for the firms to meet outsourcing demands. Intense competition between pharma firms, excellent technological infrastructure and high standards of demand set by foreign customers are sufficient inducements to encourage entrepreneurial vision and upgrade the industry’s human and physical capital.
Rush of PE players
As India is shaping into a hub for clinical trials, the interest of PE players in fast-growing small and mid-sized pharma companies has risen. The entry of PE players would have possible implications for the founders and top management teams of these firms. The PE firms may influence management decisions like recruitment, compensation of senior managers and financing of expansion. They may prefer senior management compensation to be based on performance. If the PE commitment is in stages where only a part of the total equity finance is committed upfront and the company is required to meet specified milestones before further funds are released, the management may have to develop a transparent reporting system.
While PE firms and owner managers may eventually wish to monetise their stakes in the company, they may disagree on the timing and mode of exit. PE firms’ decision to sell their stakes may lead to a conflict with the top management of the company—they may be interested in keeping the business alive and may develop preferences about timing and mode of divestment.
However, the upside of PE participation is that it could re-engineer and de-risk these companies. Indian companies need help with project management capabilities. They have technology and cost efficiency, but need enhancement of management skills. With many companies not having enough resources to fund drug trials, out-licensing potential molecules in early stages of discovery will be an alternative. Innovative companies can take their discoveries through expensive stages of development and also share the risk and reward with PE players.
