Contract research, the new sunshine sector for pharma companies

Challenged by pricing pressure in the US, the world’s largest pharmaceutical market, Indian companies have taken succour from contract research and manufacturing services (CRAMS) for growth.With generic drugs facing pricing pressure, companies are working on developing and launching speciality products such as biosimilars and other complex generics to support growth. However, the two firms in the CRAMS space that benefit most include Divi’s Laboratories Ltd and Gland Pharmaceuticals Ltd. No wonder that shares of Gland Pharma and Divi’s Labs have surged more than 70% and 35% year-to-date, respectively. This compares with the 22% gain in the Nifty Healthcare index during the period.
Gland Pharma owns the intellectual property (IP) rights of its products. With approved products being offered to multiple partners through non-exclusive partnerships, it also benefits from economies of scale. Deriving a share of profit from multiple partners, the company can command good valuations compared to plain contract manufacturers, said analysts.For Divi’s Laboratories, the benefits accrue from its strength in chemistry. The company files and produces niche generic ingredients, which are not produced by many. In the CRAMS business, the company has a strong relationship and remains a preferred partner for at least six of the top 10 big pharma companies, added analysts.
The results are visible in their earnings performance, too. Divi’s clocked 13.3% year-on-year revenue growth during Q1, driven by a strong 38.2% growth in custom synthesis or CRAMS. The strong positioning of Divi’s will help in monetizing the growth opportunity in the API and CRAMS space given its stellar execution track record and being one of the preferred suppliers, said analysts at ICICI securities Ltd in a note.Gland Pharma reported 31% revenue growth, helped by a robust show across geographies. The company has also benefited from covid-19 vaccine manufacturing orders, which have improved its earnings outlook further.
Analysts at Motilal Oswal Financial Services Ltd expect Divi’s and Gland to continue to outperform other contract manufacturing companies. They also remain positive on Laurus Labs, which has ventured into biologics/fermentation contract manufacturing through the acquisition of Richore Lifesciences in the US. The scope for growth in the CRAMS segment is further strengthened by the fact that international pharma companies are looking to cut costs by outsourcing research and manufacturing activities, and Indian companies have become preferred manufacturing partners.

Source – Mint