Limited Investment Opportunities in Indian Pharmaceutical Services

Includes: IFN, PPDI, RDY
by: Ketan Desai

Not too many folks consider India when thinking of pharmaceutical services.  That is changing.  The pharmaceutical service sector had been somewhat late to the outsourcing party compared to the IT sector.  But it is expanding quite well. According to research firm Frost & Sullivan, the pharmaceutical outsourcing business in India will grow to around $7 billion by 2013. A report by Value Notes forecasts a growth of 23.6 percent annually for the industry up to 2010.  

Currently, India conducts about 1.5 percent of the global clinical trials. This could rise to five percent by end of 2008 and 15 percent by 2011.  Outsourced pharmaceutical manufacturing activity in India is expected to cross $1bn by 2010 (Motilal Oswal Report).   

The pharmaceutical services include those related to pre-clinical services, manufacturing, radiology reviews and clinical trials.  There are too many companies to enumerate here, so a select few are mentioned. 

Pre-clinical:  Services offered here include screening, lead optimization, toxicology, ADME (absorption, distribution, metabolism, and excretion) and pre-clinical pharmacology.  Some companies in this sector include Aurigene Sciences, Advinus, and GVK Biosciences.  I have had experience with all three companies.  GVK is part of the larger GVK conglomerate, Advinus is part of the Tata group, and Aurigene is an independent subsidiary of the Dr Reddy’s Laboratories.  The parent of the last is listed in the US (NYSE: RDY).  The biggest advantage here is cost, which can be up to one-third the US cost.  GLP (good laboratory practice) standards are increasingly being used, and several US pharmaceutical giants have entered into collaborations with these outfits.  One disadvantage is the lack of monkey studies (to avoid offending religious sentiments).  

Manufacturing: India has the most FDA approved pharmaceutical manufacturing sites outside USA (75).  Services include manufacture of active pharmaceutical ingredients [API] or finished dose products.  Some companies in this space include Nicholas Piramal, Jubilant Organosys and Dishman.  The advantages include cost and the immense expertise of Indian companies in chemistry.  With India having signed the patent law, intellectual property is not so much of a concern now.  The FDA has audited some of these companies and GMP (good manufacturing practices) is not an issue.   

Radiology:  Services in this sector include radiology reviews of studies conducted throughout the world.  Studies in rheumatology, oncology, and neurology are specially suited since the primary or secondary endpoints are often radiologic.  IMC Radiology, based in Pennsylvania and Hyderabad, is one such company that has read films for phase II and III oncology and rheumatology trials.  The advantage includes low cost, high quality due to dedicated services (try finding a radiologist in the US who will be willing to give up practice to only read films for trials), and rapid turn around time (24 – 48 hours).  The FDA has “audited” IMCR through radiology charters. 

Clinical Trials:  This is the largest segment. It includes everything from recruitment, site management and clinical monitoring to data management.  Many US companies have branches in India, including PPD Pharmaco (Nasdaq: PPDI) and Quintiles.  Indian companies include Siro Clinpharm, Vimta and Lotus Labs.  I have had extensive contacts with the US companies, and some exposure to Indian ones.  One has to be careful in picking the right company – some are very good, while others (not among those listed above) leave much to be desired.  The biggest advantages of conducting trials in India include availability of patients, cost, standard of care (in urban centers) and use of English language (again, in urban centers).  Generally, recruitment is two to three times faster than US, and cost about half to a third.  The biggest disadvantages include the Indian regulatory authorities (they are overworked and understaffed), making sure that physicians truly understand how important it is to follow the protocol (in other words, GCP or good clinical practice training), and import-export regulations of test materials. 

While Indian pharmaceutical services have an excellent future, there are few good ways for an investor in the US to invest in this market. I wonder if some enterprising fund would start an ETF that invested in these companies.  India Fund, are you listening?