Positive trends in major lead indicators — R&D spend, biotech funding, project pipeline and outsourcing penetration—reinforce our optimism in the long term traction in pharma outsourcing space. Moreover, loss of exclusivity on patented products, dwindling R&D productivity and internal cost pressures have made outsourcing imperative for global pharma majors. We strongly believe that a combination of expanding pipelines and shrinking internal resources will further spur outsourcing. Additionally, Asian countries are garnering higher share of the CRAMS space as the global economic balance is shifting from the West to the East.
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Consolidation, cost cutting, currency cripple CRAMS in FY09-11
Over FY09-11, the CRAMS industry across the globe was severely crippled by global consolidation, cost cutting, inventory rationalisation, a funding crisis among small biotech companies and adverse currency fluctuations. Growth of three major Indian CRAMS players had plunged from 34% CAGR over FY06-09 to 5% CAGR over FY09-FY11.
Outlook brightens as revenue traction, funding improve since FY11
Post a rough patch where growth had almost came to a grinding halt, most CRAMS companies have seen a revenue traction over the past 4-5 quarters. Even net new business and book-to-bill ratios of global CRAMS majors have enhanced significantly. Moreover, funding for small and mid-sized biotech companies is beginning to improve, which bodes well for CRAMS companies.
Growth is here to stay as global pharma majors face harsh realities
Loss of exclusivity on patented products, a dwindling R&D pipeline and bid to realign business models to new realities have made pharma outsourcing imperative for global pharma majors. We strongly believe that a combination of expanding pipelines and shrinking internal resources will further spur outsourcing.
Valuations yet to catch up with prospects; initiating Divis, Jubilant
Post its strong operating numbers, our CRAMS universe has jumped up by almost 15% though it still trades at 40% discount to its May 2008 valuations, thereby leaving a significant scope for multiple expansion. We expect valuations to move up going forward with most CRAMS players projecting quality earnings as a favourable macro environment helps improve growth visibility while the focus on deleveraging balance sheet betters return ratios. We initiate coverage on Divi’s (BUY/SP)and Jubilant Life Sciences (BUY/SP).
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