Contract research turns bitter for Dishman

Signs of disintegration in Europe is leaving Dishman Pharmaceuticals and Chemicals very nervous.

The company’s contract-research business — dependent on major pharma firms in European Union — is facing the pressure of festering turmoil in the continent. Almost 70% of the company’s overall topline comes from Europe.

According to VVS Murthy, chief financial officer, Dishman, the contract research business has de-grown by about 25% since 2008-09.

“Before 2008-09 we used to see at least 10-15% annual growth from this segment. But last year it was flat and we expect it to remain flat this year also,” said Murthy.

With a topline of Rs991 crore, Dishman, however expects to grow by about 15% this year, with growth primarily coming from the contract manufacturing side.

“In contract manufacturing we have adequate visibility, clients and contracts to boost growth. But in research the scenario will remain bleak for sometime ahead,” said Murthy.

Contract research has been impacted by the mergers & acquisitions of big pharmaceutical firms as well as the funding issues dogging the smaller ones.

“With some large-scale acquisitions that happened in the recent past, firms are trying to find synergies with their acquired entities before running to outsource to outside parties. So contract research from big firms is slowing down,” said Murthy.

The $6.6 billion buyout of Belgian firm Solvay’s pharma business by US-based Abbott Laboratories in 2009 had affected Dishman as Solvay was a major client for the company, and order inflows from Solvay became limited that year due to the buyout.

Bhavin Shah, analyst Dolat Capital, said research activities overall are taking a backseat with big firms laying more emphasis on marketing, emerging markets, etc.

On the other hand, outsourcing by smaller firms is facing a crunch on account of funding issues, said Murthy.

An analyst in Mumbai said for mid sized firms, getting funds for research is becoming a tough task due to the economic crisis happening in EU.

“So outsourcing is directly affected.”

Dishman’s Swiss subsidiary Carbogen Amcis, a research company which the former acquired in 2006 for $75 million is also seeing flat growth this year, said Murthy.

Carbogen contributes to 37% of Dishman’s turnover. Margins from the Swiss business in 2010-11 we about 6%, compared with 15% sometime ago.

“We can’t say how and when the business will improve as it is dependent on the EU,” said Murthy.