A dose of pharma industry lingo

Looking to invest in pharma stocks? As you glance through the annual reports of pharma companies, you may confront quite a few abbreviations, many of which you may not have heard before!

Here are three key pharmaceutical business terminologies that will help you understand the sector better.

To start with, understanding the broad business segments will help you appreciate companies better. The pharma industry may be classified into three segments – Active Pharma Ingredients (APIs), finished dosage formulations (FDF) and Contract Research and Manufacturing Services (CRAMS). So, what are these?

API is the key active chemical or biological substance in a drug. However, an API is not directly consumable. It has to be processed into a formulation of appropriate dosage strength to be absorbed by the human body.

APIs being low-value products, the margins of companies operating in this segment are typically in the 10-15 per cent range. However, margins may vary across products. For instance, the operating profit margins for companies supplying niche APIs or those that are vertically integrated with their own captive raw material capacities may be much higher.

IPCA Labs is a classic example. Apart from being an API supplier, the company manufactures the key inputs too, and hence enjoys better margins.

Similarly, innovative or patented APIs may fetch attractive margins. Most Indian pharma companies manufacture APIs either for captive consumption or for supplying to other formulation players.

Finished dosage formulation is the next stage in the value-addition process. This is the consumable form of a drug. FDF is the combination of an API and an excipient (for instance, liquid in syrup), which is an inert substance. The excipient is added to the API and the same is processed into an FDF.

An FDF may be available in various forms, such as tablets, capsules, syrups, injectables, transdermal patches and parenterals.

Consider insulin, for instance, a protein produced by the pancreas to break down glucose in the body into energy. When administered as an injection, insulin enters the blood stream and acts on the blood glucose of the diabetic individual instantly.

Similarly, drugs such as diphenhydramine, which is used to treat allergic cold and cough, may be more effective when administered as syrup.

Thanks to the value addition, the operating margins for FDF drugs are higher than APIs.

The third segment, CRAMS, may further be bifurcated into contract research and contract manufacturing. A contract research company provides services, such as process development and optimisation to innovator companies. They partner with the innovators and help the drug progress through various stages of the development process. Some contract research companies also share the development risk. Here their revenues may also be linked to the success of the novel drug under development.

These companies may also have the option to supply the APIs for such novel drugs, if approved, on a commercial scale. This can be a very profitable proposition. Most companies, however, opt for a low-risk model which guarantees them a fixed profit margin. Some have a mix of both. For instance, Biocon’s CRAMS arm Syngene has a long-term contract with pharma major BMS, which is typically a low-risk model. But, the company also has contracts of a risk-sharing basis with other pharma majors.

Contract manufacturing is where a company manufactures drugs on behalf of its customers.

Here, the contract manufacturer will get a fixed manufacturing margin. Profit margins in contract manufacturing may not be very high, given that there is hardly any value addition. However, the margins may be higher for vertically integrated contract manufacturers.

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