Some firms have thought of diversification. Smaller firms such as Acharya Chemicals have bigger ambitions. Acharya, too, works in the API and clinical trial materials space, but it has identified its future in contract research. Initially, it was working with only one, giant Swiss pharmaceutical firm Roche, but in 1999 it realised that its core strength was in chemistry.

“Drug discovery companies have outsourced their compounds to us and based on our research work, we share the intellectual property,” says Anand Acharya, director, Acharya Group. For an SME like Acharya Chemicals, 85 per cent of its business is export-oriented. This SME manages everything from discovery to commercialisation, so it has created a core research team comprising 15 scientists. Similarly, Arch has spent more than Rs 10 crore on research and development and Unimark has pumped in Rs 20 crore for the same. The other major issue for SMEs is the monthly cost of hiring PhDs. For that matter, finding an experienced PhD to guide a team is a challenge. Every year, the employee cost has been growing higher. But these SMEs see a good reason to spend on talent and have made profits even with rising costs.

The Road Ahead
When SMEs fall, they fall hard. Take the case of Morepen Laboratories. In 2002, the company took a huge bet on marketing and manufactured ‘loratadine’, a drug for hay fever. It expected the drug to become a prescription medicine but the plan misfired. Loratadine became an over-the-counter drug. The company had raised huge money to market and manufacture the drug in the US, raising over $100 million (Rs 480 crore then) through bank loans and deposits in 2002. When the sales plunged, the company’s depositors were irate.

Currently, Morepen is restructuring its business and paying off its debts by issuing fresh capital to the tune of 10 per cent to equity investor Standard Chartered Private Equity. Entrepreneurs have learnt from such incidents and top SMEs have begun to adhere to corporate governance standards. They have also actively sought the help of private equity investors.

Arch Pharmalabs has gone through four rounds of funding and 59 per cent of its stake is held by private equity players. Swiss Tech-BTS, a private equity firm, has a stake in both Unimark and Arch Pharmalabs.“There will be consolidation in our space over the next three years and private equity firms will play a major role in the industry,” says Kamath. These firms will no longer remain small firms.

The challenge for mid-cap companies will be to bring in more funds and this is where the race for growth and survival will determine who will remain ahead in the regulatory and environment space.