Worldwide revenue for contract manufacturing and research for the pharmaceutical industry was estimated at $100 billion in 2004 and is expected to increase at an average annual growth rate (AAGR) of 10.8% to $168 billion in 2009. Contract manufacturing of prescription drugs for 2004 was estimated at $26.2 billion, and is expected to rise to $43.9 billion by end of 2009. Contract manufacturing of OTC and nutritional products is the largest and fastest growing segment, expected to rise at an AAGR of 11.3% to $102 billion by 2009. The global pharmaceutical contract manufacturing market for finished dosage formulation has been traditionally strong in North America and Europe. North America accounted for 50.5 percent of the global pharmaceutical contract manufacturing market followed by Europe and Asia. Due to the outsourcing boom in Asia, contract manufacturing has been witnessing significant growth in finished dosage formulations, active pharmaceutical ingredients (API's) and intermediates.
The global pharmaceutical contract manufacturing market is segmented into injectables, solid and liquid dosage forms spanning across North America, Europe, and Asia. Injectables are expected to show the highest growth during the next few years. Solid dosage forms represented 47.0 percent of the global market in 2004. Liquid dosage forms are projected to grow the slowest during the forecast period. The demand for specialized technologies and services such as sterile products, biopharmaceuticals, and lyophilization is likely to drive the market to a significant extent.
Why contract manufacturing?
Large pharmaceutical companies increasingly turn to contract manufacturing organizations (CMOs) solely to achieve efficiencies in cost, capacity and time-to-market, or to obtain a specific expertise not available in-house. Today, these factors still play a role, but now the most dynamic driver behind the use of CMOs in the pharmaceutical industry rapidly is becoming the unique, innovative, and state-of-the-art process and production technology they offer. More and more pharma companies are leaning towards outsourcing to concentrate on marketing their products, without spending time in drug discovery and process of manufacturing. This applies to those virtual companies that exist by the simple fact they can rely on contract manufacturers and researchers.
The merits of outsourcing include mainly the following:
1. It helps drug companies cut capital investment while circumventing production bottlenecks.
2. The less one produces in-house, the less one is likely to suffer the problems of labor disputes, tough environment regulations etc.
3. Finding and testing new molecules for treating various diseases has become increasingly complex, sophisticated and expensive.
4. The advent of chiral chemistry has increased the average number of steps in the syntheses of new molecules and is pushing process development and manufacturing to the limits.
The competition for generics is intense but the crucial factor is timing. The first company to launch a generic version of a particular product tends to capture 60-80 per cent of the market. Thus whenever there is a generic boom there will be a proliferation of outsourcing for manufacturing.
Opportunities for India
India has long been a formidable player in pharmaceutical manufacturing, with Indian companies producing some 22% of the world's supply of generic drugs, according to the Indian Pharmaceutical Alliance (IPA).
By 2007, India will capture a third of the world's generic drug business, predicts the IPA, which represents India's 13 leading pharmaceutical companies, including Ranbaxy Laboratories Ltd., New Delhi, (the country's largest, with $1 billion in annual revenues), Dr. Reddy's Laboratories Ltd., Hyderabad, and Nicholas Piramal India Ltd., Mumbai.
In the product patent era there are however very few options which Indian pharmaceutical companies can explore, since most of them will not be able to invest the kind of funds required for "discovery research". Such companies necessarily will have to turn to contract manufacturing to maintain high growth rates. In this, their expertise in process research and development a.k.a. 'reverse engineering' will come in handy, but again, only companies that have modern manufacturing facilities, with sizeable capacities and financial muscle will be successful in roping in clients.
The introduction of the new patent regime in India from January, 2005, has boosted the confidence of multinational companies looking to outsource the manufacturing of branded drugs with the protection of intellectual property rights (IPRs). However, the infrastructure and the bureaucratic setup in India continue to pose a problem for companies that are outsourcing. Complex logistics, rampant corruption, and counterfeiting continue to pose a threat to companies that are looking to outsource to India and China.
Of the 452 drug master files (DMF's) that were filed in the United States in 2003, 132 of them were from Indian companies, which were more than Spain, Italy, Israel, and China.
India also can boast of having more than 70 FDA-approved plants and 200 manufacturing facilities certified as having good manufacturing practices, more than any other foreign country. The key edge that India enjoys compared to western countries is the cost advantage, which has been much publicized and has been well received. The cost savings by opening a manufacturing plant in India is around 60.0 percent compared to western countries. The wages of skilled employees that carry out the most technology intensive processes are 30 to 40 percent of western levels. As a result, the total cost savings for the pharmaceutical companies to outsource to these countries is likely to be huge.
The availability of a huge talent pool combined with the emergence of world class infrastructure and technology centers has ensured that India is well in sync with the Western countries in technology as well as quality. Recent trends suggest that these CMOs have delivered products of extremely high quality on a consistent basis enhancing their reputation to a large extent. The trend to outsource manufacturing activities from Europe has begun and it is likely to increase over the period. Most of the companies in India have their own manufacturing plants, which can be upgraded to meet the international standards at a fraction of the cost relative to developed countries. Multinational companies looking to expand their global presence have a great growth opportunity in India to make these manufacturing units a global sourcing hub.
The emergence of strict enforcement of IPRs in India where product patents previously did not exist has come as a major boost to companies that are looking to outsource and protect their products. Though India has adopted the product patent regime with effect from January, 2005 it is likely to have its full impact only after 3-4 years. However, the proven proficiency of manufacturers in meeting with the federal drug authority (FDA) and current good manufacturing practices (cGMP) regulatory guidelines is likely to boost the demand for contract services to India.
Thus, there is a clear advantage: As companies increasingly face the pressure to concentrate on R&D and marketing, they cut down on manufacturing investment and outsource as much as possible to contract organizations to reap benefits of accelerated development and save on time, cost and labour. Outsourcing well planned and well implemented helps companies focus on strategy and competencies instead of worrying about demand-supply issues.
-- The author is Program Manager-Healthcare Practice Frost & Sullivan. He can be reached through sdedhia@frost.com