Custom manufacturing - of intermediates, active pharmaceutical ingredients (API) and formulations - has evolved to a viable and profitable business for Indian pharma companies from a few players testing the waters in the early 2000's. In 2006, the Indian custom manufacturing industry was about $900 million, accounting for over 15 per cent of total Indian pharmaceutical market. As per Frost & Sullivan, the contract research and manufacturing services (CRAMS) market has been growing organically at 43 per cent annually and a growth rate of over 30 per cent is expected to sustain till 2013 (making the CRAMS market about $7 billion). From a market that was traditionally dominated by North American and European players, the expectation is that Indian players would soon account for 35-40 per cent of all intermediates, APIs and formulations.
The reasons for growth in the CRAMS space are:
● Manufacturing has been clearly identified as non core by pharma companies. Hence, they are looking at either not investing in existing facilities or even in several cases shutting down some of their asset bases. Companies like Pfizer and GSK have gone public with their intent to prune their asset base. Clearly the objective is to find low cost alternatives
● Competitive pressures on global Big Pharma to outsource and improve their profitability with the increased presence of generic players. Number of blockbuster innovator drugs going off patent resulting in significant margin keeppressure on Big Pharma
● NCE continues to get more difficult and expensive - from trials to launch. The current number being touted is $800 million for every new product launched
● In addition, the ageing population curve in US and Western Europe has meant an increased governmental pressure to manage healthcare budgets by turning to and supporting lower cost drugs
● India's product patent regime - while still a source of skepticism globally - has certainly increased confidence in India's capability in being a player in the CRAMS space
As a result, Big Pharma now sees India as a bankable opportunity for outsourcing of manufacturing. Currently they have established relationships with several players in India for outsourcing intermediates and APIs. There have been significant contracts entered into and implemented by Piramal Healthcare, Dishman, Divi's amongst other CRAMS players.
The wave of formulations outsourcing can be expected in the next couple of years. India is very well placed to avail of this opportunity as well.
Custom manufacturing - What does it take?
However, though the overall picture may sound rosy, there is still a lot to be done for Indian players to be truly considered in the same league as global players like Lonza or Patheon. The difference lies in the understanding of the partner's outsourcing imperatives. Usually, this requires a conversation and meeting of objectives at the senior most levels of management. Based on this understanding, solutions on how to effectively manage the new business model for that product/set of products can be suggested.
Typical process followed in outsourcing
Essentially there are numerous considerations that drive outsourcing, apart from the objective of reducing costs (while that will always be a very strong imperative). We must be able to help our partners address all the key considerations before they arrive at development stage.
A very key attribute for a player in this process is the ability to differentiate oneself in the marketplace - that is already getting crowded. Clearly one should differentiate oneself based on the eventual solution/structure that the partner is looking for. So far there is still a tendency for several players globally (Indians included) to have a similar and familiar solution for all kinds of business proposals.
Another increasingly key attribute is the ability to support global launches of products. Here, the presence of formulations and API assets in Europe and US will be critical. The real prize in custom manufacturing is not in getting a product that is late lifecycle but one that is being launched.
Behind the success story
The performance of custom manufacturing companies was accurately reflected in the Economic Times where a comparison of the five most traded generic pharma companies with custom manufacturing players like Nicholas, Dishman, Divis, Shasun and Jubilant showed significantly higher share price growth for the CRAMS players.
While this should not be seen as an indictment of the generic model, which continues to be attractive depending on the business model chosen, it certainly shows that custom manufacturing, as a business model, is by no means a strategy that is less attractive. Recently several 'pure' generic players like Dr Reddy's, Wockhardt and Lupin have made public statements about ramping up their presence in the CRAMS space.
Historically, custom manufacturing model was seen as "services" and low margin, and not as one that had product ownership. Over the years, the sustainability of building relationships with Big Pharma and the predictability of revenue and margin, has been the reason for the attractiveness.
The encouraging story for India is that custom manufacturing is still in its infancy. Indian players are learning the ropes quickly and challenging global players. We foresee that the global leaders in custom manufacturing will emerge from India (the same way as Europe emerged as leaders in API and the US for formulations).
(Harpreet Cheema is chief manager (strategic marketing), while Ajit Mahadevan is president (formulations) with Custom Manufacturing Group of Nicholas Piramal India Ltd)