With a number of blockbuster drugs getting off patent in the coming years and increasing R&D costs coupled with low R&D productivity, major pharmaceutical companies worldwide are finding it difficult to maintain their bottom-lines. They have taken recourse to outsourcing part of their research and manufacturing activities to lower cost countries, thereby saving costs and time in the process. This has led to the evolution of Contract Research and Manufacturing Services (CRAMS) as a fast emerging business opportunity for Indian companies, particularly for mid-sized companies, who have been facing the heat of the implementation of WTO guidelines since early 2005.
CRAMS can be split into two major business segments-Contract Research and Contract Manufacturing. Contract manufacturing consists of activities like manufacturing of intermediates for New Chemical Entities (NCEs) or manufacturing of Active Pharmaceutical Ingredients (APIs).
India offers certain competitive advantages over China and East European countries. It has skilled and English speaking human resources, a strong manufacturing base with the track record of producing quality products, rich biodiversity and a structured legal and regulatory system. On the other hand, the attractiveness of demographics and cost advantage has made India a preferred choice for outsourcing.
The global pharmaceutical outsourcing market was worth USD52 billion in 2006. It is expected to reach USD76 billion by 2010, at a CAGR of 10.0% for 2006-2010 period. In 2006, CMO activity accounted for the major share (approx. 68%) of the total global outsourcing market.
Indian pharmaceutical outsourcing market
The Indian pharmaceutical outsourcing market was valued at USD929m in 2006. It is expected to reach USD3.33 billion by 2010, at a CAGR of 37.6% during 2006-2010. Consequently, India's contribution to the global pharmaceutical outsourcing market is expected to increase from 1.8% in 2006 to 4.4% in 2010.
Major part of the outsourcing market is dominated by contract manufacturing services, which Indian pharmaceutical companies provide to the outside world.
Contract manufacturing outsourcing
The global pharmaceutical Contract Manufacturing Outsourcing (CMO) market in 2006 was USD35 billion; it is expected to reach USD48 billion by 2010 at a CAGR of 8.2% during 2006-2010. In 2006, chemical synthesis constituted close to 60% of total work outsourced in the global contract manufacturing market.
The Indian CMO market stood at USD620m in 2006. It is expected to have a CAGR of 41.7% to reach USD2.5 billion by 2010. Chemical synthesis constituted 60% of the total outsourcing market by CMOs in India, followed by formulation and packaging, which constituted about 40%.
The four main components of the global outsourcing market are intermediates, APIs, custom synthesis and formulations/dosage forms. It is estimated that approximately 40% of outsourcing demand is for the manufacturing of APIs. Contract Manufacturing represents the largest opportunity within the CRAMS space. India, with its efficient labour pool and large number of USFDA compliant manufacturing plants outside the US, is expected to garner a major share of this large opportunity.
World-class facilities and infrastructure for drug manufactures
India has the world's largest number of FDA-approved plants (75) located outside of the US. India has almost three times the number of FDA- approved plants as China. This is one of the most vital factors for the outsourcing manufacturing services in India by the multinationals and global pharmaceutical companies.
As per one of the research reports, US FDA-approved plants can be set up in India at half the cost of instituting similar plants in the US or Europe. Economical service of high quality and good infrastructure make India an attractive outsourcing destination.
Contract manufacturing services catering to global clients
India serves global clients through various business models and offerings, such as outsourcing of services (including R&D) and manufacturing. Strong reverse-engineering skills, a robust talent pool, government support for exports, low production and R&D costs, and world-class infrastructure to assure high quality standards are some of the factors that enable India to play a pivotal role in the global pharmaceutical market. India is considered a global destination for supplies of high-standard APIs. For Indian contract manufacturing players, opportunities exist on two fronts. One is to capture a larger share of the opportunities created because of the shift from in-house manufacturing to outsourcing by innovator pharmaceutical companies. The other is to foray into western countries by acquiring existing contract manufacturing players in the western countries. The key players in the Indian contract manufacturing sector are Nicholas Piramal India Ltd, Divis Laboratories Ltd, Dishman Pharmaceuticals Ltd, Dr Reddy's Laboratories Ltd, and Shasun Chemicals and Pharmaceuticals Ltd. The success of the generics players can very well be attributed to the large acquisitions they have made to foray into western countries, especially in the European region. Indian contract manufacturing players have also opted for the inorganic route to growth and have made strategic acquisitions to gain scale and strengthen customer relationships.
Key outsourcing strategies
● Striking strategic alliances and mergers & acquisitions
Indian manufacturers have been entering into strategic alliances with large generic companies for supplying off-patent molecules and also signing up long-term contract manufacturing agreements with innovator companies for supplying complex patented molecules. Increasingly, bulk drug producers are collaborating with formulation companies, who have filed for New Drug Development Application (NDA), from the development stage itself. A number of API companies have taken a conscious decision not to get into formulations business so as not to compete with their customers. Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis, Novartis, and Teva are among the companies, with whom Indian companies entered into alliances for APIs and intermediates.
● MNCs outsourcing manufacturing operations to Indian subsidiaries
Pharma MNCs that have renewed their interest in the Indian markets have set up low-cost manufacturing facilities in India that meet international standards. While they continue to expand their presence in the domestic markets, many of them are simultaneously using these facilities as offshoring hubs.
Exports surge
● Using India as an export base for other countries
Pharma MNCs are also increasingly using India as a base for exports not only to the immediate neighbouring markets, but also to other markets around the world such as Japan, South Africa, Latin America and Europe.
● Contract manufacturing driving bulk drug exports
In the last few years, a number of global pharmaceutical majors have been outsourcing contract manufacturing to Indian companies to cut costs so as to be competitive. Companies like Divis, Nicholas Piramal and Dishman maintained dominant presence in the global API market by focusing on CRAMS, which contributes significantly to revenues and profits. Besides, this strategy helps in long-term contract building sustainability in revenues.
Manufacturing & licensing opportunities
The product patent regime has opened up the lucrative Indian market for multinationals. These multinationals can set up operations either through licensed agreements, mergers and acquisitions, or a combination of the two. Conventional project wise outsourcing is increasingly getting converted into long-term reliable partnering in order to achieve consistency and value for money for the partnering companies as well as the competing CMOs. For these types of alliances to be successful, outsourcing service providers are getting involved in upgrading their skills and enhancing their technological capabilities. From simple outsourcing, the trend is slowly moving towards building partnerships and alliances, where free information exchange and active involvement is also feasible. This emerging trend will drive further growth in outsourcing in terms of more manufacturing set ups dedicated for supplying needs of many global Pharma companies.
Issues & challenges Growing global competition
The increasing demand for more NCEs and the pressure of reducing the cost of development are the two major factors for companies looking at outsourcing and partnering as the best option for survival. At the same time, existing global CRAMS players are facing adverse business conditions on account of increasing need for regulatory compliances related to environmental issues and competition from low-cost countries.
Competition from China
China is emerging as a strong competitor because of its cost competitiveness, strong government support (in the form of incentives), implementation of GMP norms, aggressive focus on exports and the soaring consolidation drive to build large Chinese pharma giants. In some aspects, however, China lacks the required specialisation in some areas such as finished formulations, regulatory compliances for regulated markets and Intellectual Property Rights development. In terms of FDA approved plants, China is still far behind India. India is also leading in terms of the number of DMF filings. While India has filed 1,155 DMFs between January 2000 and June 2007, China filed only 329. In 2007 itself, India has filed 110 DMFs, which is almost three times that of China's 38 filings.
Under pressure to protect their margins, global pharma companies are outsourcing non-core activities like manufacturing of intermediates and APIs to low-cost destinations such as India. This trend is likely to gain momentum over the next decade. Making APIs and oral solid formulations (tablets and capsules) will continue to be the major source of revenue for India's contract manufacturing industry in coming years. India, with its inherent competitive advantages, stands as one of the most preferred outsourcing destinations for a range of activities and is now becoming a critical part of manufacturing and drug development value chain of various major global innovator pharma companies.
(The author is research associate, Cygnus Business Consulting & Research )