The pharmaceuticals industry's activities span a wide spectrum ranging from R&D to production to marketing. Companies with limited resources in finance, manpower and facilities need to prioritise and make decisions as to what can be done in-house against what needs to be outsourced. In that context, there is much hesitancy on the part of most R&D based pharmaceutical companies to outsource drug discovery research from third parties for several reasons. First, it has been reported that in spite of declining pipeline of new products, the returns on R&D calculated over a seven year period has been shown to be still much higher than returns on capital employed for manufacture or marketing . Secondly, for reasons of confidentiality and the tricky issues of sharing IPRs with the outsourcing partner, companies are generally averse to outsourcing drug discovery from third parties. This, however does not apply to developmental or clinical research since, by the time the candidate molecule reaches these milestones, patent applications would have been in place and confidentiality issues would no longer be of concern. It is for this reason hat the MNCs restrict outsourcing to developmental R&D, custom synthesis, formulation development and clinical research from third parties who have necessary skills, infrastructure, resources and capabilities to maintain quality standards required by Regulatory Agencies.
The Indian pharmaceutical industry
India today is the 4th largest producer of bulk drugs and formulations in the World with domestic market of Rs 22,000 crore and an export market of Rs 12000 crore. Exports are over five times imports and has been growing at > 20% annually over the last several years. India has the largest number of FDA approved plants outside the U.S. and 20% of all ANDAs filed in the U.S. are from Indian companies. These companies dominated in DMF filings with U.S. FDA as well, with 74 of the 198 filings during the 1st quarter of 2005 being from India. The phenomenal growth of the Indian sector of the industry has been primarily due to the Indian Patents Act 1970 which prohibited the filing of product patents in pharmaceuticals. That the Indian sector benefited is obvious from the fact that while in 1970 two thirds of the market share was held by the MNCs in 2004 the order has been reversed. Similarly while in 12970, there were only 3 Companies in the top ten which were solely Indian Companies today there are only three MNCs in the top ten in India. As a sequel to India signing the GATT and WTO and with the ushering in of the New Patent Act in March 2005 introducing a product patent regime, Indian companies are moving into the area of new drug discovery research. During the last five years between the top ten companies investments in new drug research has reached Rs 1200 crores in 2004. With over a 100 patent applications filed in India and abroad and over a dozen candidate molecules reaching an IND stage and various phases of clinical trials the cost effectiveness of Indian new drug research is no less than in any other Country. Over half a dozen candidate molecules have been the subject of licencing for development by international companies.
Opportunities for Indian pharma companies
Indian pharmaceutical companies have three major opportunities in the global scene. They are :
1) As a major supplier of Generic Bulk Drugs and Formulations to the Regulated and Less Regulated Global markets.
2) As a destination for contract research, custom synthesis, contract production and clinical research.
3) New drug research including discovery of candidate drugs, protecting them through the patent system and licensing on commercial terms for development by third parties.
Of these the one which is relatively a new activity for Indian companies and therefore requires serious consideration is the potential for India to be a major destination for global pharmaceutical industry's outsourcing activities. Large pharmaceutical companies are increasingly looking for off-shore outsourcing to increase their competitiveness by reducing costs as well as 'time to market' in addition to utilizing expertise of the partner in areas where in-house capabilities are inadequate. At the same time outsourcing also enables them to utilise their resources to capitalise their own internal strengths.
What can Indian industry offer? India has unique strengths in areas of chemical technology to develop innovative processes, custom production of synthetic drugs involving highly sophisticated technologies and clinical research. In all these areas Indian companies can indeed develop strategies for entry into long term contractual arrangements with leading R&D based pharmaceutical companies and develop synergistic collaboration ventures. Since all these activities happen after exclusivity is guaranteed though the patent system, confidentiality issues are not important.
An area Indian companies including dedicated ones have great potential to be involved in is clinical research. While several estimates are available, it is fair to assume that 30-35% of total drug discovery and development costs are today deployed for clinical research. Such costs could be reduced to half when clinical research activities are outsourced from low cost economies such as India. There are at any point in time over 500 molecules undergoing clinical trials in various phases in a large number of centres around the World in addition to many more for new indications of marketed drugs and post marketing surveillance for safety and efficacy. Indian advantages apart from lower costs rest with availability of large and diverse patient populations, skilled clinicians , ability to meet global ICH guidelines etc. The recent changes in Schedule Y of the Drugs & Cosmetics Act also permits on the merit of each case the conduct of trials in a concurrent phase with those carried out in centres abroad.. English being the language of Science and Medicine in India, excellent communication facilities and adequate documentation and analytical systems are the other advantages that India provides. During the last ten years , over a dozen Clinical Research Organisations have been set up in the Country and many trials have been carried out meeting FDA standards.
Weaknesses
While considering the weaknesses of the Indian industry as destinations for outsourcing, there are perceptions and realities. The major areas of concern are, lack of adequate skills and infrastructure in many areas of R&D, imprecise documentation systems, low track record of performance in the relevant fields, ambiguities in the interpretation and implementation of global regulatory and Intellectual protection standards, issues on maintenance of confidentiality, protection of data submitted for regulatory clearances (data exclusivity), non-adherence to time schedules and secrecy modalities. While some of these fall under the category of perceptions, most of the real ones are not insurmountable considering the intellectual and entrepreneurial capabilities of the Indian companies.
Threats to outsourcing companies
The real threats for the Indian companies come from within the country as well as from outside. Proliferation of CROs with short term goals and little understanding of the intricacies of global regulatory requirements leads to erosion of standards, unhealthy competition, price wars and consequently credibility loss among the international partners. Wherever Chinese industrial units are able to offer products and services, they have invariably undercut India on the price front. Lower costs of utilities including power, lower costs of finance, large Government subsidies for exports, dual exchange rates are all responsible for lower costs of Goods and Services in China. While in the area of chemical technology, India has a lead over China or even all other Countries, the same is not the case in fermentation related (biotechnology products) areas. Wherever Raw Materials are to be imported, fluctuations in their prices adversely affect costs of production. When outsourcing is seen as a threat to domestic industry and employment opportunities, countries may opt to bring in legislations to control them as has been done in some states in the US. Non-tariff barriers including imposition of phyto and phyto-sanitary measures and standards on labour and environment could stand in the way of growth of the outsourcing opportunities in India.
Overall balance is in favour of India attaining a dominant position as an outsourcing destination for international pharmaceuticals companies. Apart from becoming a global player for contract research, custom production of intermediates and development of candidate drugs for pre-clinical and clinical testing and clinical research are areas where major strides are possible. After all, of the $ 170 Billion estimated as the global outsourcing market by 2010, if India can get even a 10% market share, it will still be, in value terms, double the current turnover of the entire Indian Pharmaceutical industry. And that indeed is an achievable target.
What are being outsourced?
The areas and products which are being outsourced from off-shore parties include practically all pharmaceutical activities. Even though basic R&D for discovering new candidate drugs are largely carried out in-house by most companies, development and supply of chemical libraries for screening, scaffolds, synthons and reagents used as building blocks for new molecules are subjects for outsourcing. The company Array biopharma, a subsidiary of the Biotech giant, Amgen uses companies in China, S. Korea and Russia to supply compounds designed by Array. Generally , leading companies outsource projects which are routine, have strict time schedules and are IP sensitive. In India companies such as Syngene and Aurigene in Bangalore, Sanmar Specialities, Shasun Chemicals in Chennai, Ranbaxy in Delhi , AVRA Labs and GVK Bio in Hyderabad and several others including many National Laboratories have arrangements with US and European Companies to carry out specific jobs in a cost and time effective manner. The Shanghai based Wu Xi PharmaTech, Scino Pharma in Taiwan and many others employ over 100 Scientists each and have as customers some of the largest U.S. based Pharmaceutical Companies.
The track record of some of the leading CROs have convinced the customers that their Scientists are capable of carrying out even innovation driven research for new drugs which have the potential for patentable inventions in the area.
World CR market to touch $ 24 bn in 2010
World-wide contract manufacturing and research for the pharmaceuticals industry was estimated to be worth $ 100 billion in 2004 growing to $ 175 billion by 2010. Of these, contract manufacturing of APIs, dedicated intermediates and prescription drugs was estimated to be around $ 25 billion in 2004 reaching $ 46 billion by 2010. The largest share of contract manufacture and supply was for OTC and nutritional products expected to cross $100 billion by 2010. Contract research market in 2010, will be worth $ 24 billion up from $ 14.5 billion in 2004. A new development in the area of outsourcing is that the outsourcing activities are progressively moving out of U.S. and Europe to others, notably, China, India, Korea, Russia and Taiwan. Over the years some of the premier companies in the U.S. such as Albany Molecular research Inc, J-Star Research of New Jersey and many others have seen a decline in revenues due to more companies going off-shore primarily due to lower costs. For example, it has been reported that while the cost to a company of a Ph.D. scientist in a CRO is $ 250,000 in U.S. the corresponding figures in these countries will be between $ 45000 to 70,000.