In yet another instance of pharma players' efforts for subsistence in the industry, the pharmaceutical companies are increasingly outsourcing their research and development (R&D), clinical trials and manufacturing activities to low cost destinations that would offer access to talent, resources, speed, flexibility and above all quality services. Though most of the big names in the pharmaceutical industry are going through a tough phase of time due to expiration of patents, lacklustre drug pipelines and spiralling costs of R&D, manufacturing and marketing, these players are optimistic that outsourcing would bring them back on the track of drug discovery activities and into business at reduced risk.

Not only the pharma bigwigs but also the mid and small cap players are slowly, but steadily embracing outsourcing for better business prospects. However, low cost is not the sole factor that drives these companies to resort to outsourcing. They are of the opinion that outsourcing has become part and parcel of global networking operations and there are myriad of factors that go into sourcing decisions of each company.

"The world is getting more and more networked today. In this context, outsourcing to developing countries like India offers several advantages like access to talent, resources, speed and flexibility and leads to cost savings as well. When one's business is dependent on new products, getting alternative or parallel resources and capabilities outside the company to work on projects at a reasonable cost is always a good idea," said, Mukta Arora, head, Global Sourcing India, Eli Lilly and Company.

Besides, as an industry depended on innovation driven R&D endeavours for survival, the pharma companies think that outsourcing is the future of this industry. "Pharma world's foundation is innovation - a pipeline of new products to deliver and derive value. If outsourcing helps an innovation driven company to accelerate its R&D programme and derive more productivity from the same at reduced cost, it will be a great pathway to be followed. The challenges of declining pipelines, lowered prices, reduction in the number of blockbuster drugs shall all want us to be more flexible and more productive, while reducing the costs of drug development. These challenges shall be common to all big and small pharma and thus outsourcing would be an important way to achieve these goals," noted, Mukta Arora.

The drug major Pfizer also endorsed that there are many factors that go into sourcing decisions of large pharmaceutical companies. According to Dr Mohanish Anand, head, Clinical Research, Pfizer India, some of them are to maximise efficiency and effectiveness by focussing on mainstream business activities and partnering synergistically with external service providers or agencies for their expertise in the areas that fall outside their core competence. "Cost does play a part, but any outsourcing strategy always will focus on activities outside of core competence of the organisation," he added.

However, Novartis see outsourcing as an option to all large pharmaceutical companies to optimise the synergies available at different geographic locations. "Outsourcing activities at Novartis are aimed at improving the quality and efficacy of our services to fuel future growth and innovation. Cost is only one component that influences the decision to outsource and there are other factors such as availability of talent pool, raw material and infrastructure that play a role," said, Ranjit Shahani, vice chairman and managing director (MD), Novartis India Ltd.

Whatever may be the logic behind Big Pharma and other multinational pharmaceutical companies' decision to outsource their R&D, clinical trials and manufacturing activities, Indian pharmaceutical companies, contract research and manufacturing organisations amongst its competitors in Japan and China have a lot benefited from this trend. "Indian companies have benefited in multiple ways right from access to technology, expertise and basic advances in science. This is not considering the revenue flow that has resulted from above mentioned services as well as relationships that have been built over the years," said, Utkarsh Palnitkar, Industry Leader - Health Sciences, Ernst & Young.

Also, Satish Reddy, MD and chief operating officer, Dr Reddy's, admitted that Indian pharmaceutical industry has benefited from the recent outsourcing wave. "We see that there has been an increase in the share of outsourcing to the Indian contract research and manufacturing services (CRAMS) providers over the past few years. The benefits have enabled the Indian CRAMS players to gain a foothold in the global arena. This would enable them to build on the base and tap the opportunities in the global outsourcing market."

India - An outsourcing meadow
While major foreign pharma players are in the race of closing down their manufacturing and other facilities across the globe as part of curtailing costs and stripping down through outsourcing, their counterparts in India are busy expanding or setting up newer manufacturing, R&D and other facilities to garner more and more outsourcing deals.

India is gaining a distinctive advantage over other developing countries such as Japan and China as the sought after locale for outsourcing activities, thanks to availability of skilled work force and talent pool at cheaper costs, large treatment naïve population, plenty of US Food and Drug Administration (FDA) approved manufacturing facilities and stringent compliance to good manufacturing practices and good laboratory practices. However, it is not easy to get the exact amount of outsourced works to India, as most of the deals are signed under confidentiality disclosure agreements.

The prominent service providers in India offer a gamut of services in drug discovery, clinical trials, drug development activities, manufacturing and formulations, pre clinical trials, bioinformatics and lab services. To its credit, a couple of domestic players like Dr. Reddy's Laboratories, Divi's Laboratories, Nicholas Piramal, Dishman Pharmaceuticals, Shasun Chemicals and Pharmaceuticals, Vimta Labs, Lambda Therapeutics, Lotus Labs, SIRO Clinpharm, Quintiles Spectral, Syngene, Jubilant Biosys, Suven Life Sciences, GVK BIO and Chembiotek have already made their mark as outsourcing partners of choice in different segments of pharma business.

In recent times, big Indian players have successfully managed to grab some significant outsourcing deals. In the words of Hitesh Gajaria, sector head, pharmaceuticals, KPMG India, MNC interest in Indian pharma space has increased considerably across all segments and in particular the outsourcing of R&D operations and manufacturing. "India has now become a global outsourcing hotspot as several MNCs are outsourcing/off shoring their non core drug development and manufacturing operations to India. This trend has given a significant boost to India's research and manufacturing activity."

"In the last few years, the Indian CRAMS industry has grown at an attractive double digit rate and will continue to do so in the near future as well. Several Indian companies are now tilting their business portfolios more towards the CRAMS segment. Players are deriving significant benefits as they diversify their business models from the traditional generics segment and move up the pharma value chain and attain higher and more stable business margins. Indian companies have already successfully managed to garner a considerable share of the global outsourcing pie. The share of Indian companies in the global pharma manufacturing market is expected to go up to 22 per cent by 2010," he added.

Also, Malvinder Mohan Singh, chief executive officer and MD, Ranbaxy, is of the view that India is fast emerging as an attractive destination for big pharmaceutical companies. According to him the global outsourcing industry is witnessing a gradual shift from western nations to low cost destinations like India because of its compelling advantages and the country is ideally positioned to become a partner of choice for outsourcing by pharma companies across the world.

"India has a power house of scientific talent, strong chemistry skills and cutting edge research and innovation capabilities. We are way ahead on the knowledge platform over many developed nations. Our country also offers significant cost advantage in innovation and manufacturing, maintaining high levels of productivity. These inherent strengths are attracting and compelling big pharma players to collaborate with leading Indian companies to churn out new drug molecules and this trend is likely to continue," he said.

However, Malvinder Mohan Singh also fosters a feeling that there is a long way India has to go to reach at the top of global outsourcing market. "The Indian pharmaceutical industry can pitchfork itself as a global hub for the manufacturing of bulk drugs, dosage forms, R&D, CRAMS, contract research organisations and the entire slew of upstream and downstream activities in the pharma business.

The global market for outsourcing is estimated to be around US $35 billion. India currently has an insignificant market share in global outsourcing but industry experts believe that the stage is set for a surge in India's share by 2010."

Most of the big players have scaled up their presence in this segment primarily through inorganic route - by acquiring companies in the West, especially in Europe. This has benefited these companies with the increase in the customer base and stronger customer relationships - an integral factor contributing to the success of a CRAMS player. Large companies are also faster at adopting newer technology and gaining specialised training and building high quality infrastructure.

Of late, India has also received acclaim from global pharma players as a favourite place for outsourcing activities. "India is surely amongst the top 2-3 favoured destinations for outsourcing. As the experience and capabilities build up, we would hope to see more of the outsourcing work coming to India. The language skills, scientific acumen, availability of young workforce and the enthusiasm to learn will benefit the cause. The success of the first few partnerships and projects will be crucial to catalyse this further," said, Mukta Arora of Eli Lilly.

Endorsing a similar view, Ranjit Shahani of Novartis India said: "India is among the top five as an emerging outsourcing destination but we still have some way to go to reach the top rung."

Sourcing trends
In tandem with the country's emergence and growing reputation as the sought after locale for outsourcing activities, India has also witnessed different outsourcing models gaining ground and fading away in its soil. "If we go over the evolutionary pathway of outsourcing contracts, we find that they have moved from catalogue ordering to fee for service to preferred vendors to risk sharing and milestone based to strategic alliance to integrated offerings/co-development. Today milestones are fixed and payments are made contingent to achieving the said milestones," noted, Utkarsh Palnitkar of Ernst & Young.

"In India, there is a noticeable trend towards local subsidiaries of innovator MNCs scaling down their captive manufacturing capacities and relying on domestic pharmaceutical companies to meet their requirements for active pharmaceutical ingredients (APIs) and intermediates. Another trend in outsourcing being observed in case of global generics is that of offshoring. Companies like Teva, Sandoz, Ivax, Pliva and Ratiopharm have either acquired capacities or invested in setting up their own manufacturing facilities in India. This model helps in bringing down the manufacturing cost," he added.

As the global outsourcing market evolves into a more matured one, several more outsourcing models are expected to burgeon in line with the changing needs. Though, currently large pharma companies' outsourcing activities are by and large limited to their non core functions, it is only a matter of time they ventured into outsourcing of primary core functions. For instance, Mukta Arora of Eli Lilly does not think that outsourcing primary core functions would be detrimental to the interests of a company.

"The definition of core functions is changing rapidly today. There are examples of telecom companies outsourcing their networking operations, which was considered core only a few years back. The whole idea is to best leverage the opportunities available within the company and the outside environment to return best value to the shareholders," noted, Mukta Arora.

With large pharma companies expecting to outsource their primary core functions in the long run, it is wise for the Indian players to revamp their business strategies and move up the value chain. However, Indian players are not advised to lose generic mindset in an attempt to become an outsourcing partner of choice.

Pointing out that India need not be worried about its generics mindset in the wake of outsourcing opportunities, Hitesh Gajaria of KPMG said, "India is predominantly a generics player in the global pharma market place and are rapidly expanding their presence in both regulated and semi regulated markets. Although the domestic companies are simultaneously expanding their presence in newer segments, especially CRAMS, new chemical entities (NCE) and novel drug delivery systems (NDDS) research, with the tremendous opportunity in the global generics market, generics will continue to remain the mainstay of the Indian pharma industry for the next few years."

Moreover, global generics market offers a significant opportunity as most generics markets worldwide are set to report double digit growth on the back of growing support of respective governments and rising generics penetration.

Contentious issues
Notwithstanding the strides India is making in the global outsourcing market, there are a few contentious issues that should be addressed on war foot to take foreign players into confidence. No doubt that the introduction of product patents in Indian patent legislation in 2005 has helped the country find a place in the good books of foreign players as a trusted ally for outsourcing activities. But, the industry players feel that much has yet to be done to strengthen the country's intellectual property (IP) regime to establish India as a preferred outsourcing partner of choice.

"The IP and regulatory environment is quite favourable to outsourcing but the key barrier is the implementation of the IP laws. The government should ensure that IP protection is enforced to provide further confidence to the innovator companies," said, Satish Reddy of Dr Reddy's.

Expressing a similar view, Utkarsh Palnitkar pointed out that with the amendments in patent guidelines, India has aligned its IP system to global standards. "India is a part of the pharmaceutical R&D value chain as is evinced by the presence of MNCs who are trying to tap the India advantage. However, implementation of IP is the need of the hour. India has all the relevant guidelines in place. Strict enforcement would go a long way in assuaging fears of the innovator companies."

Even the Indian arms of Big Pharma admit that the country's IP regime has improved a lot post 2005 and they are indeed vigilant on how far the country succeeds in implementing it. "There is a considerable progress that India has made since 2005. We are going to see how the legislative changes translate into actual practice. We are optimistic about the future," said, Mukta Arora of Eli Lilly.

On Novartis India's part, Ranjit Shahani said, "As far as the pharmaceutical industry is concerned, we have done well to introduce product patents in 2005. But we need to significantly align our IP laws with the international laws in place as well as introduce data protection so as to have an environment that is conducive for research and development as well as for clinical trials."

Hinting that a strengthened IP regime would cast a spell on large pharma companies to outsource manufacturing of new products, Mukta Arora said, "The core of a pharma company is the intellectual property that it holds. Each new drug costs nearly about a billion dollars and the costs are spiralling upwards. Thus, there is a concern in terms of protecting that property. As the IP laws get strengthened in the emerging markets like India, this shall change."

It is also sad that the country is yet to resolve some regulatory issues pertaining to data exclusivity and confidentiality. Since outsourcing R&D, manufacturing and clinical research are all sensitive to IP and other regulatory regime, its high time that the authorities concerned paid heed to concerns of industry players and initiated steps to address these issues. However, while it is a must that the regulatory authorities take necessary steps to address the contentious issues, the country needs to do much more to attract more outsourcing deals.

"The ability of domestic players to garner more outsourcing deals compared to China and other competitors will be a culmination of several factors combining together, such as stronger IP regime, efficient execution of contracts, ability to maintain long term partnerships, improvement in infrastructure and technology platforms, increasing technical expertise of CRAMS players in new and more niche segments such as biosimilars, etc.," said, Hitesh Gajaria.