Pharmaceutical industry is undergoing a radical transformation globally due to increased pressures on profit margins, absence of blockbuster molecules, spiraling R&D costs, pricing pressures, and increased overheads. In such a scenario, outsourcing of business processes to third-party providers is a viable strategic option 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 or capacities are inadequate or they can be better utilized for value added tasks and to capitalize their own internal strengths.

Worldwide contract manufacturing and research for the pharmaceuticals industry was estimated to be worth $ 175-200 billion by 2010. Of these, contract manufacturing of APIs, dedicated intermediates and prescription drugs was estimated to be around $ 46-50 billion, contract manufacture and supply was for over the counter (OTC) and nutritional products expected to cross $100-125 billion by 2010 whereas contract research market in 2010, will be in the range of 25-35 billion, as estimated by market researchers.

India has over 30,000 pharmaceutical related business units existing today, over 70 million English speaking population, produces more than 125 thousand masters and 10,000 PhDs, in chemistry and pharmaceutical related fields, more than 60 FDA approved manufacturing facilities and with an estimated emerging generics market of USD 60-70 billion. In 2005, Indian contract research and manufacturing business in pharmaceutical sector is estimated at less than $550 million whereas the global opportunity was in the range of $110-115 billion.

Currently, Indian companies in CRAM space enjoy limited marketing investment and quality of production capabilities. The industry segment can be spilt into five broad further fragments such as in-licensing alliances, generics and API manufacturing, contract research & process development, co-marketing alliances and an emerging area of herbal medicines. Typically in the contract manufacturing space, there are three distinct areas of expertise emerging: Contract manufacturing of older (off-the hill) generics and old molecule manufacturing, manufacturing of specialized generics and manufacturing of patented drugs and custom synthesis (small to large scale manufacturing) and manufacturing.

The Indian companies continue to show their excellence in developing APIs. By entering into strategic alliances with large generic companies in the world for off-patented molecules in one hand and through contract manufacturing agreements with innovator companies for supplying complex under patented molecules, on the other.

Recent trends suggest the areas and products which are being outsourced from global partners include practically all pharmaceutical activities. Even though basic R&D for discovering new candidate drugs are largely carried out in-house by most major companies, development and supply of chemical libraries for screening, scaffolds, chemical synthons and reagents used as building blocks for new molecules are subjects for outsourcing.

Apart from becoming a global player for contract research, custom production and manufacturing of intermediates and development of candidate drugs for pre-clinical, clinical testing and clinical research are also areas where major strides are possible. Partnering for developing NCE's by outsourcing to India offers tremendous cost advantage without sacrificing on quality.

All major pharmaceuticals have already established a large network of these CROs (Contract Research Organizations) and CMOs (Contract Manufacturing Organizations) all across India. In the world of CRAMS, countries like India and China are often compared as both the countries have been doing very well in convincing its partnersas preferred destinations. Though cost continues to play the key role, a certain distinctive and niche areas of competence and role is however emerging and at times, being highlighted to address the growing competition between these two countries. According to surveys, Indian companies in general are being perceived to have distinctive focus for late-stage and complex intermediates, custom synthesis and process development, dosage form manufacture, increasing technical and managerial sophistication and better communication skills over its other competitive counterparts.

The contract manufacturing companies in India have their own shares of challenges and issues. Amongst the major areas of concerns 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 and proper communications. While some of these may fall under the category of perceptions, most of the real ones are not insurmountable considering the intellectual and entre-preneurial capabilities of Indian companies. Apart from these regular challenges ranging from consistent and timely supply of quality raw materials, Infrastructural availability and increasing tougher compliance requirements, developmental of skilled and IP respecting cGMP driven analytically competent workforce

Recently more and more exclusive or custom synthesis risk-sharing business models are being tried for fine chemicals and pharmaceutical companies. Such exclusive synthesis arrangements are generally carried out for "innovator" drug companies that are launching new products based on original research. If approved and successful, these products enjoy years of patent protection and profits, for both the drug company and the chemical company that supplies it with intermediates or active ingredients. But if products fail during clinical trials or are withdrawn from the market because of unforeseen complications, both parties must swallow the losses.

It is becoming important that the contract manufacturers realize their strength and their capacity to equip themselves in meeting the customer demand before venturing into serious engagements. They must collectively with their clients come up with innovative newer business models to counter the threats for which is emerging both from within the country as well as from outside. Proliferation of some CROs and CMOs 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. Many pharmaceutical companies are looking for more capabilities other than chemistry in the areas of environmental health and safety, scale up capabilities, better project management, systems to control the IPR etc.

One area of challenges facing these companies is the difficulty in retaining talents and minimizing employees turnover. It is a concern for many of the existing Indian companies particularly in the area of custom synthesis where continuity of interface and work is important.

Aggressive and Innovating ways of marketing will also play a key role to differentiate companies from now on as they will have to acquire new skills to operate globally.

Other areas of importance to be kept in mind are credible value addition while providing quality service, improvement of technical abilities, building global reputation and branding with experiences, communication skills, knowledge of specification / regulatory requirements, international quality systems, accreditation, track record of honoring and respecting intellectual property rights, adherence to timelines, building up of long-term partnership apart from being globally cost efficient.

Obviously, there are both adequacies and inadequacies in the Indian pharmaceutical sector today and it is therefore needless to add that Indian companies should start looking into inadequacies with greater attention and try to over come the constraints.

It is recognized fact globally that in future, the fate and progress of the pharmaceutical industries in any part of the world would be largely guided by the R&D capabilities and introduction of new molecules appropriate to the requirements of different regions. This calls for extensive and high level of research and development capabilities amongst the pharmaceutical industries.

Though the competition amongst the CRAM space companies are primarily based on cost, capacity, quality and timing of production factors such as proven track records, long-term relationships, regulatory capabilities for DMF fillings, Audit reports, EHS compliance, operational excellence etc also play important roles. In this competitive world, it is necessary for all Indian companies to excel. This is only possible if they rapidly build up the required infrastructure and implementation competencies. This will attain international recognition and acceptance only when trustworthy, reliable data generated by them shall be accepted by global regulatory authorities and the medical fraternity with an ease and comfort. This in turn shall be possible only when we consciously adopt ICH-GCP, GLP, GMP, GRP to GXP guidelines.

Some of the identified areas apart from usual improvements of basic requirements of any outsourcing works such as quality, timely delivery etc. on which Indian CRAM based companies are focusing on can be summarized as the followings:
1.Tie-up with research & professional institutes, government agencies for exchange of knowledge, services & commercialization for continuous development of skill base of its people
2.Improve on the response-time to business enquiry and future requirements
3.Invest in a relationship by out-of-the-way support for developmental quantities
4.Expand the skill set to handle increasing complexity in chemistry
5.Build and develop focused special technologies and platforms
6.Adopt and improve skills relating to communications and transparent modus operandi, wherever possible
7.Develop innovative models of "cost plus" multi-year supply arrangements and agreements with their potential customers
8.Identify right partnering model and move from 'supplier' to 'partner' relationship which will help in long term

Trends towards diveregence of CRAM model
Pharmaceutical outsourcing from India has been referred to by one acronym - CRAMS combining the research & manufacturing pieces. However, a deeper analysis reveals that the fundamental dynamics of the research and manufacturing components are gradually evolving into distinct business models each driven by a unique set of imperatives with some generic commonalities. The implications out of this is that the Indian CRAM space which is currently dominated by players who are present in both the legs of CRAMs would metamorphose into two distinct domains (in line with the global scenario) which would be dominated by different players in each domain.

Contract manufacturing (CMAC) is the dominant piece in India (as globally) and accounts for slightly more than 80% of the Indian CRAM space. However this in sharp contrast to the global scenario wherein contract manufacturing's share has been more than 95%. An added complication is that the contract research (CRES) segment is projected to grow at a much faster rate than the CMAC segment (again at divergence with the global scenario). The reasons for this disparity are not very difficult to fathom
.CRES as a business proposition is basically driven by the availability of skilled manpower at a reasonable cost. India, with its vast pool of English speaking chemistry graduates, presents enormous opportunities for aspiring companies to create an enterprise for CRES that would be sustainable on scale and quality. In simple terms, companies have been able to replicate the software services story here even though the magnitude of success has been lower.
.The Redundancy Push - Contract research services are typically offered during the early phases of the drug development usually until the commencement of the clinical trials. It is a well-known fact that very many molecules are screened before a viable candidate is obtained. Some estimates put that for every 5000 molecules screened only 5 hit the market (This varies based on the therapeutic area) A more interesting point to note here is that out of 20 molecules that enter phase I, about 20 hit the market. This means that the number of potential candidates have been screened down from 5000 to 20 during the preclinical phase itself. The implications of this is that there exists a huge redundancy factor (having a substantial cost impact) during the initial phases of drug development and innovator companies are under severe pressure to reduce the same. While one way to reduce the same is to increase the screening to market ratio, a more easier way is to perform these activities in cost effective destinations. Indian CRES companies easily fit the bill here.
.CMAC in India is primarily driven by pharmaceutical companies whereas in the global scenario, it was driven by chemical companies with much better credentials on the engineering front. This has been a bottleneck and many Indian companies are trying to grapple with the same.
.CMAC in India is currently driven by technology transfers (compounds that are already being manufactured at some other sites). The associated regulatory filings present a barrier for outsourcing of such compounds. With CMAC of NCEs coming into play (manufacturing sites of Indian companies would hold the first DMFs), these issues would not arise.
Quite a few companies in India offer both contract research and contract manufacturing services. While being a one-stop shop offers some advantages to theService Provider in the sense that he is able to offer a wholly integrated offering from research in milligrams to manufacturing in tons, sustainable scalability of both the legs could prove to be challenging. There were also some synergies perceived between contract research & contract manufacturing which are turning out to be not so huge.

In some cases, Customers prefer not to work with contract research partners for contract manufacturing of the same molecule as they are concerned that the balance would firmly tilt in favor of the supplier. The below table compares the key features of a CRES unit and a CMAC unit against various parameters.

The two domains highly differ in terms of requirements and characteristics on various fronts. A very clear difference exists with respect to the 'approach to capacity'. While CRES businesses can afford to operate on a more than 80% capacity utilization, CMAC cannot. This is because capacity (being determined by the number of people) is highly fungible in the case of a CRES outfit whereas for a CMAC outfit, fungibility of capacity would be highly product specific. For instance, a facility could be only 70% operated for a particular product but the remaining 30% cannot be readily accessed by a different product as the requirements may vary. Hence, a 'chicken before the egg' approach with respect to capital expenditure strengthened by a modular engineering approach with respect to the facility would best enable a CMAC company to address the lack of fungibility.

One more factor also supports the "chicken before the egg' approach to capacity. Even though outsourcing is strategically driven at most innovator companies, quite a few outsourcing decisions are taken based on tactical reasons. Internal pipelines may compete for capacity thereby leading to outsourcing of certain products. For such products, customers typically tend to work with the CMAC company which requires the least investment to execute the project. Such projects with an opportunistic nature could only be attained if a proactive investment approach is followed.

It is also very clear that the return profile is also very different in both the models. Return on investments (ROIs) tend to be lower in the CRES space as compared to the CMAC space. Gestation periods and thereby time to positive cash flow are also longer for a CMAC company thereby reinforcing the need for a higher ROI upon commercialization. This would mean that the return expectations of an Investor would be very different for a CRES company from that of a CMAC company. It is perceived that these factors would further accelerate the emergence of specialized players.

Trend in expectations - From tactical to strategic
Pharmaceutical based outsourcing industry in India is constantly evolving as a result of ever increasing customer expectations. Outsourcing contracts have been traversing a long path from 'catalogue ordering' to 'fee for service' to 'preferred vendors' to 'risk-sharing & milestone based' to 'strategic alliances' to 'integrated offerings/co-developers'.

Usually the innovator/ parent companies look out for outsourcing for the following reasons: cost effectiveness, flexibility, long-term sustainable access to external expertise, reduction of capital employment and thereby enhanced profitability.

Every company has also four possible choices:
1)Keep the project in-house (helps competitiveness and control risks completely)
2)Joint venture/partnership (helps keep control and shares risks and operational partial control)
3)Contractual outsourcing (non competitive, depended on the outsourced partner)
4)Spin offs (relatively rare but possible and extremely competitive, risky)
Usually these choices lead to activities envisaged on how a particular project under consideration is being outsourced and also decides on if this will be a totally, partially or non controlled and coordinated activity. Contractor capabilities, perceived risk factors involved in the project or compound being considered, technology and expertise requirements, impact on the pipelines and P&L of the innovator/parent companies often play a key role in these decisions.

Totally controlled outsourced activities often are driven by the operational teams and are treated as an extension of extended unit. This needs huge involvement and a lot of internal resource commitment from both the partners.

Partially coordinated activities also need commitment of clients and are often having common objectives and goals for the project being executed. Success of such projects actually depends on strategic/proactive allocation of resources from both parties rather than reactive allocations, which often plays a negative role in the process.

Non controlled activities are primarily cost driven. Often the requirements are not technically demanding and play low value addition roles at the client's priorities. Usually these arrangements have very little involvement and interactions between partners.

Interestingly, it has been observed and documented that operational /manufacturing personnel prefer to run outsourcing in a controlled manner and always give emphasis on the relationship with the partners whereas the procurement and finance counterparts would like to run with a hands off approach and often prefer performance and benefits driven outsourcing. Most companies are often fighting internally to achieve a good and acceptable balance between the two scenarios.

Indian CRAM service providers have slowly made their way into the strategic outsourcing initiatives of innovators (a gradual transition from a non-controlled to a totally controlled mode of outsourcing). An offshoot of this has been a much more rigorous and holistic evaluation of service providers, their growth plans, financial strength, risk management plans etc. Devising strategies to extract the full potential out of a relationship, ensuring perfect understanding between the technical teams from both the sides, ensure full knowledge transfer with respect to raw material sources & logistic requirements etc have become imperatives for outsourcing divisions within Innovator Companies. The gradual emergence of 'co-sourcing' is visible through such initiatives.

Trends of becoming global players
Indian CRAM space companies are also going global to expand their space of operation and for leveraging the value chain partners. These emerging activities are also exposing more number of companies in the west the value propositions of their Indian CRAM partners and also successfully addressing their concerns in areas such as IP and lack of control. The process of value chain optimization for companies focusing on core competences, lacking temporary as well as permanent lack of facilities, virtual companies, companies looking for lifecycle management of their products continues to open up newer opportunities to Indian CRAM space companies.

Indian companies are increasingly on the look out for mergers and acquisitions to strengthen their positioning in international markets and to expand offerings to their customers. They are seeking companies having better marketing presence and skill-sets in the western world and also by picking up stakes in companies in China and other low cost countries to bring in more value for money for their clients. Some of the examples of such acquisitions are Shasun Chemicals acquiring UK based Rhodia Pharma Solution from Rhodia group, France, Nicholas Piramal acquiring Avecia Pharmaceuticals & Pfizer's Morpeth facility from UK, Matrix Labs acquiring stakes in Docpharma, MChem from China etc.

Most of these acquisitions could be classified as "Know-How Intensive" -companies acquiring marketing portfolios, R&D portfolios with process IP etc. Complementarity of skills is the key here as such acquisitions are driven by the acquirer's perception that such know-how could be profitably capitalized upon through his Indian operations and thereby offer a value proposition to his customers.

Some acquisitions come under the "Asset Intensive" category. It would be puzzling to see Indian companies acquiring manufacturing facilities in developed countries where the costs are much higher. However, this time around the reasons are more from the seller's perspective. Quite a few companies in developed markets have had a strategic rethink on their CMAC business - a consequence of the formidable threat posed by low-cost countries. The outcome has been to exit/restructure their CMAC portfolio which would involve the sale of some assets. Diminishing business prospects would mean that such facilities are available at very attractive prices. Such facilities are technically sophisticated and Indian companies perceive value in such facilities as it would tremendously help them in upgrading their service offerings.

In India today, the contract manufacturing of APIs and intermediates continues to contribute 80-85% of the entire outsourcing business. India also offers outsourcing opportunities in areas such as drug discovery, clinical trials, drug development activities, manufacturing and formulations, pre-clinical trials, bio-informatics and lab services etc. It is believed that even if 10 to 12% of the global CRAM outsourcing is targeted by Indian companies by 2010, the potential growth of these industries is going to be substantial. However, Indian companies needs to work towards addressing the consistency issues with quality and reliability, IP and its protection issues along with improving technical skill-sets. This, by many industry experts today, is a very conservative estimate considering all the achieved laurels by the Indian companies, the emerging trends coupled with the mergers and acquisitions by Indian companies in the past couple of years.

(R Vipranarayanan is head, Project Management (CRAM Business) and & Dr Ashis Kumar Mukherjee is chief scientific officer at Shasun Chemicals and Drugs Limited, Chennai)