Outsourcing of pharmaceutical APIs, intermediates and dosage forms is not a new business. For many years now, pharmaceutical innovator companies have seen manufacturing and custom synthesis (manufacture of material for clinical trials) as non-core to their overall growth and profitability aspirations. However in the past few years, a mix of many different factors including shrinking pipelines, lower approvals of FDA drugs as well as implementation of price controls have forced pharma companies to embark on aggressive cost cutting initiatives. This provides a significant opportunity for Indian API and dosage form companies to become key partners of the global supply chain of companies.
Today the world pharmaceutical manufacturing market is worth about US$50 billion. Of this $15 billion is outsourced, in a ratio of 2:1 for bulk and formulations.
Bulk continues to be a significant portion of outsourced manufacturing. However this market is growing at a relatively low 2-3% per year while the formulations outsourcing market, while smaller is growing at a more aggressive 12-15%. It is expected that the overall outsourcing space will about $30 billion by 2010.
Established custom manufacturers worldwide face challenges across the entire pharmaceutical product lifecycle. On the one hand, the pipeline is scarce with the number of NCEs launched reducing as well as reduction in probability of molecules crossing from preclinical to phase1/2/3. Juxtaposed to this is the reality that with mature molecules and those off-patent molecules, cost considerations become greater, bringing into play low-cost suppliers from India and China.
Opportunity for India
The message is clear. Pharma companies while looking for new suppliers for formulations custom manufacturing will be looking to improve efficiencies by shifting their existing sources of bulk (which are largely in Europe as well as the US) to newer partners in low-cost nations. India is well positioned to avail of this opportunity that is emerging for the following reasons:
" Production costs are far lower than those in Europe/US
" QA and regulatory systems have advanced such that we now have many FDA approved plants (about 75, second only to the US)
" Strong reputations developed by many organizations within India as low-cost high quality and reliable suppliers of APIs and intermediates
" An IP policy, which is now in line with world expectations
" Advances in IT and telecom making communication easier resulting in a true "level playing field"
" Strong Chemistry and process engineering capabilities
In generics, this shift has already happened. However over the past few years many mid and large sized innovator pharma firms have begun to aggressively leverage India as a sourcing base. This is expected to grow substantially over the next few years as big pharma seek out "preferred suppliers" in India to partner with over a long term.
India, with an established pharmaceutical industry and experience in working with Western European and US quality standards, is in a stronger position than countries like China in this regard. This can be seen by the fact that the top 10 Indian pharmacos all have strong traditions of quality-led exports of bulk and formulations to developed markets as well as a strong network of successful alliances. Compared to this the top 10 Chinese companies are all State-Owned-Enterprises (SOEs) and produce more bulk chemicals and vitamins. Formulations capabilities in China are limited.
In summary, India is a compelling destination for custom manufacturing for the following reasons:
" Labour costs are 1/7th of US labour costs (and more compared to European costs). The total cost reduction is typically 30-40% while adhering to world class manufacturing standards
" Chemistry: India has a pool of trained chemists 6 times as large as the US and at 1/10th the cost. These chemists have been trained in process innovation in order to compete in the tough Indian retail pharmaceutical industry where prices are amongst the lowest anywhere in the world
" Capital Efficiency: Access to low-cost, high-quality project material and skills allows Indian companies to typically reduce plant set-up times by almost 40% compared to the US and Europe
The above reasons are sustainable in the long run and hence the attractiveness of this market opportunity.
How can India make good this opportunity?
The Indian industry needs to improve on a few key parameters to be able to ensure they succeed in this space. They are:
" Pick your lane: Many Indian companies want to do early-to-market, patent-busting generics as well as partner with innovator companies. These are untenable models as one cannot both collaborate as well as compete with one's partners.
" A well-developed IP policy within the organization as well as a track record of supporting IP. This must also be backed by the Government and judiciary implementing the IP policy with speed and fairness
" Custom manufacturing is a lot more than just making bulk drugs. One has to build capabilities across the entire process. Right from technology transfer to commercialization (with regulatory and QA support) communication with the customer is key. Hence a programme management approach would be key to its success. Proactive responses and adherence to timelines become critical.
" Ensuring highest standards of Safety, Health and Environment. In addition to QA systems, innovator pharmacos will critically evaluate our SHE systems, which will have to be in line with world standards.
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There is much to be done, but the benefits will be well worth the investment and effort.
The Future
While India has much strength, the big European and US custom manufacturers have built strong reputations and relationships with customers that is based on quality, reliability, technology and trust. The custom manufacturing company of the future is one that has capabilities across three geographies, namely, Europe/US, India and China. An organization with such a footprint will be able to tap into the strengths of each while augmenting the relative weaknesses.
It is believed that time is ripe for such alliances. The opportunity continues to be considerable and the piece of the pie huge. There is also a very good case for consolidation and M&A activity. It is clear that such alliances are mutually beneficial to the shareholders of both organizations and is the future of this space.
It is clear that despite political pressures surrounding outsourcing, it is here to stay. The view that it results in job-losses is a narrow and short-term view. With the world becoming increasingly flat, with the aid of improved telecommunication, technology availability and education, the future is about how a global supply chain works most effectively. In fact outsourcing is a win-win situation for both service providers as well as the outsourcing nation, as indicated in a McKinsey Global Institute study.
(Authors: Ajit Mahadevan, vice-president, Strategic Planning
(International) & JC Saigal, executive director (International), Nicholas Piramal India Ltd)