India Outsourcing Opportunities

India Outsourcing Opportunities: Why India has an edge on helping Big Pharma produce the next generation of wonder drugs
A Taipan Publishing Group Strategy Report
By Ajit Dayal, Contributor, Taipan Publishing Group

The tables have turned for Big Pharma, and how! These top global companies, responsible for bringing about a revolution in new drug launches in the past decade, now seem to be in need of some serious revitalization. Increasing R&D costs, low R&D productivity, impending patent expirations -- and at the same time, pressure to reduce healthcare costs -- are causing a serious dent in revenues and profitability, compelling them to cut costs and shore up earnings.

However, one man’s poison is proving to be another man’s pill. This has translated into a huge outsourcing potential for a low-cost destination like India.

India Outsourcing Opportunities: Problems Aplenty for Big Pharma

While the 1990s was a golden era for new and innovative drug launches globally, there has been a marked slowdown since the turn of the century. And the U.S. FDA is not making matters any easier. After the Vioxx debacle, it has become stricter than ever in the approval of potential drug candidates, requiring companies to provide more data with regards to the safety and efficacy of potential drugs. And the result is obvious -- a slowdown in the approval of new drugs.

But this is just the tip of the iceberg. The rise of generics, which has proven to be a boon to governments and patients alike, has not gone down well with global innovator companies. It has led to the sales of their blockbuster drugs taking a pounding on patent expiry. These problems needed to be tackled on a war footing, and quickly at that. Enter low-cost destinations like India. With the help of these countries, global pharma companies are effectively killing two birds with one stone. They are not only outsourcing stuff like manufacturing and clinical research, but are also focusing on their core R&D activities with a renewed vigor.

India Outsourcing Opportunities: India Has That Edge

India’s key claim to fame is its low-cost advantage. In fact, in a dialogue with the management of a leading Indian pharma company, Indian labor costs are around one-seventh that in the U.S. India has six times the number of trained chemists in the U.S. at a tenth of the cost. Also, Indian companies have been able to set up U.S. FDA-standard plants at around 50% lower capital costs as compared to U.S.- or Europe-based manufacturing units. These are compelling numbers indeed. What also lies in its favor is the fact that, outside of the U.S., India has the largest number of U.S. FDA plants.

A majority of the Indian pharma companies are present across the value chain and are able to provide end-to-end capabilities right from custom chemical synthesis (CCS) to formulations. This gives them an edge over their U.S. and European counterparts. In India, contract manufacturing is still in its nascent stages with the market size estimated at US$300 million. This market is expected to grow more than three times its current size by CY10 alone (Source: IBEF).Outsourcing has gained critical importance in the generics space as well given that generic companies vie with each other to provide medicines at the cheapest possible cost. Indian generics companies have established a considerable presence in the U.S. market, and relishing this, generics players from around the world have been forging tie-ups with Indian companies for their supply requirements.

India Outsourcing Opportunities: Making Its Mark in Research, Too

Contract research has also been featuring increasingly on the radar of Indian pharma companies. Consider these numbers: For every 10,000 molecules screened, an average of 250 enter preclinical testing, 10 make it through to clinical trials and only one is approved by the FDA (Source: The Economist). Also, due to the FDA’s requirement for a larger scope of clinical trials, researching and developing a new drug costs three and a half time more than it did 15 years ago. In the entire R&D chain, clinical trials are the most expensive and time consuming. This, we believe, will bolster outsourcing of clinical work to India.

When it comes to doing custom-manufacturing work for global innovator companies, Piramal Healthcare and Dr. Reddy’s are certainly at the forefront. While Cipla has made a mark in establishing itself as a preferred player when it comes to doing contract manufacturing for generics companies, Biocon has been witnessing a strong traction in its contract research business.

Having a business model that emphasizes outsourcing will be an important exports strategy for domestic companies who do not have the required scale to compete directly in the global generics market or for those who do not want to compete in the generics market. While acquiring customers and maintaining relationships with them is of prime importance, the strong growth witnessed by Indian companies focusing on this area only reinforces the fact they will emerge as a force to reckon with in the future.

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Originally published August 21, 2008.

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Copyright 2007-2008, The Taipan Publishing Group and Taipan Daily, 808 St. Paul St., Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.

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