Changing fortunes: Given the high costs of developing drugs abroad, big companies are turning to India. Swati Piramal's (above) company Nicholas Piramal is developing a patented molecule for Eli Lilly

Why is Lilly, which has better labs and vastly bigger R&D budgets, turning to a small Indian company to develop drugs for it? The answer has to do with what's happening in the global pharmaceutical industry. Finding blockbuster drugs has got a lot harder, even as costs of R&D and compliance have steadily climbed. Various estimates put the cost of developing a drug in the US at between $800 million and $1 billion. The Piramal deal, if it bears fruit, will be a steal for Lilly. Actually, it's just the sort of win-win arrangement that's fuelling the growth of an entire industry-that of outsourced contract research and manufacturing (cram). "Timeline, affordability and confidentiality are some of the factors working in favour of companies like ours," says S.P. Vasireddi, Chairman & Managing Director, Vimta Labs, one of India's leading clinical research organisations (CROs).

In 2005, the cram market was estimated, by ASSOCHAM, at $532.10 million, of which manufacturing accounted for 84 per cent and research the rest. The outsourced clinical trials piece, in comparison, was worth $100 million. If McKinsey's numbers are anything to go by, then the market is set to explode. The consulting firm expects revenues from outsourced clinical trials to touch $1 billion and cram to zoom to $900 million. "With an increasing number of cram agreements, the target is likely to be hit," says Anil K. Agarwal, ASSOCHAM's outgoing President. Agrees J.R. Vyas, Founder and CEO, Dishman Pharmaceuticals & Chemicals: "My company is looking at a 40 per cent growth in 2006-07."

Competitive Advantage

India's attractiveness as a global location for research and manufacturing is due to the local industry's long experience with reverse engineering. Given that the manufacturers have always had to come up with generic copies of drugs patented elsewhere, the only way they could survive was by cutting costs and improving efficiencies continuously. A relatively large and inexpensive pool of professionals in the industry has ensured that the competitive advantage remains. A vertically integrated supply chain and the presence of the largest number of us Food and Drug Administration (FDA)-certified plants (100 at last count) outside the us mean that the environment is ideal for Big Pharma and other generic giants to either set up shop in the country or tie up with established players. If you like numbers, the cost of manufacturing in India is 30-40 per cent lower than those of western countries and its labour cost is one-seventh that of the us. Besides, it has six times the number of trained chemists as in the US, available at one-tenth the cost.

Small wonder, innovator companies such as Pfizer have not just started sourcing products from India, but actually selling some of their manufacturing plants to Indian companies. Nicholas Piramal has Pfizer's Morpeth facility in the UK. But interestingly enough even smaller players have cottoned onto the act. Chennai-based Shashun Chemicals acquired Rhodia's pharma solutions business and Dishman purchased Switzerland's Carbogen Amcis and I03S last year.

With the acquisition of Pfizer's Morpeth unit, Nicholas Piramal has emerged as one of the leading custom manufacturing organisations in the world. It already has a long-term contract manufacturing agreement with Pfizer International for animal health products that fetches nearly 20 per cent of the company's revenues. "Going ahead we have a three-pronged strategy: capturing newer chemical entities, innovative and unique processes for late life cycle products and easy transition," says Michael Fernandes, Executive Director (Custom Manufacturing Group), Nicholas Piramal, who says sales from cram and clinical trials to be in the range of Rs 600-700 crore by the end of this financial year.

Dishman, which has nine manufacturing units in India, has plans of moving some of Carbogen Amciss large-sized contract manufacturing project work to its Ahmedabad facility. It is also one of the few companies that have set up shop in China and the UAE. Dishman's Shanghai unit will be up and running by December this year and the company is signing another JV for API manufacturing in Saudi Arabia. "We already import 70 per cent of our raw materials from China and in Saudi there are no bulk API manufacturers, so it makes sense," explains Vyas. Dishman is also looking at biotech and nanotechnology CROs and says it will acquire more companies in Europe in 2007.

Shasun Chemicals, which calls itself an "integrated research and manufacturing solutions provider", is consolidating its position with more focus on new markets, tie-ups, R&D activities and crams business. But the company's income through contract manufacturing and research is still small (7.5 per cent of total sales) compared to its revenues from bulk drugs and intermediates. Then, there are others like Divi's and newcomer Intas Pharmaceuticals who are carving out their own niches. "Western contract manufacturers generally specialise in large-sized manufacturing. However, we are working with products like cytokines and hormones, where scales of manufacturing are quite low," says Dhananjay B. Patankar. Intas also in-licences (like the Piramal-Lilly deal) nascent technologies or products and develops them through to clinical trials. "Eventually, we may license the product out again for commercialisation," says Patankar.

Some Way to Go

Despite the exponential growth expected in the contract manufacturing space, long gestation periods might test investor patience in the long term. That's because a significant amount of time and resources are required to develop MNC relationships and to comply with the regulatory requirements of various markets. "Intellectual property protection would always remain an important issue, apart from things like manufacturing standards, capacities, people, expertise and regulatory approvals," says Patankar.

While some Indian companies have already invested significant resources for relationship building (vindicated by increased flow of contracts to India), they may face initial teething problems related to delay in regulatory approvals, slower ramp-up from the MNC partners, and product withdrawals, among others. Some MNC pharma companies test the waters by awarding smaller contracts or by sourcing smaller volumes till they gain confidence in their Indian partner. Therefore, a couple of big wins may be required to gain confidence of MNC companies. The good news: the industry may not have to wait too long for that to happen.