A First Hand Look at India's Pharma Services Sector

Of all the questions I get from contract services providers about industry trends and developments, the most commonly asked one focuses on the threat of competition from contract research organizations (CROs) and contract manufacturing organizations (CMOs) in India and China. Even when companies are not feeling immediate competitive heat, the long-term prospect of having to face off with low-cost emerging market competitors, especially those in India and China, is always a top-of-mind concern for CRO and CMO executives.

Jim Miller

To gauge just how big and immediate the threat of Asian competition is to Western service providers, I traveled to India in December 2010, where I attended CPhI India and visited several CROs and CMOs. My friend and colleague, Mak Jawadekar, known to many in the industry for his role in outsourcing activities at Pfizer, accompanied me and provided invaluable introductions and insights.

This was my first opportunity to see the Indian pharmaceutical industry first hand, and I came away very impressed with the quality of the operations, the technology, and the entrepreneurial zeal of the industry leadership.

Targeting generics

Without question, what impressed me the most is the big bet the Indian pharmaceutical industry is making on the opportunity presented by the expiration of patents in the next few years. Most of the generic-drug companies I visited have 20–30 products in development for which they anticipate filing abbreviated new drug applications in the next several years. The US and European markets are major targets for their generic products, but these companies ship products all over the world and have significant sales in Africa, Latin America, and other Asian countries as well.

The generic-drug companies are in high-gear and are investing in large state-of-the-art manufacturing and development facilities to meet the anticipated demand. One executive of a CMO of active pharmaceutical ingredients (APIs) I talked with cited a figure of an anticipated three-fold increase in unit volumes for generic APIs and formulations. The new manufacturing facilities that these generic-drug companies are building are impressive; facilities of 200,000 ft² or more with state-of-the-art design and equipment are typical. In addition to the new facilities springing up around Hyderabad, the traditional center of the Indian pharmaceutical industry, large, new pharmaceutical clusters are being developed in areas, such as Vizag, a coastal city in Andhra Pradesh state, and Ahmedabad, in Gujarat. State governments are setting up special economic zones with subsidies and tax incentives to attract development to these centers.

One of the most interesting characteristics of these facilities is the predominance of equipment made within India; the displays of the Indian equipment manufacturers at CPhI India were truly impressive. One brand new injectables facility we visited had vial washing and prep equipment made in India, fillers made in Europe, and a freeze dryer made in China. The availability of high-quality locally made manufacturing equipment is an important source of cost advantage for Indian manufacturers as it lowers their capital-investment requirements.

Contract development and services are a significant part of the business for these generic-drug companies—around 30% in some cases—but they are not the driver of their near-term growth strategies. Contract services are viewed as a way to leverage existing capacity, build relationships, and support a deepening scientific base. However, the focus of these companies is on the opportunities in generic drugs, and I don't see them becoming a disruptive force in the CMO industry in the foreseeable future.

The big risk to the CMO industry is that the generic-drug companies may be building too much capacity as they each seek to cash in on the patent expirations. If this proves to be the case, we could see some Indian generic-drug companies turn more aggressively to contract manufacturing to fill their underutilized facilities. Were this to happen, it could create pricing chaos in the CMO industry and put European and North American CMOs at a considerable disadvantage.

Formulation CROs face challenges

In addition to the manufacturers, we also visited dedicated contract services companies offering discovery, API process development, and formulation-development services, along with clinical-scale manufacturing. These companies are largely targeting Western bio/pharmaceutical companies as their key clients, although they are finding clients within India as well. The impression left by these companies was decidedly mixed. Some reflected a high level of sophistication and understanding of what Western companies are looking for and expect, and others offered barebones facilities that generally wouldn't pass muster with prospective clients from major bio/pharmaceutical companies.

The performance of these services-only companies varied by service offering. Those offering discovery and process development services appear to be doing quite well while those offering formulation development and early-stage clinical trial material (CTM) services are not as robust. The global bio/pharmaceutical companies began turning to Indian and Chinese CROs for discovery and process chemistry services almost 10 years ago, and several of these companies have emerged as world-class service providers. We visited the Hyderabad campuses of two of industry leaders in chemistry outsourcing, GVK Bio and Aptuit, and came away impressed with the sophistication of their leadership and quality of their facilities and operations.

The challenge for the formulation development companies seems to be two-fold: the local market for CTM is somewhat limited by the fact that bio/pharmaceutical companies cannot conduct first-in-man studies in India, and expenditures for early formulation-development services are so low at most Western companies these days that the expected cost savings from going to India are minimal. Near term, we think those companies are going to have to establish a laboratory presence in the Western markets to capture that early-phase business, with the intention that the products can be transitioned to Indian facilities as the products approach commercialization. Longer term, the formulation-development CROs will benefit as global bio/pharmaceutical companies establish more R&D operations in India and source more of their needs locally.

My overall conclusion is that India is building a base for a strong local contract services industry in the coming years. The threat for Western contract development and manufacturing organizations (CDMOs) and CMOs is small in the near-term, but as global bio/pharmaceutical companies target this fast-growing market, Indian firms will be well-positioned to seize the opportunity.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, info@pharmsource.com, www.pharmsource.com.