Indian Pharma -Value in proportion volume

As Indian pharma players continued to invest in existing facilities which turned into goody bags with the ultimate solutions of contact manufacturing outsourcing, multinational pharma companies tried to thrust their capex plans on new drug development. Usha Sharma reports…


India is a fast growing contract manufacturing outsourcing market valued at $1.1billion and is growing at a rate of more than 40 percent, which is thrice rate of the global market growth rate. Indian pharma market is the second largest producer of pharma products by volume and 13th by value,accounting for around eight percent of global production, and is highly fragmented. It employs around 5,00,000 people. Indian companies were quick to realise the opportunities in the global pharma manufacturing market and have undertaken significant investments in the last decade in creating capacities of global standards to serve the highly attractive regulated markets. At present, India has around 119 US FDA and 84 UK MHRA approved plants and accounts for one third of drug master files (DMFs) and highest number of Abbreviated New Drug Application (ANDAs) in the US. Ajit Mahadevan, Partner, Health Sciences Advisory Services, Ernst & Young, justifies the figures, "This is driven by its ability to create a differentiating cost value proposition powered by its lower manufacturing costs, skilled manpower and strong technical capabilities. India's share of the outsourcing market is estimated to grow from 2.8 percent in 2007 to 5.5 percent in 2010."

India, being a low cost manufacturer, will hold a significant market share in global active pharmaceutical ingredients (APIs) and drug product market. The facility and regulatory affairs (RA) are the two key areas where India is superior to China and many other developing countries. Most of the Indian pharma companies are spending negligible amount of investment in R&D, even though Government of India is supporting the pharma industry in the form of soft loans, grants and industrial institute partnership programmes. The Indian market for clinical research outsourcing was valued at around $200 million in 2007, according to a KPMG study nearly three times its value in 2001-02. It is predicted to reach a value of $500-$600 million by 2010, with a 15 percent share of the global clinical trials market in the following year. Whereas, worldwide revenues for pharma industry Contract Manufacturing and Research Services (CRAMS) were estimated at about $150 billion in 2008 and will grow at an average annual rate of 12 percent over the next five years. Within this total, the global market for contract manufacturing of prescription drugs was estimated at about $40 billion in 2008. The over-the-counter (OTC) medicines and nutritional products sector will show the fastest growth.

Enhancing existence pavilions

"Today, there are a number of Indian pharma companies who are geared to meet these standards. Also, Government policy should be favourable to industry. Indian pharma companies should lay more and more emphasis on quality and cost to maintain an advantage globally"
- Nikunj Kanakia
CMD
Lifeline Industries

"As big pharma companies continue to jostle with the challenge to maintain growth and contain cost, outsourcing is likely to become a compulsion than more of a strategic choice and India with its manufacturing prowess and inherent advantage of talent, cost competitiveness, ability to maintain global quality parameters"
- Ajit Mahadevan
Partner
Health Sciences Advisory Services Ernst & Young

India is rated highest in terms of cost efficiency among prominent manufacturing locations in Asia and Eastern Europe. The manufacturing cost in US FDA approved plants in India is 65 percent lower than in US and 50 percent lower than in Europe. Indian pharma companies, being low cost manufacturers coupled with skilled manpower and strong technical capabilities, have an excellent opportunity to play as contract manufacturer outsourcings (CMO) for global pharma companies. Indian companies have broader global presence because of their low cost manufacturing, strong chemistry and mathematics in reverse engineering, large pool of technically qualified English speaking workers and high quality products. Seeing CMO's prominent growth prospect in the industry, K C Jindal, President-R&D Formulations FDC, highlights the key points , "The recent economic meltdown in developed nations have promoted generic prescriptions that may facilitate the growth of Indian generic drug manufacturers operating in regulated markets. We are well-advanced and non-inferior to Western countries in terms of manufacturing technologies, facilities and understanding of regulatory requirements of developed markets. Biotechnology is another area having tremendous growth potential where further attention is required, as currently, India is far behind even from China."

Adequate number of manufacturing facilities already exist in India to meet the current requirements. Many big Pharma companies have under utilised capacities, whereas plants of small companies need to be upgraded. Beside R&D, areas which need continuous nurturing include quality systems, analytical capabilities and Intellectual Properties Rights (IPR) management. Indian companies should respect the IPR of global players and their domestic counterparts. Although the number of patents filled by Indian pharma companies is increasing steadily, still lot needs to be done to encourage innovation.

He further says, "Contract manufacturing would help in terms of optimum capacity utilisation for big pharma companies. Global pharma companies are in trouble with falling new chemical entity (NCE) productivity, short product life, rising regulatory hurdles and greater generic competition. Further, due to economic melt down, both innovator and generic companies in US and Europe are facing un-precedent pricing pressure."

In the long run

Investment in creating capacities needs to meet stringent global quality parameters such as US FDA, UK MHRA etc., which is imperative for Indian players to serve the high value regulated markets. However, the decision to either upgrade the existing facility or create a greenfield facility is dependent on multiple factors such as target market, capacity required, technology employed, category of products (cytotoxic and many biological products require a separate standalone facility), tax and fiscal incentives (in SEZ and dedicated pharma zones), etc.

Vikram Gupta, Chief Operating Officer, IndiaVenture Advisors, positively comments, "Whenever, there is a choice between building a new facility and expanding from the existing facility, the natural choice will move towards returns on investments perspective. It would be in terms to expand the existing facility due to fewer regulatory requirements, synergy of resources; overheads can be upgraded from the existing facility (utilities, administrative costs, storage capacities, indirect manpower etc.), faster execution of projects-typically expansion of existing facilities—is much faster as compared to setting up from scratch because incremental set up takes much lesser time as compared to setting up everything new. Utilisation of existing logistics network, a new location would require setting up of warehouses and transportation support for raw materials and finished goods.

He continuous however that a new facility construction may be mandated due to unique technology required to manufacture the products, availability of specialised skills only in select geographies, special incentives in tax free zones, and confirmed long-term orders at decent prices for products requiring specific design of manufacturing facilities and environmental and regulatory requirements.

Jindal comments, "In coming three to five years lot of drugs are going off patent in the highly regulated developed markets. Since, India has the largest number of US FDA plants and we adhere to international regulatory norms more effectively as compared to our competitors, we see India emerging as a major hub for pharma manufacturing."

Mahadevan avers, "As big Pharma companies continue to jostle with the challenge to maintain growth and contain cost, outsourcing is likely to become a compulsion than a strategic choice, and India, with its manufacturing prowess and inherent advantage of talent, cost competitiveness, ability to maintain global quality parameters, etc is well positioned to be at the forefront. The recent outsourcing deal between global pharma majors and Indian pharma companies for supply of generic drugs are an indication of the same."

"You cannot get the benefits and you have to upgrade on regular basis to keep pace with the ever evolving demand. Moreover you have experienced hand to take care of the plant and market as well"
- Vijay Singla
President Drugs
IOL Chemicals and Pharmaceuticals

"Contract manufacturing would help in terms of optimum capacity utilisation for big pharma companies. Global pharma companies are in trouble with falling new chemical entity (NCE) productivity, short product life, rising regulatory hurdles and greater generic competition"
- K C Jindal
President
Research and Development Formulations
FDC

"Whenever, there is a choice between building a new facility and expanding from the existing facility natural choice will move towards returns on investments perspective. It would be in terms to expand the existing facility due to fewer regulatory requirements"
- Vikram Gupta
Chief Operating Officer
IndiaVenture Advisors

Vijay Singla, President-Drugs, IOL Chemicals and Pharmaceuticals, says, "We believe in upgrading existing facilities over building new facilities without actually investing substantially in upgradation. You cannot get the benefits and you have to upgrade on regular basis to keep pace with the ever evolving demand. (CLARIFY)Moreover you have experienced hand to take care of the plant and market as well."

After seeing global pharma companies' business strategy, Mahadevan analyses the trend that, "The positive outlook justifies the investment by Indian players as they prepare themselves to emerge as the partner of choice for global pharma companies. The current period can be regarded as the nurturing and expansion phase for Indian companies as they are investing significant capital in creating world class capacities. The next five to six years would witness Indian contract manufacturing players reach an inflexion point as the scale of contract manufacturing is likely to increase manifold. Moving ahead, investment in R&D, quality control and environmental, health and safety (EHS) functions would be critical to attain global competitiveness."

The companies would invest in creating visibility and showcasing their strengths globally. For Indian contract manufacturing players, the ability to break-even quickly and earn returns on investment will depend on multiple factors such as size and depth of product portfolio (complex product will attract higher margins), ability to secure large and multi-year contracts, ability to manage multiple vendors, ability to contain cost etc.

Dr Kamal K Sharma, Managing Director, Lupin, optimistically syas, "Pharma outsourcing is a synergistic effort, and requires skills and expertise, both on the part of the outsourcer and the service provider. It calls for the availability of a highly skilled scientific manpower, discovery chemistry, reverse engineering skills, and a commitment to quality factors that lend to the development of the industry as a whole. Knowledge gained does not only help the outsourcer, but also aids in the maturing and evolution of the Indian players, sharpening and honing their research abilities and imparting valuable know-how. All these factors together point to the blooming of a culture of innovation that is being witnessed in the Indian industry today."

He goes on to say, "As such, there is no threat of outsourcing harming Indian players, but in fact the contrary. The expertise gathered through this exercise, combined with increased revenue inflow, will enable Indian players to further invest in R&D — both for the generics and innovative segment. Thus, outsourcing will only help boost the 'innovation processes in India'."

Therapeutically growth driven

Jindal tries to explain therapeutics growth move, “The result of lifestyle modification in developed nations is evident with increasing risk of cardiovascular, metabolic and psychic disorders. These areas can be considered as thrust areas for Indian contract manufactures. There are certain therapeutic areas like cytotoxics, beta-lactam antibiotics, sex hormones, immuno-suppressants and aerosols whereas in western world it would like to preferably outsource the manufacturing facilities for drug products and APIs due to environmental and safety issues. The low cost advantage of Indian manufacturer will attract multinationals for contract manufacturing.” He further highlights that, global projects on HIV/AIDS fetched large contract manufacturing orders for anti-retroviral drugs due to cost advantages. There is absolute necessity for upgradation of existing facilities that should get approved from Western drug regulatory agencies so that there is adequate capacity utilisation. However, new facilities may have to be created in niche areas like cytotoxic, hormonal and pulmonary drug delivery products. In the domestic market, anti-infectives have the highest contribution (19 percent) to the total domestic sales. Cephalosporins, penicillins and quinolones are key drug classes among anti-infectives. Gastrointestinal and cardiac are the second and third largest therapeutic categories, respectively. Oral anti-diabetics and anti-peptic ulcerants are the fastest growing segments under alimentary and metabolism therapeutic categories.

Cholesterol reducers have emerged as a key class of cardiovascular drugs in the last few years. Anti depressants accounted for about 15 per cent of the total revenues of the central nervous system (CNS) segment in 2007-08. Around 40 percent of disease burden globally is contributed by top five therapeutics areas—oncology, cardiology, anti-infectives and diabetes.

Cancer accounts for an estimated 7.6 million deaths globally. The oncology pipeline is the richest in number and potential in value, with a large number of pharma and biotech companies focusing on oncology drugs. About 30 percent of all launches in 2010 are expected to be in oncology. The global oncology drug market is growing at 17 percent annually. Presently, the Indian oncology market is expected to be at US$ 30 million.

"Between 1990 and 2005, a large number of global fine and specialty chemical companies restructured and downsised their operations. The traditionally integrated players in the western world saw merit in focusing on specific aspects of business and outsourcing all non-core areas, manufacturing in particular"
- Mahesh Malneedi
President
Makro Group

"As such, there is no threat of outsourcing harming Indian players, but in fact the contrary. The expertise gathered through this exercise, combined with increased revenue inflow, will enable Indian players to further invest in R&D - both for the generics and innovative segment"
- Dr Kamal K Sharma
Managing Director
Lupin

Recently, Indian companies have been focusing on new emerging areas such as biosimilars, oncology and other such drugs which are considered tough to manufacturer due to their complex nature and high skill required.

Oncology is the largest and one of the fastest growing therapy areas in the country and moreover has the highest number of active investigational new drugs (INDs). Biologics has the third-highest number of active INDs present in the pipeline. India has nascent capability in these areas currently since they require higher investment and highly specialised technology. Indian companies have identified the need to augment its capabilities in oncology and biologics. Currently, India has 200 companies working in the area of biotechnology with an emphasis on vaccines and bio-services. There are over a 100 national research centres in the country that support these activities.

Singla said, "Amongst the many therapeutic areas that might prove extremely profitable for Indian pharma companies anti-diabetic, anti-ulcerants and analgesic drugs are witnessing high growth in demand worldwide, and with many international patents, are completing their term in near future, which will make companies like ours to capitalise upon the vast opportunities. We had foreseen this scenario long back and have been preparing for the same with our expansion plans that include increase in production of Ibuprofen and setting up new plants for the production of proton pump inhibitors (PPIs), which will commence commercial production soon."

India is already one of the top players in global generic pharma industry. In order to sustain this position and be ahead in race, there is a need for constant investment in R&D. Indian domestic market is also steeply growing and hence pharma manufacturing in India may have better future than present day scenario.

Manufacturing capabilities

Presently, India accounts eight percent of the global pharma production activity making it the world's fourth-largest pharma producer. Around 64 percent of the total outsourcing is constituted by active pharmaceutical ingredients (APIs), wherein the country is ranked the third-largest player worldwide with 500 different APIs. Indian has a well established manufacturing base in formulations where it manufactures 60,000 packs across 60 therapy areas. The size of Indian pharma industries has been reported as $17 billion in 2007-08 with export consisting of nearly 52 percent of total market. In India, approximately 270 research based pharma companies and 8,000 small generic companies make a highly competitive market that produces high quality medicines at low cost than any other country.

Mahesh Malneedi, President, Makro Group, shares his views on the development of CMOs in India, "Between 1990 and 2005, a large number of global fine and specialty chemical companies restructured and downsized their operations. The traditionally integrated players in the Western world saw merit in focusing on specific aspects of business and outsourcing all non-core areas, manufacturing in particular. This opened up new avenues for many traditional Indian pharma companies with under-utilised capacities and expertise. Consequently, in the late 1990's, contract manufacturing activity jumped, though growth has slowed subsequently. More recently, India has emerged as an alternative research base for global pharma companies."

Driving competition

Though India is already established as a low-cost manufacturing base with significant technical and manpower capability driving its growth, it is important to realise that 80 percent of the industry is still based out of Europe and US and they would continue to pose a challenge for India. In addition, China has also been investing in building capability and will influence India's standing, in the medium/long term. Jindal says, "We need to upgrade our existing manufacturing facilities to the international standard. A number of facilities need upgradation both software and hardware to meet cGMP requirements of regulated markets. New facilities may be created in niche areas like oncology, hormone and pulmonary drug delivery products."

Setting up new facilities due to the above reasons can lead to superior returns on investments because of capital efficiency of Indian companiesas it offers attractive returns to Indian companies as they are able to reduce the up-front capital cost of setting up a project by as much as 25-50 percent due to access to locally fabricated equipment and high-quality local technology or engineering skills. Indian companies have been able to establish US FDA standard plants at approximately 50 percent lower capital costs as compared to US or Europe based manufacturing units.
Lower costs of production: The basic production cost in India is up to 50 per cent lower than that in the US there is 30 to 50 per cent lower depreciation,
FDA approved plants can be constructed in India for 30 percent to 50 per cent lower costs, leading to higher utilisation of equipment due to improved processes. There is 85 to 90 per cent manpower cost savings, and all savings are applicable across all hierarchal levels (eg, operators, research scientists, etc), and improved, more efficient processes contribute to lower labour costs per unit.
There is also 40 to 50 per cent savings in raw materials as bulk drugs can be manufactured in-house at 40 to 50 per cent of ethical cost, excipients and intermediates can be sourced locally at 20-30 per cent lower costs, and most other raw materials can be sourced internally and from China.


Looking ahead

Gupta avers, "In my view the Indian pharma manufacturing companies need to do the following to retain their position in the global pharma market namely—continuous upgradation of existing facilities, continuous training of the manpower, innovation in processes and technology, take advantage of economies of scale by creating optimal size capacities and continue with M&A activities across borders.

Nikunj Kanakia, CMD, Lifeline Industries speaks on the same line, "We should create facilities that are world class and meet global standards, in line with international regulatory norms like the US FDA, Australian-TGA, UK MCA, and EMEA. Today, there are a number of Indian pharma companies who are geared to meet these standards. Also, Government policy should be favourable to industry. Indian pharma companies should lay more and more emphasis on quality and cost to maintain an advantage globally."

"Indians enjoy an in-depth process understanding, revere se engineering skills, a technological bent of mind, combined with a large untapped talent pool which will further enable Indian players to have a competitive advantage vis-à-vis other countries. With global efforts to reduce healthcare costs, we are witnessing increasing instances of global giants outsourcing their R&D operations to India," ends Sharma.