Local pharma can and should step up outsourcing play

In the late nineties, when big pharmaceutical companies starting feeling the burden of over-sized research units in the face of a dwindling pipeline of molecules, they started looking at ways to source manufacturing at lower costs and to farm out semi-skilled chemistry work to Indian companies.

Back then, Indian firms, soaked in the success of generic drugs business, were hesitant and looked down on the prospects of aligning with multinational companies for vanilla manufacturing pacts.

But over the decade, inhibitions were shed and companies started working in tandem.

The earliest to take the plunge were the likes of Dishman, Divi’s Labs, Cadila Healthcare and Shasun.

The lure of having strong, assured revenue flows over long-term contracts attracted attention from large companies like Piramal and Dr Reddy’s.

Jubilant Organosys, earlier known as Vam Organics, completely transitioned to a pharmaceutical services company in a span of five years.

Dozens of other smaller units sprouted on the horizon and the outsourced manufacturing industry stands at $1.5 billion today. With growth upwards of 40% annually, more and more players are getting magnetised.

The latest to announce an entry is Aurobindo Pharma. Aurosource, the new division of Aurobindo, endeavours to capture business from large drug makers across the entire chain of business from pre-clinical data work to helping with know-how for regulatory filings. It put forth a simple logic.

The worldwide outsourcing business is over $50 billion and Indian companies have not cornered even 4% of that large pie. With nearly a dozen big and small manufacturing bases and expertise in developing hundreds of generic drugs, there could be a big opportunity waiting to be tapped by Aurosource.

The secret to succeed will, however, be in getting the cost-efficiency and ensuring good, enduring relationships. A few companies may have gone for ambitious delivery targets and come almost close to spoiling future business prospects. Bad word in business spreads faster. At the lower end, again, there could be many who may not be passing the global quality standards. Also important will be to scale higher into sharper value added technology platforms.

In the US, companies like Codexis have developed platform technologies that have helped companies reduce the number of stages needed to get the final yield. This gives two advantages: lesser time to arrive at the final product and lesser costs.

For contract manufacturers, it will be important to look at full-fledged contracts than work on smaller piecemeal projects. For large companies, managing too many vendors is seen as a big drain on resources and they are looking at fewer companies to deal with, essentially those who have large manpower in the labs and large manufacturing capacity. Remember, Pfizer, as part of its cost-saving exercise, had gone on a vendor pruning programme about a year ago.

WuXi of China has set an example in large-scale manufacturing, but being too commoditised has not worked in its favour.

Indian companies are confronted with one other mighty problem. Most go out in the market to offer similar services. Though there could be a range of sub-sects to work on, they replicate the same expertise, undercut and ultimately kill each other.

One good example of distinguishing itself is Cadila Healthcare. Years ago, the company set up a joint venture with Byk Gulden, which later became Altana and is presently called Nycomed, for manufacturing large volumes of pantoprazole. The success of this joint venture led Cadila to forge its next deal with Hospira, a large injectables company. Injectables is considered to be higher up in the value chain and the margins are stronger.

At a time when big companies are cutting thousands of jobs but do not want to let up on it pipeline, Indian companies can look at developing a strong bonding with foreign companies who are showing increasing appetite to come to India. Also Lonza, one of the best known contract manufacturers, has developed tremendous skill sets, which brings to it great companies like Teva.

Biologics could be another area waiting to be grabbed but quality will play a key role here.