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Article: Potential for Contract Manufacturing Organizations in India

June, 2017

Dr. Satyanarayana Chava, Chief Executive Officer, Laurus Labs, believes that India is already a pioneer in the generic drug manufacturing and can also become a world leader in the CMO business

The global pharmaceutical CMO (Contract Manufacturing Organisation) business is estimated to be around USD 50-60 billion wherein India’s share is less than ten percent. The CMO market is growing at double digit rate with India growing much faster than the global market. The factors leading to huge growth include increasing R&D costs for innovators, rationalization of manufacturing networks, and pressure on bottom lines.

Currently, contract manufacturing in India is focussed on late stage life cycle management, which essentially means outsourcing of products that are close to patent expiry. However, slowly India is moving up the value chain with contribution during pre-clinical, clinical and commercial stages.

While looking for an outsourcing partner, a customer would look for alignment with the global regulatory norms (USFDA/MHRA), proven cost advantage, expertise in chemistry, ability to scale up operations from Labs scale to Kilo Scale to Tonnes Scale, skilled manpower, infrastructure at par with the global norms, ability to offer full scale services, and ability to work on different business models.

Navigating through Challenges

India is one of the preferred destinations for contract manufacturing because of technical knowledge, availability of trained manpower, and cost advantage. However, currently India’s share in the global contract manufacturing business is low. There are a number of challenges that need to be overcome before India can become the most preferred destination for contract manufacturing. Some of these are related to scale of operations, regulatory challenges, political headwinds, lack of tax incentives, IP protection and legal system, and lack of self-sufficiency in basic chemicals.

Scale: As a country India is known as the world’s pharmacy and has large capacity at an aggregate level. India has a highly fragmented manufacturing base and market with very few players having large capacities on their own as compared to some of the western counterparts that are very big and have large capacities. Indian companies lack scale and thus may not be able to serve multiple product needs of the same customer. Given this is a capital intensive business, adding capacities is time consuming and customers may not wait for so long. A player with large capacity can attract multiple customers and the same customer for multiple products without having capacity constraints.

Regulatory Challenges: As mentioned earlier, customers are looking for regulatory compliant companies to engage in business relationships. Although India still has the largest number of USFDA approved plants outside the US and projects an image of a regulatory complaint industry, that image has however been severely dented in the last couple of years. A series of import alerts and warning letters have raised the regulatory risk profile of the Indian pharmaceutical industry. This would impact not only the short term business performance but also lead to questions regarding reliable supply from the Indian companies.

Overcoming regulatory challenges require interventions at every level of the organization. It could be strengthening the IT systems, building quality right into manufacturing and development, training employees, building capabilities of supervisors, and changing the mind-set and behaviour.

Political Challenges: Another challenge that the industry could face in the future is more political in nature. With growing anti-globalization, protectionist and localization sentiments across the globe, the current supply network could be disrupted. The potential customers may have to change their manufacturing network to comply with the country regulations. That could be negative for the Indian manufacturer since the customer may not be able to consolidate production and may have to divide the business among multiple suppliers across the world.

Lack of Tax Incentives: The industry needs to invest in new age technologies and build new capabilities to sustain competitive advantage over other countries. Countries like China and South Korea are investing heavily in building manufacturing capability for complex molecules and new technologies like biologics etc. To promote R&D in India, the government should provide tax incentives for companies investing in R&D. The weighted tax deduction for R&D expenses for the pharma companies has been reduced from 200% to 150% and it would be further reduced to 100% going forward. This does not bode well for the future of the industry.

At a time when government spending on R&D is low and university infrastructure is not up to the mark, the burden of research in new technologies has to be borne by the private sector. The government should support the private sector in acquiring knowledge and building capabilities for India to remain competitive in the changing environment.

IP Protection and Legal System: As part of its international commitments, India started product patents from 2005. This has certainly improved India’s investment attractiveness among many companies globally. However, as with many laws in India, the enforcement is poor. Although legal agreements are signed between innovators and CMO companies, the risk of intellectual property leak cannot be ruled out. In case of a breach, the legal system is expected to provide relief to the affected party. The legal system in India is slow and it can take years to get the final judgement on a case. By the time the legal case is completed it may happen that the product in question is no longer relevant and the party that breached the intellectual property has already benefited out of it.

If India were to emerge as a global leader in the CMO business, we need to establish dedicated IPR courts to fast-track intellectual property cases. The judgement should be given in a stipulated time and the penalty in case of breach should be proportionate to the profit made out of the unauthorized use of the intellectual property. This would provide confidence to the global community regarding security of their innovations.

Lack of Self-Sufficiency: Indian pharmaceutical industry is heavily dependent on imports from China for most of the key starting materials and intermediates. This dependence is only increasing with time. This impacts the supply chain flexibility and control on the supplies, which in turn could affect the reliability of supplies sold to the customer.

There is no short term solution to this problem and a holistic approach is needed to reduce our dependence on China for basic chemicals. This could include policy support to large scale vertically integrated plants, reducing capital investment through affordable land and financing, availability of utilities like power and steam at affordable rates, common effluent treatment plants, and enabling policies and regulations like rationalization of rates, removal of bottlenecks at ports etc.

It is not all gloom and doom in terms of CMO business in India. India is one of the fastest growing markets in terms of CMO business and a lot of opportunity still exists. By taking a few measures in the right direction, India, already a pioneer in the generic drug manufacturing can also become a world leader in the CMO business.

The opinions expressed in the article are the author’s own.