This article was contributed by PharmARCians, and was first published in www.pharmabiz.com.


BANGALORE, September 13, 2007- Contract services can be defined as providing certain services to a customer at a cost. The customer typically outsources one or more activities to a vendor for various reasons such as non-availability of resources, focus on core competence, improved efficiency, and so on. In the pharmaceutical domain, various activities in the value chain starting from drug discovery to commercialization could be outsourced to a contract service provider.

Pharmaceutical industry is constantly undergoing change. Not long time ago, the pharma companies did everything in-house and restrict access to information or resources to third parties. However, the situation is changing rapidly; in-house resources are getting exhausted with a very thin product pipeline and in addition many drugs are going off patent and thereby hampering company sales and competitiveness. Increasing cost of drug development (~$1 billion and 10 - 15 years for a new drug) is also eating into the profits. This emerging situation has led pharmaceutical companies to look at various avenues that could reduce the cost and increase the efficiency such as contracting out activities to service providers.

India is the star destination when it comes to offshoring /outsourcing of pharmaceutical activities and is way ahead of its nearest rivals China, Malaysia and Czech Republic. AT Kearney Offshore Index clearly put India ahead of all its competitors due to its strong mix of low costs and significant depth in human resources. Contracting services in India has gradually moved up the value-added chain from being the providers of intermediates and APIs to new drug discovery and clinical research. India's competitive edge comes from its availability of vast talent pool which is well trained, English-speaking and inexpensive. This competitive edge is further reinforced by the favorable economic policies of the country.

Pharma / Biotech value chain and contract services offered:
The Pharma / Biotech value chain could be broadly split into three phases viz, Discovery phase, Preclinical/Clinical phase and Commercialization phase. India started from the commercialization phase (Contract manufacturing) and is gradually moving across the value chain by offering clinical research and drug discovery. The potential contract services that emerge out of the value-chain are Drug Discovery/Contract Research Services, Preclinical/Clinical Research services and Contract manufacturing (Pharma / Biopharma) services.

Contract services market:
Indian contract services market (Drug Discovery/Contract Research Services, Preclinical/Clinical Research services and Contract manufacturing services) is approximately $ 6.85 billions of which the majorchunk(>90%) is coming from the Contract Manufacturing Services (Pharma / Biopharma). The contract services market in India is estimated to grow at a CAGR of 20% and touch $35.7 billion by 2015. This translates into increase in the share from 3% to 9% in the global market. Within the Indian contract services market, the share of contract manufacturing (pharma/biopharma) is estimated to come down to ~77% while the share of drug discovery and clinical research is expected to increase from 6% to 16% and 2% to 7% respectively.

Drug discovery:
Drug discovery in simple terms is the identification of disease target and discovering the suitable drug to treat the disease, which is a highly knowledge intensive industry. Drug discovery consumes about 35% of total drug development cost and 3-5 years of time. Increasing time and money for drug discovery has led to outsourcing one or more activities of drug discovery.

This is an emerging sector in India. This sector is estimated to be almost half a billion dollar industry and has captured 11% of global offshore market in 2006. The projected supply potential of India is estimated at $5.8-6.2 billion against a projected demand potential of $11-12 billion by 2015. The current demand-supply gap between India and global offshore market is currently at 88% and is projected to decrease up to as low as 48% by 2015.

Global demand for drug discovery activity stands at $23-25 billion, which is about 35% of total global R&D spending in 2006 by pharmaceutical and biopharmaceutical companies. Drug discovery spending is projected to reach $50-53 billion by 2015. The spiraling R&D costs (increasing by 50% for every five to seven years) led to finding strategic options in drug discovery. The first option was outsourcing, which followed by offshoring to Asian countries like China and India where the talent pool is abundant and also offers significant cost advantage.

India's proven ability in chemistry is fuelling drug discovery research sector. This is coupled with other drivers of offshoring such as declining scientific work force in the western world and increasing cost of development, world class IT and synthetic chemistry skills and cost advantage makes this sector very attractive.

Preclinical/clinical Research services (CRO):
Clinical Research Organization (CRO) manages a research or an investigation to assess the toxicological and clinical effects of an investigational drug. CROs were primarily organized as outsourcing outfits to manage clinical trials. They have evolved over time and expanded their service offerings that are complex in nature and are critical to the very success of the drug. In recent years, drug companies have become increasingly reliant on CROs. This is quite evident from the increase in the head count of clinical research personnel by 6% from 2001 to 2004 among major CROs, while drug companies' head count remained flat.

In 2006, India captured about 11% of global offshored market of clinical research, which stood at $150-250 million. The sector is estimated to grow at a CAGR of ~30% and touch $2.4-2.8 billion against a projected global demand of ~$28-30 billion by 2015.

China and Russia are the nearest competitors to India in the clinical trials space. India has edge over China with respect to relevant expertise to conduct clinical trials, which is considered as a qualitative advantage. In comparison with Russia, India has a bigger patient pool and better infrastructure besides cost advantage.

Clinical research sector in India is in its growth phase and is expected to achieve a significant share of global offshore clinical research market. The key drivers of this sector such as availability of patient pool, well qualified and experienced investigators, availability of infrastructure are in India's favor, hence, the sector looks quite promising.

Contract manufacturing services (CMO):
Contract Manufacturing Services include manufacturing of Pharmaceuticals (API, Intermediates & Finished formulations) and Biopharmaceuticals. Contract Manufacturing Organization's (CMO) offer manufacturing services with small size manufacturing during pre-clinical R&D to large scale manufacturing during commercialization. CMOs were primarily organized as outsourcing outfits to manage cost effective manufacturing of drugs. Over time the CMOs have expanded their service offerings to development services, custom primary production, physical processing, clinical lot manufacturing, formulation development and packaging services to support successful commercialization of drugs.

In 2006, India captured about 5% of global offshored market of contract manufacturing (pharmaceuticals/biopharmaceutical), which stood at $ 7.35 billion. The projected supply potential of India is estimated at $30 billion against a projected offshore demand potential of $118 billion by 2015.

Manufacturing sector is a capital and technological intensive process. The manufacturing of pharmaceuticals/biopharmaceutical products requires high level of expertise and GMP standards. Given the fact that India has highest number of USFDA approved manufacturing facilities next only to the US, this sector is way ahead of other destinations. Moreover, the newer companies' (especially biotech) primary focus is on discovering newer drugs/medication and does not have the manufacturing capabilities and might not have resources to set up one as it is highly capital intensive (approx. $ 20-$500 million.) and time consuming (18 to 48 months). Hence, most of the biotech companies focus on their core expertise of drug discovery and outsource the manufacturing to a third party by transferring the technology.

The innate advantage that India brings in terms of availability of workforce, cost advantage is further reinforced by India Inc.'s experience in this space.

Overall the contract services market is expected to be one of the key industries in the pharmaceutical domain. However, there are certain critical factors that need to be addressed to ensure the longevity of the growth such as retaining the cost advantage, improving service qualities, customer protection & confidentiality and IP protection.

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