The Indian pharmaceutical industry has had a good run for the last couple of decades. Pharma companies built a strong capability to develop new processes for products launched in the West, which acted as a tonic for strong growth in the domestic market. Some companies also made a dent in the export market with products made from their alternative processes.

That engine of growth will grind to a halt by the year 2005, as India complies with product patents. With or without alternative processes, Indian companies will not be able to make and sell products patented by global players, unless they are licensed to do so. With licensing, the margins will not be as high as before - and it is likely that foreign drug companies will prefer to make and sell their products on their own through subsidiaries.

A new avenue
Not to worry. Indian pharma companies have found a new route to growth. It''s called contract manufacturing. Along with contract research, this avenue will ensure that these companies will be able to leverage their research and manufacturing capabilities and expand business in Indian and abroad.

There is one good reason why this should happen. The big global pharmaceutical companies have found that it pays to outsource manufacturing and focus their own resources on research and marketing. Hence the urge to contract the production of their products to those who can do the job cheaper.

Company after Indian company is entering the contract manufacturing and contract research business. Click here to see a list of Indian pharma companies that have entered contract manufacturing.

Contract manufacturing, also known as third party, or toll, manufacturing, is not an entirely new activity for the Indian pharma industry - but in the opposite way. Most large Indian companies have been farming out production of bulk ''actives'' and formulations to third parties (mainly small scale units) in order to circumvent the rigid Drug Price Control Order. Now they are learning to make stuff for others.

Globally, the trend for outsourcing pharmaceutical products like bulk drugs, drug intermediates, and formulations by multinational drug giants has gained ground for the past decade. As companies shift focus to high-end value-added operations like marketing, they are handing over the now not-so-lucrative manufacturing tasks to outsiders.

A big market
In 1997, outsourcing by global pharmaceutical majors accounted for a staggering $67 billion. In 1998, this figure increased by 10 per cent to $73 billion. According to International Medical Statistics, a premier market research organisation, half of the big pharmaceutical companies world-wide have moved towards aggressive outsourcing through long terms strategic alliances, while nine per cent of the companies outsource moderately. Only 31 per cent went for in-house capacity expansion in the last two years to cater to growing demand.

Some of the companies that outsource aggressively are American Home Products, Bristol Myers Squibb, Glaxo-Wellcome, Merck, Hoechst Marion Roussel, Novartis, Pharmacia and Upjohn, and SmithKline Beecham. Indian companies can tap those who do not have a local subsidiary. Others, with an existing Indian presence, are using their local subsidiaries to do what they find expensive to do at home. For example, Glaxo India is producing rantidine bulk for Glaxo-Wellcome Plc.

Outsourcing of patented drugs is a very lucrative market. Statistics show that of 65 ''new chemical entities'', or NCEs, introduced between 1994-98, bulk requirements for 35 molecules were outsourced, averaging $60 billion per year.

Further, according to IMS, there are 501 NCEs at various stages of development world-wide. Of these, 241 belong to companies that outsource aggressively. The development status of these 241 molecules indicates 82 in phase-one clinical trial, 97 in phase two, 48 in phase three, and 10 in the pre-registration phase. If we assume, conservatively, that the outsourcing value for each molecule is $500 million per year, we are talking of a whopping $120 billion per year.

India is eligible
The overall perception among pharma pundits is that bulk drug manufacturing will continue to migrate from Western Europe and the US to India and China due to their inherent advantages, such as low-cost manufacturing, easy availability of qualified workforce and lax environment laws that favour investment in these two countries.

India''s eligibility as a manufacturing base is evident from the recent decision of SmithKline Beecham Consumer Products Ltd, the Indian subsidiary of pharma major SmithKline Beecham Plc, to set up a Rs 250-crore manufacturing unit at Sonepat in Haryana. The 26,000-tonne facility is built with the aim of catering to the company''s global requirements of OTC, or over-the counter, products.

Many other multinational drug companies are creating or expanding their manufacturing operations in India. Click here for details on multinational pharma companies that have set up subsidiaries in India for product development and manufacturing.

If outsourcing for patented products is a big market, outsourcing for generics will be important too. Consider this: in the US, third party manufacturing accounts for $7 billion, or over a fourth, of the $30 billion sales of generics formulations.

A "moderate" (by Indian industry''s reckoning) shift of 30 per cent of the remaining 75 per cent, from in-house production to outsourcing will lead to a big boom in contract manufacturing to a tune of $8 billion dollars. This should, in turn, trigger a simultaneous boom in the bulk drug industry.

Not easy
Riding on the generics wave is not easy, warn experts. The global pharmaceuticals industry is under intense pressure from governments, national health services, health management organisations, and health insurance companies, which want to substitute low-priced generics for expensive patented medicines. As a result, many research-based companies are seriously eyeing the generics segment. Which means that the generics segment will see much greater competition than in the past.

Says Carl Fearn, commercial manager - chemical business unit, IMS Global Services, "Suppliers must be willing to ride the ''storm'' that can occur after a patent expiry as volumes may go up due to severe price cuts." Moreover, manufacturing agreements for generics would require high levels of investment for capacity expansion as qualitative regulations for generic drugs are equally stringent in the international markets.

Another important requirement will be timely commitment. For a blockbuster drug, it is estimated that a delay of one day can lead to erosion of $1 million dollar in sales. In case of generics, delivery is all the more important, as the first company to introduce a generic substitute can corner 60-80 per cent of the market. According to G C Saigal, president - manufacturing, Nicholas Piramal India Ltd, Indian companies should understand the fact that in order to align with a multinational, quality and reliability are the two most important factors.

In the case of multiple alliances, suppliers need to be careful in making their projections. The requirements of large companies may vary dramatically from those of smaller companies. In the end, the biggest worry for any manufacturing company would be the failure of the product in the highly competitive generic market. This could be disastrous if the company has invested in creating new capacities or upgrading existing facilities.

On the brighter side, if these deals click, manufacturers are virtually assured long-term supply arrangements. And, to top it all, there will be the possibility for the manufacturer to be a future partner. Ranbaxy made such an advantage when it tied up with Eli Lilly.

Adds Anand Apte, general manager, Merck Development Centre India, "Any small and medium-sized company can grow only to a certain extent on its own. After that, it must find itself a win-win relationship."

That''s exactly what most of the Indian entrants into contract manufacturing are hoping for.