This issue’s question for our resident outsourcing guru:

I have had two separate opportunities to accompany Pfizer’s senior management – including two Presidents of Pfizer Global R&D (Dr. John LaMattina and Dr. Martin Mackay) – to India. While there, we managed to arrange a few Key Opinion leaders (KOL) meetings so that we had a chance to explore opportunities for this ’emerging market.’ We also had a chance to have a meeting with the President of India, Mrs. Pratibha Patil. She was very interested in knowing how global pharma companies like Pfizer could help patients in India get access to the modern medicines. We also conducted some partnership meetings with many Indian companies during the Bio Asia 2009 Conference in Hyderabad. Based on those experiences, I offer some perspectives about potential prospects for the Indian Pharma and outsourcing industry.

A rising global acceptance of generics, coupled with increased outsourcing of manufacturing by “Big Pharma” to lower-cost locations, has benefited the export-focused Indian pharma companies. This has led to increased contract manufacturing volumes outsourced to India, as well as certain partnerships and alliances by multinational companies (MNCs) with quality Indian majors. Companies such as Aurobindo Pharma and Claris Lifesciences have entered into alliances with large pharma for specific products, including upfront license fees.

India-focused pharma companies will continue to benefit from steady domestic growth, with a consequent overall boost in volumes and capacity utilization. Pricing pressures – due to a greater-than-expected increase in competition – could offset some of the anticipated improvements in profitability.

Competition could arise from both existing players as well as new entrants into the generics space. This remains a key risk factor for future margins. Regulatory issues could also have an impact, primarily with regard to approvals for new products and any tightening in quality controls.

The majority of Indian pharma companies have completed much of their capacity expansion programs, and will likely spend the next year or two consolidating their recently expanded facilities. Large future capacity additions appear unlikely over the near term. Although higher utilization levels and strong demand growth will continue to drive revenue growth, margin benefits could be offset in future by adverse currency movements, heavy competition, and/or price erosion in key markets.

The global pharmaceutical industry is facing a period of significant drug patent expirations, which substantially expands the addressable market for generics companies. Regulatory steps taken by developed countries towards curtailing growing health care budgets have also contributed to the increase in demand for generics. As global pharma companies sharpen their focus on the generics market, we will see greater outsourced manufacturing volumes in order to control costs. This could occur either through higher contract manufacturing volumes, or through longer-term relationships/alliances.

India is well-placed to benefit from this shift, with the country’s strong manufacturing base – both in formulations, as well as in key areas (bulk drugs and APIs). India has the highest number of FDA-approved plants outside of the U.S. The Indian domestic pharma industry is expected to continue to grow at near-double-digit rates during 2010. Many global financial firms have predicted that rising purchasing power and increasing penetration of health insurance reform will support strong growth in India’s domestic formulations business in the long term.

The partnership agreements are generally long-term supply contracts for generic products for regulated and unregulated markets, and may or may not include up-front licensing fees. Large pharma’s incentive to enter into alliances arises from the benefits it derives from a readily-available generic product portfolio with necessary approvals in place. It enables the global firms to make up for some of the erosion in revenues and profitability from their dwindling product pipelines .

For the large pharma companies, these contracts – in addition to the up-front licensing fees that cover the cost of R&D – provide long-term revenue visibility. Indian companies benefit from the fixed profit margins in the highly competitive and price-sensitive generic market, and are able to leverage the strong, established distribution networks of the global Pharma companies. Deals/alliances like these are likely to increase in future; as patent expirations accelerate more Indian companies will be targeted for their portfolio of generic drugs and their capability to contract manufacture drugs at competitive low cost. This would in turn provide generic players with access to newer markets and assured revenue streams.

This is not to forget clinical research, the other pharma outsourcing sector making strides in India. We are seeing relatively modest size BA/BE service providers now launching into Clinical Phase studies. We also note significant growth in PK/PD/Toxicity study undertakings by some smaller firms. I expect a lot more improvement in their progress ahead in a few years!

Makarand (Mak) Jawadekar most recently served as Director, Portfolio Management and Performance at Pfizer Global R&D, until February 2010, when he opted for an early retirement after 28 years at Pfizer Inc. He currently serves on several companies’ advisory boards and also consults with bio/pharmaceutical companies for global outreach in emerging market regions. He can be reached at mjawadekar@yahoo.com.