India has gained currency as a popular sourcing base for many manufacturing multinationals, but pharmaceutical transnationals have had India low on the priority list because of lax patent laws.
But two factors offset the flaw: the sheer cost advantage and the increased thrust on research and development by Indian companies.
One of the main emerging target areas would be sourcing of bulk actives and intermediates from India by global generic manufacturers due to cost advantages, said V V L N Shastri, country head Firstcallindia Equity Advisors.
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The bulk industry in India has more than 800 local manufacturers and a lots of them have world-class skills in chemical synthesis and process engineering.
Salaries, infrastructure costs and equipment costs are also low, at times lower by more than 50 per cent. Even the bulk drug for mature, stagnated molecules can cost up to one third the cost as against the US, analysts said.
"But despite the research being sourced out of India, it will be a while before products are also launched in India, due to the patent law structure," said an analyst with a private equity research firm.
The export of bulk actives and intermediates has risen by about 15 per cent in the last three years. Currently it is about $500 million and is expected to reach about $1800 million by 2010.
Bulk drug consumption is currently estimated to be around $25 billion, of which nearly 40 per cent is manufactured by multinationals. "The most exploited for exports would be the mature molecules rather than current blockbusters," says Shastri.
Many Indian companies have managed to get the US FDA approval for their manufacturing facilities. Ranbaxy is currently selling antibiotics in its generic version in US markets. While Morepen is to supply loratadine in bulk form to Geneva Pharmaceuticals, the Swiss company granted 180 day exclusivity after patent expiry of loratadine.
While R&D costs are 75 per cent lower, labour costs are lower by 80 per cent than in the US. A qualified person in India can be hired at 20 per cent of the prevailing rate in the US. Even purchasing raw material from markets like India, can ensure lower manufacturing costs.
Plus the size of the Indian population makes a huge pool of patients available in India for various clinical tests, helping in the development of products.
Another window of opportunity for MNCs in India now would be sourcing of formulations for exports to other markets. Cost of manufacturing generics are about 45 per cent lower than manufacturing costs in developed countries such as the US.
Several FDA-approved facilities also have good manufacturing practices (GMP), a certification for the manufacturing facility given by the World Health Organisation.
As a start, both Dr Reddy's and Lupin have tied up with PRI in the US to gain access to regulatory and marketing capabilities for selling bulk actives.
Another option with MNCs to expand operations in India would be to acquire a local competitor. This would allow MNCs to acquire process engineering skills, help in cheaper manufacturing, give the company an experienced sales force.
It would also give the MNCs a local reputation and a presence in export distribution lines in some selective markets.