India: Big Pharma's New Promised Land?
For years, software companies have known that they can slash costs by hiring eager, smart, and inexpensive programmers and engineers in India. Following in software's footsteps, corporations providing telephone support and back-office services soon saw the virtues of India's well-trained workforce as well. Now, Big Pharma is discovering the same benefits, as multinationals such as Pfizer (PFE ), GlaxoSmithKline (GSK ), Bristol-Myers Squibb (BMY ), and Novartis (NVS ) tap India's research and manufacturing prowess to cut costs and speed development of new pharmaceuticals.
That's a big change for India. Foreign drugmakers have long shunned the country because of its lack of patent protection and blatant copying of drugs. But on Dec. 22, the Indian government introduced a bill in Parliament that would bring India's intellectual-property protections in line with international norms. "India's changing regulatory environment is coinciding with the pharma majors' increasing need to trim costs and boost productivity," says Gautam Kumra, a partner at McKinsey & Co. in New Delhi.
The trend is still nascent. So far, India's drug-outsourcing market amounts to just $470 million. But it's expected to grow 30% a year, hitting $800 million by 2005, according to Bombay brokerage Kotak Institutional Equities. The growth will come from the efforts of companies such as Bombay's Nicholas Piramal India. On Dec. 9, Advanced Micro Optics, a Santa Ana (Calif.) maker of eye-care products, hired Nicholas to produce eye drops and tablets for contact lenses. The pact is proof of the company's "ability to meet stringent quality and time requirements for the export market," says Chairman Ajay Piramal. Now, Nicholas has a dozen similar deals in the pipeline.
A host of players are entering the outsourcing game. Hyderabad-based Divi's Laboratories does custom chemical synthesis for Merck, Abbott Laboratories, and Glaxo and makes generic anti-inflammatory and anti-arthritic formulas for other firms. Bulk drugmaker Matrix Laboratories has seen its outsourcing business grow fivefold, to $10 million, in one year. In Bangalore, Biocon has 300 scientists doing contract research, up from just 25 in 2000, after sealing deals with Pfizer, AstraZeneca, and Bristol-Myers Squibb.
It makes sense for pharma companies to look to India. Indian scientists are well-trained yet earn about a third of what their Western counterparts make. India has more pharmaceutical facilities approved by the U.S. Food & Drug Administration than any foreign country. And many of the 122,000 chemists and chemical engineers that India graduates every year have traditionally found jobs reverse-engineering patented drugs. Now, as India tightens its patent laws, its pharma companies will be looking for ways to keep both researchers and manufacturing plants busy.
In their eagerness to cut costs, some multinationals are even willing to set aside old grievances. Although New Delhi-based Ranbaxy Laboratories in March successfully challenged Glaxo's patent on the antibiotic Ceftin, in October Glaxo hired Ranbaxy to research molecules that may become the building blocks for drugs. The deal "fits naturally with our other collaborations around the world to complement our own resources in drug discovery," says Mencef Slaoui, a Glaxo senior vice-president.
Similarly, Novartis has hired Hyderabad-based Dr. Reddy's to research a diabetes molecule despite an ongoing lawsuit over a generic version of Novartis' antifungal cream Lamisil. AstraZeneca, meanwhile, has established a $10 million R&D facility in Bangalore that will focus on developing cures for tuber- culosis. While expansion in India represents just a fraction of these companies' global business, the share is growing fast as India becomes competitive in yet another knowledge industry.
By Manjeet Kripalani in Bombay