Strategic Analysis of the Indian Pharmaceutical Contract Manufacturing

Market

Presenting Opportunities for Market Share Gain

Aiswariya ChidambaramSenior Research Analyst - Healthcare

Areas of Contract Manufacturing

Indian Contract Manufacturing Market Value Chain

25%

15%20%

55%

15% 15%

0%

10%

20%

30%

40%

50%

60%

Discovery API development

Dodage development

API manufacturing Dosage manufacturing

Packaging

Extent of Outsourcing in Each Area of the Value Chain

Exte

nt

of

Outs

ourc

ing

Outsourced Core Functions

Outsourcing Trends

Increase in outsourcing of core functions

Late life-cycle outsourcing – API manufacturing represents the highest share

Drug discovery, development activities and dosage manufacturing – potential future areas

Increase in outsourcing of core functions

Late life-cycle outsourcing – API manufacturing represents the highest share

Drug discovery, development activities and dosage manufacturing – potential future areas

Traditional Formulation

Cluster

Traditional Formulation

Cluster

Emerging Bulk Drugs

Cluster

Emerging Bulk Drugs

Cluster

Emerging Formulation

Cluster

Emerging Formulation

Cluster

Traditional Bulk Drugs

Cluster

Traditional Bulk Drugs

Cluster

GOAMAHARASHTRA – Mumbai, PuneANDHRA PRADESH - Hyderabad

GOAMAHARASHTRA – Mumbai, PuneANDHRA PRADESH - Hyderabad

ANDHRA PRADESH - VisakhapatnamANDHRA PRADESH - Visakhapatnam

HIMACHAL PRADESH – BaddiUTTARAKHAND - Pantnagar, Haridwar

HIMACHAL PRADESH – BaddiUTTARAKHAND - Pantnagar, Haridwar

GUJARAT – Ahmedabad, Ankleshwar, Vapi, Vadodara

MAHARASHTRA – Mumbai, Tarapur, Aurangabad, Pune

ANDHRA PRADESH – Hyderabad, MedakTAMILNADU – Chennai PONDICHERRYKARNATAKA – Mysore and BangaloreGOA - Panaji

GUJARAT – Ahmedabad, Ankleshwar, Vapi, Vadodara

MAHARASHTRA – Mumbai, Tarapur, Aurangabad, Pune

ANDHRA PRADESH – Hyderabad, MedakTAMILNADU – Chennai PONDICHERRYKARNATAKA – Mysore and BangaloreGOA - Panaji

Contract Manufacturing Market—Key Indian Hubs

Contract Manufacturing Market—Benefit Analysis

50

25

25

3

10

5

15

7

United States

India

Raw Materials Manpower Depreciation Other Site Exp

Percentage points comparison with U.S.

Manufacturing Cost Arbitrage, India, 2010

The United States

The United States

ChinaChina

India – Non-

USFDA

India – Non-

USFDAIndia – USFDA

approved

India – USFDA

approved

EuropeEurope

Percentage points comparison with U.S.

Cost Comparison, India, 2010

100

95

70

66

22

7

4

United States

Germany

Italy

United Kingdom

Poland

India

China

Percentage points comparison with U.S.

Labor Cost Arbitrage, India, 2010

Low-cost manufacturing hubs

Cost of manufacturing 60 percent lesser than the

United States

Labor is the main source of cost arbitrage

Low-cost manufacturing hubs

Cost of manufacturing 60 percent lesser than the

United States

Labor is the main source of cost arbitrage

Contract Manufacturing Market—Cost Arbitrage

5

8

10

25

27

55

119

Hungary

Israel

Taiwan

Spain

China

Italy

India

Number of U.S. FDA-approved Facilities, Global, 2010

Contract Manufacturing Market—U.S. FDA-approved Facilities

India not only offers cost competitiveness, but

also ensures product quality

More than 119 U.S FDA approved facilities in

2010 – ranks second after the U.S

GMP compliant and cater to international

standards

India not only offers cost competitiveness, but

also ensures product quality

More than 119 U.S FDA approved facilities in

2010 – ranks second after the U.S

GMP compliant and cater to international

standards

DMF Filing Trend by DMF Type, Global, 2008-2010 DMF Filing with U.S. FDA, India, 2000 - 2010

0

100

200

300

400

500

600

700

800

2008 2009 2010(As on March10,2010)

786710

129

236

155

8578114

1116 20 4

No

. of D

MF

s fi

led

Type II Type III Type IV Type V

Year

271 294 321

455380 365

736 760799

1131

1021 1024

3739 40 40

37 36

10

15

20

25

30

35

40

45

0

200

400

600

800

1000

1200

2005 2006 2007 2008 2009 2010

% o

f DM

Fs

fro

m In

dia

No

. of D

MF

s fi

led

DMF Filed, India DMF Filed, Overall % of DMF from Ind ia

• India continues to lead in the number of DMF filings with the U.S. FDA.

• Way ahead of China as well as other Western countries

• Major companies include Dr. Reddy’s Laboratories, Aurobindo Pharma, Sun

Pharmaceuticals, Lupin, Matrix Pharmaceuticals and Orchid Pharmaceuticals.

Contract Manufacturing Market—DMF Filing

China India

EuropeThe United StatesBulk and Sourcing Hub

• Good cost of RM/ early stage intermediates

• Late lifecycle APIs

Scale Manufacturing Hub (API and formulations)

• More than 100 U.S. FDA-approved plants

• High-quality managerial

Quality assurance •

Strong API and

formulations capability

Early Stage and LaunchHub

• R&D expertise and

investments

• Technology capability• Facilities to support

launch• Relationships and track

record

Source: Frost & Sullivan analysis

Source: Frost & Sullivan analysis

Existing Business Model, Global, 2010

Contract Manufacturing Market—Existing Business Model

•

Pre-clinical API

Pre-clinical Formulation Phase-I API Phase-II a

APIPhase-II b

API Phase III API Registration Launch Commercial

Manufacturing

Clinical Trials Formulations

Formulations Development

PRE-CLINICAL DEVELOPMENT CLINICAL DEVELOPMENT COMMERCIALIZATION

FULL-SCALE SUPPLIESEARLY PHASE CUSTOM SYNTHESIS AND FORMULATIONS DEVELOPMENT

DEVELOPMENT PARTNERDEVELOPMENT PARTNER LAUNCH PARTNERLAUNCH PARTNERLIFECYCLE AND

TRANSITION MANAGEMENT

PARTNER

LIFECYCLE AND TRANSITION

MANAGEMENT PARTNER

Prior 20002000-20052005-20102010-20152015 OnwardsAPIs/ Bulk

Drugs

Prior 20052005-20102010-20152015-20202020 OnwardsFormulationsFormulations

Existing Business Model, Global, 2010

Contract Manufacturing Market—Emerging Business Model

Capacity

Reputation/Credibility

Technical expertise

QualityLow

Low High

Low High

2 105 6 8

2 104 6 8

2 104 6 8

Low High

2 104 6 8

High

Personal relationship

Communication

Timely delivery/ Speed

Approved facilities/Regulatory support

Low

Low High

Low High

2 104 6 8

2 104 6 8

2 104 6 8

Low High

2 104 6 8

High

Cost LocationLow High

2 104 6 8Low High

2 104 6 8

Note: Above are the key competitive factors in the selection of a CMO by Pharmaceutical/Biotech companies for contract manufacturing services. The factors are rated on a scale of 1 to 10 with 1 = Low importance and 10 = High importance based on the end-user’s input.Note: Above are the key competitive factors in the selection of a CMO by Pharmaceutical/Biotech companies for contract manufacturing services. The factors are rated on a scale of 1 to 10 with 1 = Low importance and 10 = High importance based on the end-user’s input.

Source: Frost & Sullivan analysis.

Key Competitive Factors in the selection of a CMO

Analytical: Sample Types

Divi’s Laboratory

Ltd.

Piramal Healthcare Ltd.

Jubiliant Organosys

Ltd.

Aurobindo Pharma

Ltd.

Dr. Reddy’s Laboratory

Ltd.

Raw Materials

API Testing

Dosage Form

Cleaning Validation

Intermediates

Company Service Information Comparison

API Types Divi’s Laboratory

Ltd.

Piramal Healthcare Ltd.

Jubiliant Organosys

Ltd.

Aurobindo Pharma

Ltd.

Dr. Reddy’s Laboratory

Ltd.

Small Molecules

Controlled Substances

Custom Organic Synthesis

API - Intermediates

Cytotoxics

Process Development

Company Service Information Comparison (continued)

Formulations List

Divi’s Laboratory

Ltd.

Piramal Healthcare Ltd.

Jubiliant Organosys

Ltd.

Aurobindo Pharma

Ltd.

Dr. Reddy’s Laboratory

Ltd.

Injectable

Oral

Topical

Buccal/ Sub-lingual

Ophthalmic

Antibodies Formulation

Company Service Information Comparison (continued)

Patent Expiry of Blockbuster Drugs WorldwidePatent Expiry of Blockbuster Drugs Worldwide

Interest of Big Pharma Leading to Increased Industry ConsolidationInterest of Big Pharma Leading to Increased Industry Consolidation

Expansion of Manufacturing CapacitiesExpansion of Manufacturing Capacities

New Product Launches/Novel Drug Delivery MechanismsNew Product Launches/Novel Drug Delivery Mechanisms

Increasing Adherence towards an Integrated Business ModelIncreasing Adherence towards an Integrated Business Model

Biologics ManufacturingBiologics Manufacturing

Contract Manufacturing Market – Emerging Trends

Enormous Cost-

saving Benefits

Manufacturing costs

reduced by 40 – 60 %

Patent Cliff

Drugs worth $150 billion

going off patent

globally

Increasing Regulatory

Support

Novel technology,

new pharmaceuti

cal hubs, SEZ policy

Industry Consolidation

Strategic alliances between

Big Pharma

and domestic participan

ts

Limited Technical Know-how

Lack of expertise in sterile products, technolog

y platforms

IPR Protection

Breach of proprietar

y informatio

n

Drivers Restraints

Contract Manufacturing Market—Pushing and Pulling Forces

United StatesSize: $55.78 BGrowth (2011 – 2016): 8.5%

EuropeSize:$36.44 BGrowth: 8.2%

JapanSize:$8.00 BGrowth: 9.2%

IndiaSize:$10.00 BGrowth: 18.5%

ChinaSize:$26.45 BGrowth: 19.4%

Global Generic Pharmaceuticals Market – Patent Cliff

• Currently Indian generics represent 15% of the generics in

the U.S.• With drugs worth $67.50 billion losing patent protection in the

United States, it is expected that Indian companies will capture at

least 30.0 per cent of the replacement generic equivalents

Indian Generics Market – A Snapshot

48%52%

Domestic Sales and Export of Generics, India, 2010

India – primarily a branded generics market with

more than 95% generic penetration

Constitutes 20 – 22% volume share globally

Leading exporter of generics to the tune of $11

billion

Highly fragmented market – more than 20,000

registered units

Big Pharma vying to gain market shares in

domestic market

Price driven; cost pressures fuelling

consolidation

IndiaIndia China

Source: Frost & Sullivan analysis

Focus on:

- Late stage intermediates

- Complex synthetic APIs (Custom Synthesis)

- Dosage

Greater number of U.S FDA plants and DMF filings Large English speaking population TRIPS compliant product patent regime

Focus on:

- Early stage intermediates- Large volume API manufacturing- Expertise in fermentation

Currently lagging behind, expected to rapidly catch up Language barriers Better logistics & infrastructure

China – A Potential Competitor

In the last two years, the drive among multinationals to outsource manufacturing to Indian companies has gained momentum. Although contract manufacturing companies should have been best positioned for these contracts, the multinationals are preferring the Indian generic companies as outsourcing partners.

The key reasons for this are:

•Generic facilities are capable of manufacturing products across various therapeutics segments, unlike the pure play contract manufacturers that develop cost efficiencies through one or two technologies at a time.

•Generic facilities are already running and manufacturing products for less regulated or emerging markets.

•Generic companies are already in compliance with regulations in regulated and semi regulated markets, something that is lacking in pure contract manufacturers.

•Frost & Sullivan, therefore, foresees that pure play contract manufacturers will continue to face hurdles related to scale up and will not be able to effectively compete against the generic companies for strategic tie-ups, as Big Pharma has being showing interest in strategic tie-ups with Indian generic companies (which have their own brands in emerging markets)

Strategic Tie-ups between MNCs and Indian Companies

Source: Assocham, Frost & Sullivan analysis

Contract Research and Manufacturing Services Deals

Source: Assocham, Frost & Sullivan analysis

Contract Research and Manufacturing Services Deals (continued)

Source: Assocham, Frost & Sullivan analysis

Contract Research and Manufacturing Services Deals (continued)

Strategic Deals between MNCs and Indian Companies

Strategic Deals between MNCs and Indian Companies (continued)

80%

20%

APIs and Intermediates Formulations

64%

36%

APIs and Intermediates Formulations

Percent Revenue Split, India, 2010Percent Volume Split, India, 2010

• Outsourcing of APIs for generic drugs is expected to remain high in the future.

• Contract Manufacturing of APIs and intermediates for NCE has started gaining momentum.

• Contract manufacturing of NCE formulations is expected to begin during the forecast

period.

Indian Contract Manufacturing Market Overview (continued)

Active pharmaceutical ingredients (APIs) or bulk drugs are defined as the active part of a drug, which is responsible for its medicinal property.

Asia Pacific, particularly India, is a favored market for API outsourcing, due to low cost benefits, complex synthetic abilities, and GMP compliance.

Every company currently involved in the contract manufacturing segment, also has some presence in the API segment due to the amount of manufacturing outsourced to this segment.

In terms of volume, 80-85 percent of the entire outsourcing in contract manufacturing takes place in the areas of APIs and intermediates.

Contract manufacturing for API, which is outsourced to India, is mainly for generic formulations.

However, as the Indian contract manufacturing segment market matures, contract manufacturing for New Chemical Entities (NCEs) will be outsourced to India.

Indian contract manufacturing organizations are already being used by many MNCs as suppliers of advanced intermediates.

China is a major competitor in the Asian market. However, is still a supplier of low-cost off-patent molecules and low-end intermediates.

However, the threat from the Chinese suppliers for these products and higher-end ones is only bound to increase as the Indian contract manufacturing segment market matures.

The trend is shifting toward outsourcing the manufacturing of advanced APIs, such as biotech-based APIs, biopharmaceuticals and advanced bulk drugs required for the production of dosage forms of new chemical entities in high-end therapy areas, such as oncology.

Source: Frost & Sullivan analysis

APIs and Intermediates—Overview

• Early market growth stage• Limited shelf-life and storage

issues• Require high investments and

specialised technical know-how

• Increasing focus on biologics• Expected to witness fastest

growth (29.5%, 2011 – 2017)

• More than 70% of Indian CMOs have expertise

• Patient compliance and prevalence of self-prescription.

• Low manufacturing costs and lower degree of technical change

• Expected to remain the key segment (25.4%, 2011 – 2017)

• Low-value business

• Majority pediatric and baby-boomer end-users

• High transportation and wastage costs

• Likely to present relatively lesser growth prospects (12.5%, 2011 – 2017)

Formulations —Overview

-range of services control the market

-Number of CMO’s - high-Suppliers can forward integrate-Volume benefits are available

- Moving up the value chain

Becoming more specialized and niche

Power of Suppliers

-End users have bargaining power-Buyer concentration vs. industry is high

- Buyers in need due to generic penetration and pressure on margins

Power of Buyers

- Low entry barriers in case of toll - Government policies are supportive - Economies of scale & scope exits

- IPR strengthening

- Technology and regulatory strength

Threat of New Entrants

-Easy access to cheap technology

- Virtual pharma model - Wider product range and

Threat of Substitutes

- Consolidation likely to increase

Low Impact

Medium Impact

Industry Rivalry

Traditional

Emerging

- Top participants, control the

- High toll manufacturing CMOs- Suppliers can forward integrate

- Volume benefits are available-

-

Power of Suppliers

- End users have bargaining power

- Buyer concentration versus industry is high

-

Power of Buyers

- Low entry barriers

Supportive Government policies -

Economies of scale and scope

-

Threat of New Entrants

- Easy access to low – cost

technology and skilled labor

-

-

Threat of Substitutes

-

Low Impact

Medium Impact

Industry Rivalry

Traditional

Emerging

-

market concentration

market

services

Contract Manufacturing Market: Porter’s Five Forces Model for Non-sterile Formulation, India, 2010

Non-sterile Formulation—Porter’s Five Forces Model

Contract Manufacturing Market: Porter’s Five Forces Model for Sterile Formulation, India, 2010

Power of Suppliers

- Number of suppliers is high

- Raw material cost is low

- Difficulty to forward integrate

- High competition exists

Threat of New Entrants

- High entry barriers

- Stringent and time-consuming

regulatory processes

- Rising attractiveness in terms of

market size and profitability

Threat of Substitutes

- Access to technology

- High capital investment

- Complex manufacturing process

- Availability of limited capacity

Power of Buyers

- Less bargaining power

- Average buyer concentration vs. industry

- Buyers in need due to new sterile product

approvals

- Expanding role of generic pharmaceuticals

Industry Rivalry

- Very few reliable companies

- Low competition

- Outsourcing trend is accelerating

- Competition is on the basis of

technology, quality and capacity

-

Low Impact

Medium Impact

Traditional

Emerging

Sterile Formulation—Porter’s Five Forces Model

Source: Frost & Sullivan analysis

Emerging Opportunity Areas

Innovation

Funding

Expertise

Regulatory compliance

“Any sufficiently advanced technology is indistinguishable from magic”

– Arthur C. Clarke

Technology – The Powerful Tool

Larger companies - complex technologies such as combination drugs and controlled releases.

Foray into therapeutic segments, which have difficult manufacturing processes and less competition.

Focus on cost, quality of manufacturing and complex chemistry skills.

Commoditized generic market - focus on complex technologies and can command premium pricing.

Indian Companies Focussed on Complex Technologies

TherapeuticsDevelopment of RNA-i based therapeutics

Development of anti-sense based therapeutics Recombinant protein therapeutics

Monoclonal antibodies

GovernmentRegulatory bodies like EMEA to drive new

product and technology introduction

Increase in approval rates of new biopharmaceuticals and biosimilars.

GlobalizationConsolidations, mergers, acquisitions

Opening and expansion of Asian marketsGlobal capital markets

CMOs moving up the value chain

– consolidating horizontal spread,

expanding vertical spread

“A-one-stop-shop” offered by

CMOs, promoting a complete

portfolio of products and

comprehensive range of services.

Shift from a purely transactional

relationship to a risk-sharing model

aligned with customer priorities

Large CMOs moving into niche

areas of manufacturing.

Development of virtual pharma

Transition from “small molecule

blockbuster” model to

biopharmaceutical model“ The best way to predict the future is to create it” – Peter Drucker

What Can be Expected in the Future?

Customer-centric range of services

Staying ahead of industry curve by building brand

preference

Strengthened relationship for longevity

Reacting to Change

Anticipating Change

Leading the

Change

• Develop drugs for key indications.

• Customize according to customer needs and preferences.

• Comply with new government policies.

• Analyze prospects for market globalization.

• Research customer needs, preferences and expectations.

• Monitor new technological developments to predict future.

• Foresee capacity requirements.

• Pioneer new and better technologies.

• Introduce innovative products, that open new market opportunities and spur creation of whole new industries.

• Seek to set industry standards.

• React and respond as needed.

• Defend and protect company’s position in the market.

• Plan ahead for future changes.

• Invest in R&D.

• Instill competitive capabilities.

• Improve product line.

• Strengthen distribution.

• Seize the offensive.

• Be the agent of industry change.

• Influence rules of the game.

• Force rivals to follow.

Strategic Posture Actions Strategy

“ Change is the law of life. And those who look only to the past or present are certain to miss the future.” – John F. Kennedy

Source: Frost and Sullivan

Facing the Change – Strategic Recommendations

• Outsourcing of non-core activities such as manufacturing of intermediates and APIs to low-cost

destinations such as India is gaining momentum for pharma MNCs as they focus on their core R&D and

brand building business.

• Indian companies have strengthened their presence in the market and developing technical expertise in

niche segment (sterile drugs, cytotoxics, lyophilization, etc.) that offer higher margins and higher entry

barriers. Acquisition of foreign facilities would accelerate growth and foster better relationships with

innovator companies, though generating adequate return from such investments can be difficult.

• In the long run, companies, which provide integrated drug development, research, clinical trial and

manufacturing outsourcing services, will prove to be one stop shops catering to all the needs of the

innovator companies resulting in long-term partnerships and better customer franchise.

• The domestic market offers significant opportunities for CRAMS providers, as increasingly larger

domestic companies are outsourcing manufacturing and packaging services to these participants in

order to focus on marketing and sales, and new drug development. Their ability to offer value-added

services such as drug delivery systems, combination drugs further leverages their value proposition.

• Overall, the outlook for Indian CRAMS appears to be healthy, supported by increasing outsourcing of

manufacturing and high-end research activities.

Conclusion

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AISWARIYA CHIDAMBARAMSenior Research Analyst - Healthcare

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