India - A Cure For Pharma Outsourcing Woes?

Pharmaceutical companies are making a transition to asset-light models, focusing on core competencies. This is where India’s contract development and manufacturing organisations (CDMOs) step in, offering a potential remedy. Hence, both domestic as well as international companies are partnering with CDMOs for drug development, regulatory support and risk-sharing to expedite project timelines and ensure cost-effective manufacturing at scale while maintaining stringent quality standards. The report highlights the role of the CDMO companies and their future prospects 

Eroom’s Law, the grim corollary to Moore’s Law, paints a concerning picture for the pharmaceutical industry. Drug discovery is becoming a labyrinth – increasingly expensive and time-consuming despite technological advancements. The inflationadjusted cost of developing a new drug roughly doubles every nine years. In order to highlight the contrast with the exponential advancements of other forms of technology such as transistors over time, the name given to the observation is Moore’s Law spelled backwards. [EasyDNNnews:PaidContentStart]

Dr. Jack Scannell’s now famous observation highlights a harsh reality. Creating a novel pharmaceutical drug today demands a staggering investment, often surpassing USD 1 billion, and spans a decade or more. This financial burden stems from several factors: the substantial capital outlay essential for establishing and managing extensive and diverse manufacturing facilities and the intricate research and development expertise necessary for cultivating a broad product range. These significant capital requirements and associated challenges present formidable obstacles for pharmaceutical enterprises. 

Consequently, innovation is stifled, leading to delays in delivering life-saving treatments to patients. Even traditional pharmaceutical powerhouses are grappling with the strain, finding it arduous to sustain their research and development pipelines. Indian pharmaceutical companies encounter additional hurdles such as pricing pressure and heterogeneous regulatory compliance requirements across international markets. Compliance costs increase due to varying approval processes and timelines globally, and staying abreast of regulatory changes. 

The dynamic Indian market demands adaptability, with multinational companies outsourcing to comply with regulatory policies. Indian firms are also shifting towards asset-light models, focusing on core competencies. This is where India’s contract development and manufacturing organisations (CDMOs) step in, offering a potential remedy. Hence, both domestic as well as international companies are partnering with CDMOs for drug development, regulatory support and risk-sharing to expedite project timelines and ensure cost-effective manufacturing at scale while maintaining stringent quality standards. 

CDMOs: Unsung Hero of Pharmaceutical Value Chain 

CDMOs specialise in the development, scale-up and manufacturing of drug products both for clinical trials and for commercial distribution. CDMOs offer a range of services that include drug development, process development, analytical testing, formulation development, scale-up, manufacturing, packaging and distribution. These services can be provided on a stand-alone basis or as part of a complete end-to-end service offering. Contract manufacturing has picked up in India because of the vast availability of skilled personnel, lower production costs and large number of WHO-GMP-certified plants. 

The Indian CDMO space has seen traction in recent times with big pharmaceutical companies preferring to outsource research and development as well as manufacturing activities. This kind of outsourcing is also carried out by pharmaceutical companies in order to maintain an asset-light model of operations. There are various advantages, including the overall cost factor, for such pharmaceutical companies. CDMOs can help with economies of scale and speed of development, which is crucial for pharmaceutical companies to survive in an increasingly competitive industry. In the following paragraphs we will highlight some of them. 

Cost Advantage : As discussed in the earlier paragraphs, the rising cost of commercialisation of drugs has strained the profit margins of pharmaceutical companies. In 2022, based on a study of the top 20 pharmaceutical companies, the average cost to develop and commercialise a drug was USD 2.284 billion. In 2019, the same cost was USD 1.986 billion, including the cost of failure. Moreover, since early 1900s, the cost of drug approval has doubled from USD 1,000 to USD 1,200 million in 1990 to the early 2000s to USD 1,300 to USD 3,000 million in the 2000s to 2020s. CDMOs can typically help gain 35-70 per cent savings by bringing their experience, expertise and economies of scale in managing drug development and manufacturing. Selection of the right geographical location for outsourcing can also impact cost savings. 

Time Savings : In 2022, the average launch cycle time from the advent of trials until approvals has also increased. The average cycle time in 2021 was 6.9 years, which rose to 7.02 years in 2022. Therefore, drugs spend longer in the development phase, increasing costs. Furthermore, it often takes about 7-10 years for a drug to move through all its four phases. A delay in any phase can cause huge losses. CDMOs are equipped to handle various drug development and manufacturing aspects, which can significantly accelerate project timelines and reduce the launch time to a great extent depending upon the phases of commercialisation that have been outsourced to CDMOs. 

Access to Specialised and Global Expertise : Drug development and manufacturing are highly collaborative processes involving multiple stakeholders like drug developers, APIs and excipient suppliers, technology providers and regulators, among others. CDMOs have dedicated teams of scientists, engineers and regulatory experts with specialised knowledge in formulation development, analytical testing and quality assurance. By outsourcing to CDMOs, companies can tap into this expertise without building in-house capabilities, which may be time-consuming as well as costly. 

Supply Chain Risk Mitigation : Companies are increasingly looking to de-risk their supply chain and diversify their sourcing efforts. By partnering with CDMOs, companies can share some of these risks. 

Supporting Growth of Small and Mid-Sized Companies : Although large pharmaceutical industry leaders are leading the way in drug innovation, small and mid-sized companies are also actively showcasing their innovation. As such, the share of the research and development pipeline in small to mid-sized companies has increased from 66.6 per cent in 2017 to 74.9 per cent in 2023. In 2009, 31 per cent of the new molecular entity (NME) discovered were developed by small pharmaceutical companies, and in 2018 it doubled to a staggering 64 per cent. However, most small and emerging pharmaceutical companies lack advanced development and manufacturing expertise. These companies opt to partner with CDMOs to build and commercialise their clinical pipeline. 

Flexibility and Scalability : CDMOs offer flexible adaptation to changing project requirements. They can scale production up or down as needed, allowing companies to efficiently manage variations in demand from the development phase to the commercialisation phase and owing to unforeseeable changes (as for example, pandemics, wars, inflation) in the commercial market. Additionally, pharmaceutical companies will lean on outsourcing partners to manufacture large volumes and make the drug accessible in generic-dependent markets such as India, Africa and South America. 

Access to Advanced Technologies : CDMOs invest in state-of-the-art equipment and technologies, ensuring access to the latest drug development and manufacturing innovations. This access can improve product quality and process efficiency. 

Focus on Core Competencies : Outsourcing non-core functions to CDMOs allows pharmaceutical and biotech companies to concentrate on their core competencies, such as research, marketing and strategic planning. This strategic focus can lead to better innovation and market access.
 

Role of CDMO

As discussed in the above paragraphs, one of the primary reasons for pharmaceutical companies partnering with CDMOs is to reduce the time to market (TTM). To achieve this, pharmaceutical companies are gradually outsourcing research and development activities to academic and private contract research organisations (CROs) to reduce drug development timelines and costs. CROs typically support pharmaceutical companies for drug and new chemical entity (NCE) development and clinical research and trials. CROs carry out patient recruitment for clinical trials, clinical monitoring and analytics of the data collected. 

Further, they also engage in biostatistics and regulatory consultations. CDMOs take over the formulation drug development and manufacturing activities. CDMOs which offer drugs development include companies which conduct clinical trials, develop a specimen copy of the finished formulation and offer generic drug development for drugs going off-patent. Usually, the drugs marketing companies transfer the process technology to the CDMOs and CDMOs in turn conduct the development and manufacturing activities on behalf of a drug marketing company. 

CDMO Value Chain Overview 

CDMO: India Advantage

The landscape of CDMOs is experiencing a geographic shift. Traditionally based in Europe and the US, these companies are now increasingly concentrated in the East, particularly the Asia-Pacific (APAC) region. This eastward migration is driven by cost efficiencies, rapid capacity expansion and growing capabilities in APAC. Lower manufacturing costs, readily available raw materials, supportive regulatory reforms and rising local demand for pharmaceuticals are all fuelling this trend. While North America still holds the largest market share (47.4 per cent in 2022), its dominance is expected to decline (45.2 per cent by 2027) with a slower growth rate (CAGR of 4.9 per cent). In contrast, APAC is poised for significant growth (CAGR of 8.8 per cent), increasing its market share from 23.8 per cent in 2022 to 27.4 per cent by 2027. 

This shift is driven by the desire of pharmaceutical companies to leverage cost advantages, improved regulatory compliance in APAC, and government initiatives promoting the region as a viable outsourcing hub. Additionally, the need to diversify supply chains post the corona virus-triggered pandemic and navigate global political uncertainties is leading companies to look eastward for CDMO partnerships. Within APAC, India and China are emerging as preferred destinations. China, in particular, has been a popular location for nearly two decades due to its low costs and fast turnaround times for pharmaceutical research and manufacturing services. 

After weathering challenges like the US-China trade war and pandemic supply chain disruptions, the strong China-based manufacturing relationship is showing signs of strain. Rising political tensions are pushing Western governments to encourage companies to ‘de-risk’ their supply chains by reducing reliance on China. This is leading some pharmaceutical companies to explore Indian manufacturers for producing active pharmaceutical ingredients (APIs) for clinical trials and other outsourced work. India offers several compelling advantages beyond just cost-effectiveness. Robust infrastructure, favourable regulatory reforms and a wellestablished English-speaking workforce make India a strong contender for outsourcing. 

Indian CDMOs also boast the experience of serving regulated markets and the expertise to handle complex global development and manufacturing demands. Further strengthening India’s case, a recent study revealed a tripling of IP-related lawsuits in China between 2016 and 2020, highlighting ongoing intellectual property protection concerns. In contrast, India has made significant strides in IP protection over the past decade. Signing multilateral agreements and amending national laws, including a shift to recognising complete product patents, has reassured companies about potential patent infringement risks associated with outsourcing, particularly for innovative products. 
 

CDMO Market Size and Opportunities

India-based research firm Mordor Intelligence estimates that the pharmaceutical CDMO market size is estimated at USD 238.47 billion in 2024, and is expected to reach USD 330.36 billion by 2029, growing at a CAGR of 6.74 per cent. The growth in CDMO industry is going to be far superior as compared to growth in the pharmaceutical sector. The primary reason for this is willingness on part of the pharmaceutical companies for outsourcing. Increased outsourcing is mainly driven by advantages offered by the use of CDMOs as discussed above. Accordingly, the growth of the CDMO market is expected to not only be attributed to the growth in the overall pharmaceutical industry but also to the shift towards increased penetration of outsourcing activities in the pharmaceutical industry. 

CDMOs offer a range of services that include drug development, process development, analytical testing, formulation development, scale-up, manufacturing, packaging and distribution. These services can be provided on a stand-alone basis or as part of a complete end-to-end service offering. Contract manufacturing has picked up in India because of the vast availability of skilled personnel, lower production costs and large number of WHO-GMP-certified plants. 

This will have a direct impact on the financials of the Indian companies that are operating in this segment. It is estimated that revenue from India’s CDMO industry in 2023 was at USD 15.6 billion. However, it is estimated that revenues from India’s industry will grow, on average, at more than 11 per cent annually over the next five years.
 

Indian Players

The USD 42 billion domestic pharmaceutical industry has 3,000 companies with 10,500 manufacturing units. Of them, at least 100 are becoming CDMO specialists, an emerging segment that includes API manufacturing and contract research and development. Some are developing biotech drug capabilities too. India’s ability to develop drugs at one-fourth the cost in the West and the largest number of US Food and Drug Administration-approved plants outside the US is helping organisations bag long-term deals from big pharmaceutical companies. Nevertheless, the Indian CDMO market is fragmented, with the top vendors accounting for a significant share of the total market. 

Apart from these major players, several players in the market are investing in innovation and partnership activities to gain an increased market share. Therefore, the intensity of competitive rivalry is high. The key players are Divis Labs, Jubliant Pharmova, Laurus Lab, Piramal Pharma, Gland Pharma, Syngene International and Suven Pharma. Beyond these, there are many other companies that are present in the CDMO space even though a major portion of their revenue does not come from this domain. The following table shows the key financials (9MFY24 versus 9MFY23) and valuation parameters of these companies. 

The financial and valuation glimpse of the top CDMO companies clearly shows that most of the positives are already priced in. Compared to pharmaceutical companies that are currently trading at an average PE of 41 times, all the companies with major focus on CDMOs are trading above the average. 

Selecting a CDMO Company for Investment The CDMO market in India is still at a nascent stage considering the growth that lies ahead. The full benefit of this outsourcing to Indian manufacturers will not be immediate. It will take time to develop relationship and confidence, which is in early development. Hence, investors should keep an eye on this sunrise sector as they have the potential to give you the next multibagger. When selecting a CDMO company for investment, several key factors must be considered to ensure optimal returns. Evaluating the company’s speed in delivering projects is crucial. 

The ability to execute tasks promptly and efficiently can significantly enhance scalability and meet market demands effectively. Additionally, flexibility is paramount as the CDMO should possess the capability to accommodate special requests and adjust schedules accordingly. Another essential aspect is assessing the experience level of the staff and the research and development expenditure, as a skilled and knowledgeable workforce can contribute to streamlined operations with high-quality outcomes and continuous workflow. 

Moreover, investing in a CDMO with state-of-the-art manufacturing technologies is essential to maintain competitiveness and efficiency in the industry. Finally, seeking a CDMO that offers innovative solutions can provide a competitive edge and ensure long-term success in the dynamic pharmaceutical landscape. By prioritising speed, flexibility, experience, technology, cost and innovative solutions, investors can make informed decisions when choosing a CDMO company for investment. Investors need to note that this is a sunrise sector and may take time to become lucrative. Nevertheless, it should be on your radar.

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