2.1 Introduction

India is the largest democratic country in the world. It is second only to China in terms of population with 1.1 billion citizens. Currently, the Indian economy is one of the largest emerging economies in the world. It is commonly grouped with Brazil, Russia and China as part of the BRIC (Brazil, Russia, India and China) countries that are having an increasingly important impact on the global economy. The gross domestic product, measured by current exchange rates, hit US$1.2 billion in 2008. However, when calculated using purchasing power parity, the economy is estimated to be about US$3.4 billion, second of all top outsourcing countries.¹

India’s recent growth has been remarkable, with real GDP rising by over 8 per cent per year since 2004. Growth has been driven by rapid expansion in export-oriented, skill-intensive manufacturing and, especially, skill-intensive services. For example, pharmaceutical firms such as Dr Reddy’s Lab have been profiting from the production of generic drugs and investing in R&D to discover new ones. Growth has been amplified by increased local demand, backed by rising urban and rural incomes and a sharp rise in savings and investment rates.

India is the leading country for offshore outsourcing. The offshore outsourcing industry started in India and, due to its immense English- speaking population, it has been able to grow the IT and business process outsourcing (BPO) export sector to US$47 billion and capture more than half of the industry globally. That is not to say that India does not have its challenges, nor is it the best geographically located country for outsourcing, but it has an unparalleled history and size.

USA and Europe are the largest customers for the Indian outsourcing industry. Due to the 2008–2009 global recessions, most of the US and European companies are looking to cut costs and therefore they are now outsourcing their work to low-cost countries, with India gaining the most out of this.

2.2 Cost competitiveness

India has a significant cost arbitrage in the conduct of clinical trials, including infrastructure, operational, patient recruitment, drug, manpower, data management and processing costs.²

The R&D depends on the efficiency of the providers of allied services (namely clinical data management, biostatistics, pharma co-vigilance and medical writing) for testing drugs and identifying new indications. The expenditure on these services accounts for 19 per cent of the total expenditure on R&D.³ The cost of these services in India is usually 40–60 per cent lower than in developed countries and around 10–20 per cent lower than in other emerging economies.⁴ These figures clearly reflect the considerable amount of revenue savings resulting from cost advantage in allied services alone.

India is a highly cost-competitive location. On comparing India with some prominent manufacturing locations, it is seen that India is way ahead of all its competitors on cost efficiency. This has been possible thanks to the inherent nature of the Indian pharmaceutical industry and its evolution. The three key factors that contribute to this efficiency include:

Besides these, the operating costs of Indian laboratories are at least 45–60 per cent cheaper than global laboratory costs.

Apart from these, the other cost-reducing factors are as follows:

The Indian market is now a prominent contributor for active pharmaceutical ingredient (API) sourcing, due to its low-cost APIs (primarily established APIs). This characteristic of the Indian market, coupled with a much improved manufacturing and development capability, makes it better than most of the other low-cost countries.

2.3 Resources and skill

India is now looked upon as one of the leading global pharmaceutical suppliers. It not only provides for low-cost manufacturing solutions, but also innovations through R&D. Process development, drug discovery support services, chemical synthesis and clinical trials are some of the areas which are being outsourced by global pharmaceutical companies in India. Custom manufacturing of APIs and intermediates present the biggest opportunity for Indian companies in the contract research and manufacturing (CRAM) sector. India now has the highest number of FDA-approved plants outside the US.⁸

Pharma companies are seeing India as a good option to off-shore their manufacturing requirements. This has been possible because Indian companies are increasingly subscribing to international quality, environment, health and safety (EHS) standards. All of these reasons coupled together have made India a preferred destination for outsourcing across the entire value chain from drug discovery to drug product manufacturing.

India is now thought of as the country with the highest skilled manpower for custom manufacturing. There are large numbers of students who graduate every year from top universities, thus providing these companies with a large pool of people to choose from. For example, of the total number of postgraduate students qualifying every year, almost 37.5 per cent have chemistry as their specialisation.⁹

This large talent pool qualifies from almost 7000 institutes which are approved by the All India Council for Technical Education (AICTE), which offer both degree and engineering courses, and almost 9 per cent of these offer pharmacy courses. In addition, there are around 300 college-level educational and training institutes offering degrees or diplomas in biotechnology, bioinformatics and biological sciences, and produce almost 50 000 qualified professionals annually.¹⁰

These indicators highlight India’s capacity for innovation and its potential to augment its productivity and competitiveness. Despite the fact that India’s stock of scientists and engineers engaged in R&D is the highest in the world, the spending on R&D still remains meagre. There has been a healthy increase in R&D activity ever since 2002 thanks to the contribution of the multinational corporations (MNCs). India has had a strong record in producing basic knowledge, as proxied by internationally refereed scientific and technical publications. It has also experienced a significant increase in patent applications. Overall, India appears better at producing basic rather than commercialisable knowledge. Still, the efficiency of its R&D spending, as measured by the relative costs of a scientific publication or a US patent, appears higher than in comparator countries.

Not only is there a large pool of qualified professionals, but English is widely used in higher education, business and medicine making. India is the second-largest English-speaking country in the world after the US.

Currently India accounts for eight per cent of global pharmaceutical production, making it the world’s fourth-largest pharmaceutical producer. Its strength is in API, where it is the third-largest manufacturer worldwide with 500 different APIs.¹¹

India has around 119 US FDA plants, in addition to around 844 UK MHRA (Medicines and Healthcare Products Regulatory Agency) approved plants. Many of these plants also have approvals from countries such as Canada, Australia, Germany and South Africa. These approved sites aptly demonstrate the ability of Indian companies to deliver quality products worldwide and act as a platform for CRAMs players.¹²

The inspiring environment for innovation is a result of policies, institutions and capabilities that have supported the creation and commercialisation of new knowledge, and the percolation and assimilation of the existing knowledge for both formal and informal sectors of the Indian economy. Strong institutional competition and a growing mind-set to value innovation have had a great impact. Liberalisation of the Indian economy has contributed to the rise in private sector enterprises in various fields, which have ultimately contributed to the competition in the market and also the R&D spending. Enterprise R&D spending as a share of sales increased more than sevenfold between 1991 and 2004.

2.4 The role of the government

The Indian government has also been very supportive when it comes to R&D in biopharmaceuticals. The government has started various schemes and instituted various agencies in order to further strengthen India’s position in the pharmaceutical manufacturing outsourcing market. The following are the various schemes and agencies started by the government:

2.5 Conclusion

Outsourcing is not only an option but a strategic imperative for pharmaceutical companies across the globe.

India is a fast-growing custom manufacturing and outsourcing destination with a growth rate of 43 per cent, which is three times that of the global market. This is driven by its ability to create a differentiating cost–value proposition powered by its lower manufacturing costs, skilled manpower and strong technical capabilities.

The growth of emerging markets over 2008–13 is expected to be around 11–14 per cent in contrast to the slow-down expected in European and North American markets. This would indeed position India in such a way so as to attract growth in the pharmaceutical industry.

As per a survey conducted by Ernst & Young,¹³ India is rated highest in terms of its cost efficiency attractiveness among the six outsourcing hubs – India, China, Eastern Europe, Puerto Rico, Singapore and Ireland. Approximately 67 per cent of the respondents have rated India as ‘excellent’ and the remaining 33 per cent have rated it ‘above average’. India’s cost efficiency is driven by its low manufacturing cost which is only 35–40 per cent of the cost of manufacturing in the US supported by its low installation and manpower cost. Around 90 per cent of the respondents have rated India either ‘excellent’ or ‘above average’ for its technical capability attractiveness. This is demonstrated by the fact that India has manufacturing prowess in both APIs, where India is the third largest producer in the world with 500 different APIs, and in formulations, where it manufactures 60 000 packs across 60 therapy areas, and currently accounts for eight per cent of the global pharmaceutical production making it the world’s fourth largest pharmaceutical producer.

R&D spending appears more efficient in India than in comparator countries. Using the publication of scientific and technical journal articles as a proxy for basic knowledge outputs, and patents granted in the US as a proxy for commercialisable outputs, India is relatively stronger in the production of basic rather than market-driven knowledge. However, based on its efficiency of R&D spending, as measured by the relative costs of a scientific and technical publications or a US patent, India does better than all its comparator countries, except Russia for journals and Korea for patents. India has perhaps the lowest R&D costs among these countries as a result of its lower pay to scientists and engineers, the main cost component in R&D spending. In its entirety, India appears better at producing basic knowledge than commercialisable knowledge.