Today's pharmaceutical industry is flooded with numerous CMOs, with Asian countries being the prime focus for big pharmaceutical companies looking to outsource. This is primarily due to the advantage of low production costs in Asia in comparison to other regions. Unlike the market for contract small-molecule manufacturing, the market for contract biologics manufacturing in China and India is still in its infancy. Western CMOs engaged in pharmaceutical chemical development, particularly early-stage intermediates and generic active pharmaceutical ingredients (APIs), face strong competition from suppliers in China and India and increased competition, particularly from Indian suppliers, in advanced intermediates and custom APIs.

Increasing Government Sanctions are Favoring CMOs

India and China represent the fastest-growing countries in the CMO services sector having witnessed drastic changes in their government and regulatory policies that encourage pharmaceutical outsourcing in order to increase business and attract foreign clients.

Regulatory Changes in India and China

In India the Biotechnology Policy in 2005 issued simplified procedures for regulatory clearance and exemptions from import duties and service taxes, encouraging foreign investments within the country. Furthermore, the introduction of the new patent regime in India during January 2005 encouraged multinational pharmaceutical companies looking to outsource their manufacturing of branded drugs with the protection of Intellectual Property Rights (IPRs). The amendment of the Schedule Y article allows parallel phase clinical trials to be conducted along with reductions in custom duties for clinical trial samples being imported.

In China the State Food and Drug Administration (SFDA) has clearly stated contract manufacturing as a long-term goal for the country's economic growth. In early 2001, Article 13 of the new edition of the "Drug Administration Law" was issued. According to this, a drug manufacturer may produce drugs only after getting approval of the drug regulatory department, which is under the State Council. The new law legalized pharmaceutical contract manufacturing in China. In August 2003, the SFDA clarified in the trial version of the "Regulations on Processing Drug for Export" that Chinese drug manufacturers' may conduct contract manufacturing for a pharmaceutical company outside China.

The Indian CMO Market

India is an important emerging CMO destination. A combination of factors such as the availability of low-cost skilled labor, low manufacturing costs, government and regulatory support, experience in generics manufacturing, strong financial condition of CMOs operating in India and the availability of adequate numbers of cGMP-compliant manufacturing sites in the region make India a popular outsourcing destination of choice for CMOs. According to GBI Research's analysis, the Indian CMO market was worth $1.3 billion in 2010 and is expected to grow at a CAGR of 21% to $6.0 billion by 2018.

Challenges and Key Concerns for the Indian CMO Market

A key concern over India's drive to become a major CMO hub is its poor IP protection and regulatory framework. Indian IP protection laws have undergone significant changes in recent years and are becoming increasingly favorable towards foreign investors, but there are still apprehensions over inadequate IP protection for Western companies. A notable example in this respect is the rejection of a patent application from Novartis for its anti-cancer drug Glivec (imatinib) by the Intellectual Property Appellate Board of India (IPAB). This drug was already patented in more than 40 countries around the world, including China.

Adding to these concerns is the increasing threat of counterfeit medicines originating from India. The World Health Organization (WHO) statistics show that up to 40% of drugs sold in India could be counterfeit. WHO also expressed concern over the manufacturing of such drugs and their export to other countries from India. WHO statistics show that counterfeit drugs from India constitute a significant proportion of worldwide seizures. The Organization for Economic Cooperation and Development (OECD) statistics show that 7.5% of fake drugs across the world have their origins in India. Such a high number of counterfeiting incidents makes the pharmaceutical companies wary of outsourcing to India.

Compliance with cGMP guidelines is quite varied across India due to the existence of many state drug regulatory authorities. A proposal to create a Central Drug Authority (CDA) that could regulate manufacturing on a national scale was shelved due to protests from small-scale manufacturers. The current regulatory framework is clearly inadequate for ensuring compliance with cGMP guidelines. A notable recent instance is the U.S. FDA's ban on imports from two of Ranbaxy's Indian manufacturing sites, citing violations of cGMP guidelines.

Effective tax rates in India are also very high and make it difficult to run businesses profitably. Total tax payments made by a business consist of a combination of profit tax (percentage of profits), labor tax (percentage of profits), and other taxes (percentage of profits). According to World Bank data, total tax payments as percentage of profits are as high as 64.7% in India. This is a point of concern for businesses operating there, as in Eastern Europe overall tax payments rates range between 37-59% of profit and for many attractive destinations the rates are in the range of the mid-40s.

The Chinese CMO Market

China is set to become the global hub for Contract Manufacturing Organizations. Production costs in China are among the lowest in the world and these low costs along with excellent infrastructure and facilities provide a competitive edge to Chinese CMOs. The direct and indirect personnel costs for the manufacturing of API in China are nearly 10% of those in Western countries and overall costs to produce a drug are 40% of that in the U.S.. Extremely low costs are one of the key reasons for production being outsourced to China.

The Chinese CMO market is currently generating revenues of $2.1 billion in 2010 and this market is expected to grow at a CAGR of 17.9% to reach $7.8 billion by 2018. The Chinese CMOs concentrate upon manufacturing generic APIs, bulk drugs and generics, but developments in the manufacturing of biologics are also taking place in China.

Challenges and Key Concerns for the Chinese CMO Market

One of the key challenges for Chinese CMOs is complying with the U.S. FDA and EMA's cGMP standards and getting large-scale contracts (especially for biologics manufacturing) from western pharmaceutical companies. As many of them are currently following national cGMP standards, the Chinese CMOs have to modify their facilities, improve their manufacturing processes, train their staff and implement IT systems to control their manufacturing processes in order to meet these challenges.

China does not have a great track record in IPR protection. Although the patent laws in China have recently been under revision to bring IPR protection more into line with global standards, there is still much to be done to improve IPR protection. Currently, China is on the priority watch list in the annual Special 301 report of the Office of the United States Trade Representative (USTR) for violations of IPR taking place in the nation.
Several Chinese drug manufacturers only follow national cGMP guidelines, which are below the accepted global standards (U.S. FDA cGMP, or EU cGMP) and this may create a regulatory risk for drugs originating from China.

World Health Organization (WHO) estimates show that close to 20% of the world's counterfeit medicines seizures have originated from China. A noteworthy example is the major recalls of Heparin-based medicines made by the U.S. FDA in the U.S. in 2008 because of counterfeit Heparin API imported from China. Recently, China's leading internet search engine Baidu was accused of promoting counterfeit drug-selling websites. These examples show that drug regulation and IPR protection framework is still not effective in China.

Another challenge for CMOs from China is maintaining profitability while paying a high amount in taxes. Total tax payments made by a mid-sized business consist of a combination of profit tax (percent of profits), labor tax, and contributions to labor funds and other taxes. According to World Bank data, total tax payments as a percentage of profits are as high as 63.8% in China. This is just a little lower than India's 64.7% and still clearly higher than in Eastern Europe. The taxes there average out at the range of 45%.