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Could President Obama's tax reform, which is targeted at reducing outsourcing, endanger India's contract-services industry?


Pharmaceutical Technology
Volume 34, Issue 3, pp. 18, 23, 24


(PHOTO: DARRIN KLIMEK, PHOTO DISK, GETTY IMAGES)
Major pharmaceutical companies in India are concerned about US President Obama's proposed tax code. In a bid to solve the problem of increasing job losses in the United States, Obama has reiterated a campaign pledge to end tax breaks for American firms that outsource jobs overseas. While several contract manufacturing and research organizations in India are hoping the new tax proposals aren't approved, other firms have decided to expand the contract services they offer.

A clear track record

At the forefront of the outsourcing industry, India has actually "become an enabler for industry growth through the expansion of Indian offshoring firms into other countries," said J.R. Vyas,managing director of Dishman Pharmaceuticals and Chemicals (Ahmedabad, Gujarat). "It is no longer restricted to outsourcing. We are actually participating in collaborative research," he explained.

Predicted growth despite economic dip

A December Ernst & Young report, "Taking Wings—Coming of Age of the Indian Pharmaceutical Outsourcing Industry," estimated that the Indian pharmaceutical outsourcing industry would bring in revenues of $2.3 billion in 2009. Although the revenue marks a huge jump from 2008 figures ($1.1 billion), the US tax reform could place a big dent in future revenues, not to mention in India's outsourcing industry. The country's pharmaceutical outsourcing market is growing at three times the rate of the global outsourcing market, according to Ernst & Young and the Organization of Pharmaceutical Producers of India (OPPI).

"According to our analysis, India's share of the total global outsourcing market is also estimated to increase from 2.8% in 2007 to 5.5% in 2010," said OPPI Director-General Tapan Ray. He cautioned that the industry is already undergoing a paradigm shift, including a major dip in profit margins, on account of the global economic slowdown, intense competition from China, and the appreciation of the Rupee against the US dollar. The effect of the US tax change "could prove to be the veritable last straw," he said.

Ajay Piramal, chairman of Piramal Healthcare (Goregaon, Mumbai) underscored Ray's sentiment, adding that the contract-services space is becoming a difficult area to operate in. Many multinational companies already have scaled back their outsourcing requirements because of the economic climate, he explained.

It's no secret that the drug industry is facing significant challenges. The regulatory environment is becoming more strict. Pipelines are underperforming. Healthcare budgets are rising. "There is no way out but to outsource,'' said Hari Bhartia, cochairman of Jubilant Organosys (Noida, Uttar Pradesh).

This point is especially true for pharmaceutical and biotechnology companies that are outsourcing clinical-trial services to reduce costs. "Outsourcing to a specialized provider is an effective and highly popular method for minimizing financial outlay and maximizing efficiency,'' said Rashmi Barbhaiya, chief executive officer of Advinus Therapeutics (Hinjewadi, Pune).

Weighing old and new skills

Cost reduction is certainly shaping many firms' outsourcing strategies, but so are the quality of labor and the services available in the contract sector. Although flexibility and speed are major draws, so are the knowledge pool in medicinal chemistry and engineering and manufacturing prowess in active pharmaceutical ingredients (APIs) and formulations. A contract firm's ability to provide end-to-end services is also important to companies deciding whether to outsource—and to whom to outsource.

The Indian contract-services sector has immense experience in discovery chemistry, process research and development, pipeline and matured intermediates, and dosage development. In addition, many companies have developed in-house tools, methods and processes that cater to clients around the world. Understanding global business processes, quality-management systems, and shortened project timelines has helped India's contract organizations capture most of the outsourced deals coming from the US and Europe.

Unsure of the ramifications of President Obama's tax proposals, some domestic Indian contract organizations are adding to their capabilities in biopharmaceutical manufacturing, including those involving monoclonal antibodies, complex proteins, peptides, chiral-chemistry, oligonucleotides, DNA vaccines, and gene therapy, to take on new clients. Incidentally, several drugmakers pursuing clinical development of novel cancer therapeutics—as well as of high-potency prostaglandins, opiates, and hormones—are finding their way to India.

Several factors are behind this trend, including the costs associated with building and maintaining high-potency molecule containment facilities, the potential market size (i.e., patient pool) for these agents, and the economic risks associated with cytotoxic-drug development.

Dishman, for example, has commissioned a high-containment API-manufacturing facility in Ahmedabad to manufacture a range of oncology APIs and other related high-potency products. The company plans to invest $20 million in the project. An outsourcing partner for the global pharmaceutical industry, Dishman is homing in on high-potency therapies such as steroids, hormones, isotopes, and cytotoxics.

With an integrated state-of-the-art facility in Bangalore, Jubilant Biosys, a subsidiary of Jubilant Organosys, is looking to add to its current pool of 450 scientists. The firm specializes in multiple disciplines such as medicinal chemistry, structural biology, pharmaceutical chemistry, molecular modeling, crystallography, and discovery-related information technology.

Hoping for the best

While many Indian firms are beefing up their contract-services appeal in an effort to sway US drug manufacturers' outsourcing decisions, others feel that the effect of President Obama's tax proposal could be minimal. "People don't make strategic business decisions based on tax rates. Microsoft and IBM will not go back, they are here for the market," said Pramod Bhasin, chairman of the National Association of Software and Service (Nasscom), the premier trade body for the information technology-business process outsourcing industries in India.

There may be no looking back for the pharmaceutical industry either, adds Dishman's Vyas. "The production of high-potency APIs in India is four times cheaper than [production] in Western countries." With that in mind, how can large US firms afford not to outsource?

A. Nair is a freelance writer based in Mumbai.

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