Mega deals While the recent consolidation in pharma industry is an outcome of the challenges faced by the global pharma companies over the last few years, this spells good news for Indian pharmaceutical contract manufacturers such as Piramal Healthcare, Jubilant Organosys, Divis' Labs and Dishman Pharma.

A couple of weeks back Roche bought a controlling stake in Genentech for $47 billion. This follows Merck's $41 billion deal to combine with Schering-Plough and Pfizer's game changing $68 billion buyout of Wyeth in January this year.

With these large acquisitions being focused on reducing costs and increasing revenues, Indian companies think they will get more contract deals. Pharma contract manufacturers either supply formulations (finished dosages) or active pharmaceutical ingredients (drug raw materials) to global companies. The phrase Big Pharma is often used to refer to companies with revenue in excess of $3 billion.

According to industry estimates, outsourcing helps Big Pharma cut costs by 30-50% due to cheap labour in India. For instance, Pfizer-Wyeth combine expect to save $ 3 billion by 2010 end and Indian pharma contract manufacturers could play an important role.

"The Big Pharma is concerned about three functions: manufacturing, sales & marketing and research. Going forward we expect that manufacturing will be more skewed towards India and China. Chinese players lose out to Indian companies on quality and adherence issues. Recession cannot wipe out Big Pharma and Indian pharma outsourcers stand to benefit as these dinosaurs merge," N Santhanam, chief operating officer of Rs 2,800 crore, Piramal Healthcare, said. Piramal's Pharma Solutions provides end-to-end support for bringing a drug to market or managing the life cycle of a launched drug.

With the Obama-led US government as well other European nations looking to cut down public healthcare budgets, companies are being pressured to cut down prices of medicines. R Sankaraiah, executive director (finance) of Jubilant Organosys, agrees. "The slowdown has put further pressure on the margins as government’s worldwide aim at bringing down the overall public health care expenditure. This trend of consolidation and collaborations will continue and is likely to have a positive impact on the Indian CRAMS sector," Sankaraiah feels. In the first nine months of FY09, Jubilant's contract manufacturing and research business has grown by 61%.

Analysts feel several India based companies are well positioned to leverage their competitive advantages in terms of low cost business model, knowledge-based talent pool, efficient innovative technologies and large patient population to deliver cost effective solutions for the global pharma companies. In fact, as luck would have had it, most Indian contract manufacturers are at the far end of their capital expenditure cycle (indicating minimum requirement of more capacities).

On the short-term, these big mergers may not play out well for Indian contract manufacturers but the long-term story remains very much intact. "Big Pharma's focus on rationalising working capital needs and reducing stocks from the system would result in lower off take of sales in the next couple of quarters…but the focus on optimising will lead to more outsourcing," pharma analyst Rohita Sharma at Enam Securities said.