Small players account for 40 percent of pharma indFew outside the recently developed township of Baddi in Himachal Pradesh will know Arun Rawat or his drug manufacturing company Kanha Biogenetic Laboratories. But this first-generation entrepreneur, who ventured into the drug-making business just five years ago, produces medicines for such majors as Wockhardt, Ajanta Pharma and Ind-Swift, to name a few.

His neighbour, R B Gupta, who runs Unix Biotech, supplies over 30 products to Cipla, the biggest company in terms of domestic sales. India's big pharma is getting a bulk of its medicines made from small and medium enterprises (SMEs) like Kanha and Unix. The contract manufacturers, mostly clustered in the hill states of the country, are churning out over 60 per cent of the medicines consumed in the country, according to industry estimates.

The business generated by these companies is more than Rs 25,000 crore, says Rawat, who is also the general secretary of the Baddi Barotiwala Nalagarh Industries Association. This means that, in value terms, these units account for 40 per cent of the Rs 60,000-crore domestic pharma industry.

“There are over 300 drug manufacturing units in Himachal Pradesh alone. Over 70 per cent of them are doing contract jobs for established pharmaceutical companies. We offer them good quality medicines at best prices,” Rawat adds. It is not just Himachal Pradesh. Pharmaceutical clusters in Uttaranchal, Sikkim and Jammu & Kashmir are all full of such contract manufacturers who have set up units in the last five years, lured by tax exemptions.

With the March 2010 deadline for tax exemptions nearing, contract manufacturers are confident that the outsourcing will continue even after the tax sops are over.

Contract manufacturing is, however, big business for not just new comers. Established pharmaceutical manufacturing hubs in Gujarat and Andhra Pradesh also have several such firms who specialise in contract manufacturing.

For instance, Hyderabad-based Gland Pharma is manufacturing high-value injectables for leading global players to be sold in the US market. Ravi Penmesta, managing director of Gland, confirmed the development but refused to disclose names of the foreign clients as he is bound by confidentiality agreements.

“We do supply high-value medicines to multinationals. Our manufacturing facilities are US FDA-compliant and are of global standards," Ravi said, referring to the US drug regulator Food and Drug Administration.

MSD India, the Indian subsidiary of global drug maker Merck Inc, had said recently the company would leverage the high quality manufacturing base of India to up production. US injectable major Hospira also acquired the injectable business of Chennai-based Orchid Chemicals and Pharmaceuticals recently to make use of this India advantage.

Even Mankind Pharma, one of the top 10 pharmaceutical companies in terms of domestic sales, had initially sourced their medicines almost entirely from contract manufacturers.

But has the proliferation of contract manufacturers created a dilution of manufacturing standards? "No," says Rawat. "All of us are quality conscious. Even our clients are," he explains.

There have, however, been some cases of domestically manufactured drugs whose source could not be traced from the labelling, raising quality concerns. This has alerted government agencies.

“We are keeping a close watch on drug majors to see that they continue to be responsible for the drugs for which they outsource production," a senior government official says.

Rawat adds, drug majors are utilising their facilities to manufacture drugs for exports and are outsourcing their domestic requirements to the SMEs.