India Woos U.S. Biotech Companies

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India is hoping to become the promised land for the U.S. biotech industry.

India's biotech sector wants to generate 1 million jobs and investments of $10 billion by 2010, according to Reuters. Just as the country's burgeoning IT industry has concentrated on providing programming for more mundane back-end operations, the nation's biotech executives think they can help drug companies with behind-the-scenes support in manufacturing, drug discovery, contract research, and bio-informatics.

If U.S. firms are able to take advantage of India's low-cost labor, the payoffs could be significant. Recent research shows that drug companies spend an average of 37% of their R&D dollars on clinical trials. Some analysts estimate that such studies may cost 50% to 60% less in India than in the United States. In addition, Indian companies should be able to provide significant savings in the IT area, such as in bio-informatics.

Contract service companies have long done business abroad but are now mulling expanding their presence in low-cost markets. Covance (NYSE: CVD), for one, is moving "cautiously" in India through joint ventures. In addition, Albany Molecular Research (Nasdaq: AMRI), after being burned by off-shore outsourcing, is exploring an overseas alliance.

The opportunity to cut costs could not have come at a better time for biotech companies. Specialty biotech treatments may be a major force in driving Americans' drug bills higher, a trend creating public pressure for government intervention. Anecdotal evidence of biotech's effect on medicine costs can be seen in Genentech's (NYSE: DNA) great success with its cancer treatments Avastin and Rituxan, both of which are fairly pricey. Off-shoring could help biotech firms slow price inflation, which may help stave off regulation, while keeping profit margins healthy.

Not that outsourcing to India or other areas with cheap labor is a panacea. In some cases, shipping and storage costs as well as other logistical barriers may negate potential savings. But if biotech companies can find ways to overcome these challenges, the benefits could be tremendous.

Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.