An existing agreement between Nycomed and Cadila Healthcare is to be amended, moving the responsibility for chemical production of active pharmaceutical ingredients (APIs) to the joint venture company Zydus Nycomed in India.
The two European production facilities affected by the deal are located in Singen (Germany) and Linz (Austria), which employ a combined total of 1,390 people.
In January Nycomed announced its intention to find a partner to help relocate its API production as the pharmaceutical industry shifts towards countries with lower production costs.
Barthold Piening, Nycomed's executive vice president operations, said: "Chemical API production is under increasing cost pressure from countries with lower wages."
"This will enable us to continue API production at the highest quality level with competitive costs."
The global contract manufacturing market is forecast to reach a value of $26bn by 2011, according to data from market research firm Kalorama.
Production costs in India are widely believed to be 30-40 per cent lower than in developed markets and the companies also have the skills and experience gained through over a decade of API production and establishing scale manufacturing operations.
These figures are attractive to companies and earlier this month GlaxoSmithKline (GSK) announced it would be cutting production at its plant in Ulverston, Cumbria, resulting in a reduction in the workforce from 540 to 210 over the next two years.
The move is part of GSKs attempt to achieve savings of $1bn by 2010, a cut of 40 per cent, which CEO Dr JP Garnier says will be achieved through, "standardisation, consolidation, outsourcing and offshoring".
Savings of this magnitude have been mooted before by financial analyst Stewart Atkins in 2006 at the "Change management" meeting in the UK.
He calculated that for a typical large European pharmaceutical company, savings of $1.1bn were possible by moving 70 per cent of production staff, 30 per cent of R&D staff and 20 per cent of admin staff to cheaper markets such as India and China.
Reductions in cost of this magnitude are hard to ignore as plateauing innovation and saturation of traditional markets makes it harder to deliver to investors the double-digit returns often seen in the sector.
These pressures have seen developing markets become a focal point for pharmaceutical production, sales and testing.
AstraZeneca has established a tuberculosis research institute in Bangalore, India and increasing numbers of company's are looking at the savings of conducting clinical trials abroad, which can be as significant as 60 per cent.
There is also a desire to tap into the expanding market for pharmaceuticals in the developing world, with GSK launching experiments to expand its differential pricing of medicines in an attempt to boost sales and expand treatment.
At present it appears that the reductions in overheads outweigh the risks associated with offshoring, such as confidentiality breaches, loss of control over the project and decline in the development of in-house expertise.