In her swank headquarters just blocks from some of Mumbai's worst slums, Swati Piramal is midway through an impassioned pitch about revolutionising the world of drug discovery. Sanskrit passages of the Bhagavad Gita, the ancient Hindu text that guides her business philosophy, adorn the office walls of her company, Piramal Life Sciences. Its logo is gyan mudra, a finger gesture used in yoga meditation resembling the Western sign for "A-O.K."

Journey now to Bangalore. After a crawl through the city's notorious traffic and a bone-rattling ride over a cratered road that washes away with each rainfall, the four-wheel-drive van arrives at the glistening, ocean liner-shaped headquarters of Jubilant Biosys. The laboratories inside are world-class. But when equipment fails, repairs often take a week, scientist Ajith Kamath explains sheepishly. Lunch is Domino's pizza with toppings that include corn, Indian paneer cheese, and hot spices. Turns out Jubilant is co-owner of India's Domino's franchise.

• Narrated slide show: Outsourcing lab work to India

At first glance, companies such as Jubilant and Piramal may seem too undeveloped - or perhaps just too culturally remote - to rub shoulders with the world's top pharmaceutical makers. But judging from all the deals taking shape in India, they may have a critical role to play in the industry's future.

In recent months, Western executives have been flocking to India's hastily built science parks, looking for allies in the never-ending quest to develop blockbuster treatments. With little fanfare, they've started a process that could lead to wide-scale outsourcing of drug research to Asia.

Five Western companies have formed drug discovery partnerships with Jubilant, including Eli Lilly, Amgen, and Forest Laboratories. Lilly is also partnering with Piramal, as is Merck. Every month deals are signed with India's elite pharmaceutical companies. The goal is to take promising compounds discovered by the multinationals, run tests to weed out the weakest candidates, and develop some of the others into marketable drugs. Eventually the Indian partners also hope to rack up scientific breakthroughs that lead to entirely new medicines for diseases such as Alzheimer's, cancer, or diabetes.

• Plus: Chinese scientists build big pharma back home

Looking beyond India's potholed streets and poverty, Western drug executives say they've forged a powerful model for research collaboration. The timing is no accident. Despite spending billions at home on technologies to turn gene-based discoveries into new medicines, pharmaceutical companies are struggling to come up with revolutionary products that will pull them out of a five-year slump with virtually no revenue growth. In desperation, the drug giants are paying hefty premiums to swallow biotech companies - witness Roche's $44 billion bid to purchase Genentech in July.

What the multinationals now seek from India is the same combination of brainpower and cost savings that made the subcontinent a leader in software and computer services. Some Western companies are volunteering to share intellectual-property rights on new discoveries and even divvy up the profits. "It's a transformation of the R&D enterprise," says Robert W. Armstrong, Lilly's vice-president for global external research. "We have to think in a totally different mode."

• Slide show: Who's who in Chinese-American life sciences

The rush east, where five PhD chemists can be had for the cost of one in the West, entails risks. At a time when Pfizer [Get Quote], AstraZeneca, and others are slashing US R&D jobs by the thousands, the buildup in Asia is bound to set off alarms that America is sacrificing another key industry through radical outsourcing. But if the strategy works, it could save the drug industry billions of dollars, bring down the prices of new drugs, and accelerate breakthroughs.

The impact of research outsourcing will be amplified greatly as China, with an even bigger pool of biochemists, expands its role. Lilly, Sanofi-Aventis, and others have already struck up partnerships there. China has "extraordinary potential," says Eric J Topol, former chief cardiologist at the Cleveland Clinic, who advises HUYA Bioscience, a drug licensing venture based in San Diego. China could yield "a flood of potentially important therapies. It's just a matter of time".

The East-West research collaborations are new and have yet to produce a single drug. But many Western executives say they're stunned at how quickly the Indian industry is achieving targets set by the joint ventures. Just a few decades ago, India was a outcast in the pharma business. To the outrage of Western multinationals, New Delhi in the 1970s declared it would cease honoring patents on pharmaceuticals. Thousands of generic drugmakers then sprouted up, reverse-engineering Western medicines and distributing them in India and in other developing countries.

The Indian executives argued they were providing a social service, selling antibiotics, say, for a fraction of what Western patent holders demanded. In the 1990s, Indian generics makers Cipla and Ranbaxy Laboratories [Get Quote] started selling AIDS cocktails in India and Africa at just $1 per dose.

Even Indian drug executives, however, realised the knockoff business is a dead end. Almost all of India's top pharma managers say their cherished goal is to stamp out diseases in the Third World. That will require breakthrough medicines, not factories full of pirated generics. They also recognise the only way to jump-start a modern industry is through collaboration with Western drug companies. So in 2003, New Delhi reversed course and said it would protect the rights of foreign patent holders.

The first collaborations involved fairly simple lab work, mainly to save on labour costs. The Indians wanted more responsibility. But while India had plenty of good chemists who could crank out drug knockoffs, it lacked biologists with the deep knowledge and experience to develop novel compounds.

When Sandeep Gupta, a former Forest Labs research director, toured Indian pharma companies in 2006, he urged the CEOs to import talent fast. "I told them unless they expanded their biology capability, I couldn't [make deals] with them," he says. Soon, local drugmakers were snatching up thousands of Indian-born biologists who had trained abroad and offering them leadership opportunities.

Jubilant nabbed Kamath, a 14-year veteran of Pfizer, to head its nascent structural biology department, and V N Balaji, who had worked at Monsanto and Allergan, as chief scientific officer. The company quickly expanded its team of 50 chemists and drug discovery experts to an army of 700. "If you told me five years ago this would all be here today, I would have replied 'no way,' " Kamath says.

Over time, the partnerships evolved into co-development arrangements. The turning point was a 2003 collaboration between GlaxoSmithKline [Get Quote] and Ranbaxy. Glaxo handed over novel compounds thought to have medicinal value and offered its Indian partner a share of the intellectual-property rights and millions in royalties if it could help develop a commercial drug. Western drug companies have announced about $400 million worth of such deals so far, but the total value is probably much higher.

BristolMyersSquibb, for example, has expanded a research partnership with Bangalore-based Biocon [Get Quote]. It includes a state-of-the-art research facility that will house 400 scientists - the cost of which has not been announced.

For the Western partners, the first objective in these alliances is to cut costs. In the US, specialised research outsourcing firms will charge a drug company $250,000 and up for the full-time services of a PhD chemist. With an Indian partner, the same work can be done for roughly one-fifth the cost.

But what Western companies long for, more than anything, is to replenish their drug development pipelines. It can cost as much as $100 million to nurture a potential drug from a germ of an idea to the point where it is tested in people. After all that, the odds of any drug winning Food & Drug Administration approval are just 1 in 8. By conducting many experiments in low-cost Asia, the drug companies believe they can run more projects while keeping R&D budgets flat.

In other words, they gain "more shots on goal" - a phrase that gets repeated so frequently you'd think it's a quote from a sacred Indian text.

The other catchphrase that comes up constantly is "fail fast, fail cheap." When scientists study potential drugs in the test tube and then in animals, they detect many problems that ultimately cause drugs to fail, such as toxic side effects or inadequate absorption in the body.

Killing projects at that stage is essential, because most of the cost to develop a drug - a few hundred million dollars, typically - comes later, during human clinical trials. In effect, Western drugmakers want to front-load the failures through early-stage screening in India, says C.S.N. Murthy, CEO of Bangalore-based Aurigene. "Here, you can get four failures for the price of one."

In the early days, Western executives were suspicious of their Indian partners with their history drug knockoffs. Yet they were also powerfully attracted. Mervyn Turner, a senior research vice-president at Merck, says his first trip to India in November 2007 was "mind-blowing." He was impressed by the local companies' yearning to do world-class research and by their passionate, charismatic leaders. In Mumbai, he met Piramal, the Harvard-educated daughter of a textile mogul, who explained that she chose medicine to find a cure for polio. She's "a force of nature," he says.

A look inside Forest Lab's partnership with Aurigene shows both the strengths of the new research model and the hurdles it faces. Forest has given Aurigene some prized, proprietary data on how novel drugs might attack metabolic disorders such as diabetes. Aurigene's job is to screen a library of therapeutic chemicals and come up with a drug.

Each company has assigned three senior staff to a "joint research council," and parallel teams of chemists and biologists keep in constant touch via teleconferences. Murthy says speed is of the essence. While large US labs struggle with bureaucracy, "in a place like this, a scientist makes some computations in the morning, and by the afternoon he has all the data.

He doesn't call a meeting. He walks up to a colleague and stands over him until he gets what he needs." Forest and Aurigene recently designed a drug and started animal tests in just three months - a quick kick-off by US and European standards.

Western drug companies are giving Asian partners more responsibilities than they ever imagined. Suven Life Sciences [Get Quote], an Indian startup in Hyderabad, is co-developing drugs for brain diseases with Lilly. As part of the deal, Suven can work on its own drugs for Alzheimer's, obesity, and Parkinson's disease, provided they don't compete with jointly developed products.

Early on, Lilly sought to impose restrictions on Suven's own research. "We didn't have any flexibility," says CEO Venkat Jasti. But as the relationship evolved, Jasti prevailed on his US partners to toss that paperwork in the trash. "We can't do it the Lilly way," Jasti says. "Innovation comes from freedom."

With Nandini Lakshman in Mumbai