Given the current economic crises and recession on all major economies, outsourcing has become a more relevant and strategic option for several pharma multinationals. Cost reduction influences around 20 to 25 per cent of pharma major's decision to outsource some of their drug discovery research and manufacturing activities. Besides, it helps them focus more on core business, while reducing over all price pressures. It in turn gives them a competitive edge. Information technology sector and its success reassure this strategic initiative.
The pharmaceutical industry has been slower than other sectors to adopt outsourcing, largely due to concerns over protecting valuable intellectual property. But rising costs and shrinking margins are leading more pharma companies to do so, according to a recent IMS report.
Four of the 10 largest pharma companies announced major initiatives to outsource manufacturing activities last year. IMS identifies the increase as one of the top 10 strategic moves of the pharma industry. Outsourcing of other functions will likely soon follow, the report adds.
It's a bitter pill for US pharmaceutical companies to swallow. With the increasing economic burden of health care costs, they will be hard pressed to maintain their high-price, high-margin business model. Droves of retiring baby boomers and the possibility of national health care legislation, among other market forces, are leading folks to favour inexpensive generic drugs over their costly patented counterparts.
This cost squeeze is leading US pharma companies to outsource more of their research and development to low-cost countries. Of the $45 billion such companies spend annually on research and development, 33 per cent is currently outsourced. Analysts believe it will grow to 41 per cent by 2009.
In particular, pharma companies are looking to Asia. In a recent survey by PricewaterhouseCoopers, 72 per cent of multinational firms said they are considering outsourcing clinical trials to Asia. This reality is reflected in the favourable financial outlooks of several Chinese contract research organisations (CROs).
Pharma giant Pfizer just announced plans to outsource more of its R&D to China, India, Japan and South Korea, apart from doubling the amount of manufacturing it outsources to 30 per cent.
Pfizer is investing $300 million on R&D in South Korea over the next five years. The company also intends to close two manufacturing facilities in the US and one in Germany and will send more of that work to contract manufacturers in Asia.
Common areas of outsourcing
Clinical trails: With a population of more than 1 billion, 250 medical colleges, about 20,000 private sector hospitals, nearly 24,000 primary health centres, about 5,00,000 qualified English speaking medical professional, excellent IT skills and facilities for data management, wide variety of genetic pool of population, wide spectrum of communicable and non communicable diseases, India is the best location for multinationals to outsourcing their clinical trials. The country also has large base of diabetic, cardiac and oncology patients.
Collaborative R&D in informatics & chemistry services: High research and development (R&D) expenses implies opportunities to outsource and help mitigate the significant and uncontrollable factors of drug development by increasing the variety of technologies, timeliness and cost of new chemical entity (NCE) introduction. If managed effectively outsourcing can improve R&D productivity and impact sales.
Global bulk drug outsourcing: India has the highest number of manufacturing plants approved by US FDA, outside USA. The quality of bulk drugs manufactured by domestic manufactures has improved significantly, consolidation is increasing with several local players opting for mergers and acquisitions.
Relocation of production base: Manufacturing cost for the formulation will be half of what it is in the developed world, thanks to low cost of inputs. Contract research and manufacturing and multi-year supply arrangements are all boasting outsourcing.
Special economic zones (SEZs) are expected to take india's manufacturing competitiveness to the next level as fifteen pharma SEZs, including four biotect SEZs, have received a nod from the SEZ board in principle.
Pre-clinical studies: India, which was not widely favoured as a destination for pre-clinical studies earlier, will now grant patent safety to MNCs, allowing them to invest in Indian contract research organisations (CROs). Further, an increase in healthcare costs may prompt the entry of "healthcare maintenance organisations (HMOs) and customised healthcare management firms into India in the near future.
Pharma sector has to take advantage of the situation by going in for additional investments in infrastructure, hiring qualified personal to maintain its lead in production and to narrow the gap in maintaining timelines for deliveries. Indian pharma should be able to produce state-of-the-art infrastructure and one-stop shop for all kinds of production of bulk drugs to package formulation.
(The author is Director of World Med Community.com, Chicago, USA)