The pharmaceutical industry has finally caught up with the offshoring trend and there is now a significant movement towards global sourcing. Leading this trend are large MNCs based in the United States, Western Europe, and Japan. These companies either have experimental programmes in various countries or have outsourced labour-intensive functions like IT and administrative services. Nearly 10,000 jobs were offshored in 2003; 2008 is expected to see a doubling to about 21,200 jobs. This reflects the increased attractiveness of offshoring as a cost-saving mechanism.
Within the pharmaceutical industry R&D represents 74% of offshored employment. Currently, the R&D activities undertaken in less developed nations include clinical trials, clinical statistics, data management, medical writing, and discovery. Clinical trials have been recognized by the pharmaceutical industry as an area with the greatest potential for cost-savings and expansion. This is amply supported by the fact that Quintiles, a well-known provider of clinical trials, has hired 850 employees in India, or 5% of its total employment, and it plans to expand its data management centre in Bangalore. Although, it is inherently risky to globally source a core function like R&D, pharmaceutical companies are more than willing to follow in the footsteps of industries that have succeeded in this space.
Employment-wise R&D constitutes the largest offshored operation. Functions like drug discovery, clinical trails and research are being carried out by scientist, doctors, and nurses in lesser developed countries. R&D and Human resources have also been supported to some extent by research analysts, finance wizards and accountants in these countries. It is therefore critical that global pharmaceutical companies make the right decision while choosing a competent and dynamic regional partner to carry out these activities.
A standard pharmaceutical business model does not exist for offshoring but companies are conducting their offshoring activities through a mix of captive and vendor arrangements. One of the commonly used models is where a pharmaceutical company initially controls procedures and management, but over time gradually transfers power to its on-site vendor or partner.
Destination India
India, with second largest population in the world, and with every sixth patient in the world being an Indian, is going through an upheaval economically, socially and scientifically. India has a huge pool of talented doctors; 20,000 new doctors graduate every year in India. There is also a distinct wage arbitrage in India. India has many talented chemists from years of reverse-engineering drugs developed in the United States and Western Europe, and churns out over 122,000 each year.
While this wealth of labour does not extend to scientists with managerial experience - integral components of the discovery process - there is an abundance of qualified labour in other areas such as lifesciences and analytics. Currently, Indian regulatory requirements are not as strict as those in US. Outsourced clinical trial activity in India in 2005 was at around US $75 million (Rs.3.5 billion) and is estimated to go up to $281 million (Rs.13.2 billion) by 2010.
India's inherent advantages in both contract manufacturing and research make it an attractive destination for the mass production of drugs and clinical research. The existing Indian pharmaceutical industry is recognized for its ability to reverse engineer patented drugs, and its abundance of economical and trained chemists. There are nearly 75 USFDA approved plants and over 200 Good Manufacturing Practices-certified units. This is the highest number outside of the US. About 126 Drug Master Files (DMFs) were filed by the Indian pharmaceutical companies with the US FDA in 2003, which is 20% of the total drugs entering the US market. Based on this we can conclude that India has the talented workforce and manufacturing infrastructure required for offshoring.
The Indian government has permitted 100 percent foreign direct investment (FDI) into the pharmaceutical industry. The factors luring FDI to Indian are reduced import tariffs and price controls. The low levels of R&D investment by domestic pharmaceutical companies (2% of total revenues) have triggered the shift towards a more friendly investment scenario.
Indian companies focused on reverse engineering blockbuster drugs for international sale while they devoted only a small percentage of revenue to R&D. Thus the needs of both Indian and international companies are synergistic.The international companies are trying to decrease R&D cost and Indian companies looking forward to larger FDI investment.
For Indian pharmaceutical companies, there are very few options to explore in the product patent era. Due to lack of substantial funding needed for 'discovery research' they find in contract manufacturing the means to maintain high growth rates. Ranbaxy Laboratories and Lupin Laboratories were among the first Indian companies to engage in manufacturing contracts from multinational companies. Ranbaxy received its manufacturing contract from Eli Lilly and Lupin from Cynamid (early 90s).
Indian companies bagged manufacturing contracts worth $75 million (Rs.3.5 billion) in 2004. India is the world's largest producer of generic anti-AIDS drugs. The generics market in India was valued at more than $4 billion (Rs.17.7 billion). The Indian pharmaceutical industry generated sales of around $900 million (Rs.4 billion) a year in India and supplied 85 percent of the domestic market in 2004.
In order to sustain their profits, more and more pharmaceutical companies are outsourcing significant amounts of their operations to lesser developed countries like India and China. A few major pharmaceuticals already have pilot programmes in place or plans to offshore sizeable components of their operations. Offshoring is expected to grow at 16 percent CAGR over the next 5 years, driven by robust increases in the span of activities and relocation of both back-office and core processes. Thus, pharmaceutical offshoring is a phenomenon waiting to happen, which could yield high returns for the domestic pharmaceutical companies. And very rightly, most Indian companies (big and small) have identified the same and are taking steps to project themselves as the best option for attracting offshored activities.
(Mahesh Sawant is program manager, Healthcare Practice, Frost & Sullivan. The author can be reached through: sdedhia@frost.com)