Outsourcing in Pharmaceutical Industry

Introduction

Pharmaceutical industry is constantly undergoing a change. In the past pharmaceuticals had a different strategy, companies use to build all the products internally and confine access to information or resources to third parties. The past situation is changing; in-house resources are getting exhausted with a very thin product pipeline and in addition many drugs are going off patent by 2008 hampering company sales and competitiveness. It takes $800 million and 20 years for a new drug/device to enter the market. Patient recruitment and medical personnel account for nearly 70 per cent of the clinical costs that are required to bring a drug to market. Threat from generics, low productivity of R&D process, higher costs for product approval and parallel imports are the major market feature for decreasing pharmaceutical profits. Global outsourced R&D expenditure is increasing every year leading to rise in business prospects for Contract Research and Manufacturing services (CRAMS).

The total pharmaceutical and biotech outsourced market is currently pegged at $33 billion and is expected to reach to $48 billion whereas R&D outsourcing expenditure is around 50% of the total market as stated below.

Table 1: Global R&D Outsourced Market (Source: Frost & Sullivan, “e” stands for Frost & Sullivan estimates)

Outsourcing
Outsourcing - the current mantra of pharmaceutical industry - is being used more strategically as an ongoing part of a company's overall business strategy. Outsourced activities can be in various fields’ right from the drug discovery till manufacturing of the products. Pharmaceutical firms have long outsourced functions such as manufacturing, packaging, clinical trials and sales force mobilization.
The U.S. market for outsourced pharmaceutical manufacturing is growing at the rate of 10 to 12% annually. Pharmaceutical companies will continue to fuel much of this growth as they outsource an increasing number of products and services. Biotechnology companies, which have almost doubled in number during the past five years, also contribute to this trend as they seek ways of bringing their products to market without making capital investments in their own manufacturing facilities.

Why outsource?
Pharma alliance or partnership holds cost benefit advantage by reducing huge amounts of capital outlay for producing latest technology in-house. Outsourcing allows pharma companies to ramp up the R&D operations at a fast pace with minimal capital outlay. Benefits of Outsourcing are:

- Outsourcing reduce the overall costs by 30% to 35%

- Faster and cheaper to have discovery work outsourced, reduces drug development cost

- Reduces problems faced during the regulatory processes around the world

- Improve manufacturing efficiencies

- Reduce excess production capacity by divesting facilities

- Minimize investments in capital-intensive facilities

- Improve net earnings and cash flow;

- Divert resources to focus on other competencies like marketing

Outsourcing can allow pharma companies to establish consistency and efficiency across sprawling international networks of commercial, supply chain and manufacturing organizations. Outsourcing if managed and executed strategically has every potential to add value to the shareholder value and keep the investor community happy.

Why outsource work into India?
India today has the largest number of US Food & Drug Administration (FDA) approved drug manufacturing facilities outside the US. The Indian patent act amended on March 2005 opens a new avenue for India into the global pharmaceutical market. Pharma multinationals have maintained a low-key presence in Indian market due to absence of product patents and rigid price controls. Indian pharmaceutical industry did not receive significant foreign direct investment (FDI) but introduction of product patents will see multinationals strengthening their presence in the country. India holds multiple advantages over other countries for increasing outsourced work:

- Presence of over 10,000 pharmaceutical companies and one fourth of it can provide contract manufacturing facilities to foreign pharmaceutical companies

- Presence of around 25 Contract Research service (CRO) providers with excellent infrastructure and well trained and experienced staff to conduct clinical development activities

- India’s well known software skills and English speaking scientist for bioinformatics

The second largest population in the world, a growing economy and rising income levels makes Indian market difficult to ignore.

Conclusion
It’s a great challenge to successfully manage the outsourcing relationship and generate value.
To maintain continuous growth in outsourced work from pharmaceutical companies, outsourcing partners need to confidentially retain the proprietary knowledge and meet the regulatory compliance. Outsourcing solves the problems for the pharma companies and allows them to exploit the potential of new drug discovery technologies. It’s not a far fetched dream when the pharmaceutical companies and outsource partners work in symbiotic relationship where pharma companies provide their core competencies in marketing and commercialization and outsource partners supply new innovative products.