What is Outsourcing in context to pharmaceutical industry?
The Food and Drug Administration (FDA) indicates in its guidance for Industry, Quality Systems Approach to Pharmaceutical Regulations that "Outsourcing involves a second party under a contract to perform the operational processes that are a part of a manufacturer's inherent responsibilities."
Why do companies outsource?
Increase Core Competency - Core competency means a product from a company which provides benefits to the customers, it is not easy to imitate by the competitors and is a point of difference for the company with respect to its competitors.
Outsourcing helps to increase the product range of the company.
Sometimes cost of production is high in a country, hence to bring the cost of production down, it is advisable to outsource. Take China for example; where labor cost is low, hence companies outsource the production to China.
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Outsourcing also reduces the time taken by a product to be launched in the market.
As the pharmaceutical industry is being globalised, it is better to produce the drug near the market and hence outsource. For example; if a drug has to be circulated in India, then the drug manufacturing for India is outsourced to India.
Companies need not setup facility and have dedicated resources for something whose requirement is variable. They can outsource the manufacturing work and pay as per their needs.
They can avail the service of highly skilled and educated labor at a lower cost.
Companies can have faster access to latest technologies and processes followed by outsourcing to the Clinical Resource Organization (CROs) in the low cost countries like India and china and hence minimize the investments in capital-intensive facilities.
The pharmaceutical companies world over are now making Outsourcing a part of their strategy to meet the new challenges posed by increased competition and globalization. To remain competitive, companies are focusing on their core competences and outsourcing other activities. These activities include Contract Research, Drug Recovery and Development, Manufacturing, Managing clinical data, back office functions. There are other organization functions which are considered to be outsourced like Payroll, logistics, procurement and distribution. The costs of manufacturing and for Research and Development in developed countries have increased. Whereas countries like India and China provide highly skilled labor and state of the arts facilities at much lower cost compare to that in developed countries.
Outsourcing survey done by CONTRACT PHARMA organization reveals that this year 44% respondents to the survey indicated that their spending on outsourcing increased compare to that of previous year. Whereas 34% respondents indicated that their spending on outsourcing is going to be less than previous year.
The survey also revealed the trend that 54% of top 20 pharmaceutical companies in the world are going to spend more on Outsourcing this year compare to previous year, whereas the number is 40% for medium and small size companies. This indicates that large companies are spending more on outsourcing to be able to focus on their core competencies and being more competitive.
The chart below reveals that 45% of the companies outsource their work to be able to focus on their core competencies.
List of 10 Best Outsourcing Companies in the world compiled by International Association of Outsourcing Professionals (IAOP):
Jones Lang LaSalle
Nair & Co.
TEKsystems Global Services
Most of the Pharmaceutical companies across the world are looking towards India and outsourcing the drug making process. Now, let's look at some facts and figures as to why are they outsourcing? Indian pharmaceutical industry is 4th largest in terms of volume and 13th largest in terms of value. In over 60 therapeutic categories with over 60000 brands, the market share comes close to USD 5bn. India is the country with cheap labor due to its population and also has world class facilities and expertise in manufacturing of drugs and thus without hampering the quality of the drug, mass production can be brought into picture. This reduces the cost of production to a great extent. Study says that at least 35% of the drugs used in the US are manufactured in India.
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All this happened after the Indian Patent Act of 1970. This act removed the product patents in the agro-chemical, pharmaceutical and food processing sectors, hence preparing of patent drugs in India became legal. Due to this, the entrepreneurs of India legally reversed the engineering plant, change the manufacturing process and by pass the patents and thus having no research and development cost to recover, could sell the same drug at a much lower cost than the price of the original drug. India began to follow the World Trade Organization's Trade Related Aspects of Intellectual Property Rights (WTO-TRIPS) agreement and acknowledged product rights after the revision of the Indian Patent Act in January 2005.
From the year 2007 to 2008, the Indian pharmaceutical market has grown over 4% and thus reaching a new high of USD 7,734m. It has been estimated that the market will keep on rising at a rate of 13.2% from 2009 till 2014 and can reach a new high of USD 15,490m by 2014.
Another reason for the involvement of the global pharmaceutical companies is due to the immense growth perspective furnished by the elderly population, developing patent system and other socio-economic reasons.
Challenges for India
â€¢ The pharmaceutical industry in India is overregulated. This may hamper new players coming into market and existing player's growth.
â€¢Ethicality of trials is also an issue.
â€¢ Inadequate funds and lack of infrastructural facilities required to become a global leader in healthcare.
Top ten Pharmaceutical companies in India
Turnover (as in 2007)
Rs 4,198.96 crore
Dr. Reddy's Laboratories
Rs 4,162.25 crore
Rs 3,763.72 crore
Rs 2,463.59 crore
Rs 2,215.52 crore
Rs 2,080.19 crore
Rs 1,773.41 crore
Rs 1,613.00 crore
Rs 983.80 crore
Rs 980.44 crore
In-House Offshore Initiatives to India
Work Done and Future Plans
â€¢ Emphasis on collaborative research work with UK.â€¢ R&D has already started for development of indigenous technologies for new drugs and process improvements of old drugs.
â€¢ Started building its in house capacity for clinical research in 2004 and plans to further it in the subsequent years.
â€¢ Indentifying institutes in India for long term collaborations.
â€¢ Plans to make India the prime R&D Hub
â€¢ Has invested more than 13 million $ in India in various segments of psychiatry, cancer, infectious disease, etc.
â€¢ Has conducted over 20 clinical studies so far
â€¢ Plans to make India an research hub and shift major part of its global R&D operations to India
â€¢ Plans to make India a base for clinical development in cardiovascular, diabetes and oncology segments
â€¢ Has captive centre at Bengaluru, set up in 2001 to discover new drugs for the treatment of TB
â€¢ Plans to scale up the operations in India
â€¢ Plans to make India the base for clinical development for asthma related drugs, cardio-vascular and oncology.