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Outsourcing entered the business lexicon in the 1980s and often refers to the delegation of non-core operations from internal production to an external entity specializing in the management of that operation. The decision to outsource is often made in the interest of lowering firm costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of worldwide labor, capital, technology and resources. Insourcing is the opposite of Outsourcing; that is insourcing (or contracting in) is often defined as the delegation of operations or jobs from production within a business to an internal (but 'stand-alone') entity (such as a subcontractor) that specializes in that operation. Insourcing is a business decision that is often made to maintain control of certain critical production or competencies.
Strategic importance of outsourcing to the pharmaceutical industry
Global pharmaceutical industry faces numerous challenges in the form of increasing competition in generic markets, rising cost of new product development, declining research and development (R&D) productivity, shrinking average patent life, and mounting governmental pressure to reduce drug prices. Given the backdrop of such a competitive landscape, the decisive factors for growth and sustainability are faster new drug development and cost containment with Pharmaceutical Contract Manufacturing emerging as a strategic option offering several advantages. Firstly, outsourcing provides pharmaceutical companies the opportunity to avail flexibility, quicker time to market, and lower scale-up costs. Thus, companies will be able to meet growing demand for new drugs and focus on their core competencies. Secondly, outsourcing enables companies to reduce excess capacity in their manufacturing networks and restructure supply chains. Finally, value-added outsourcing services meet the increased demand for specialized manufacturing capabilities in key technical niches and increased demand for back-up sources of supply.( Bombourg,2010)
Strategic rationale for outsourcing decisions
Big pharmaceutical companies are typical multinational corporations with worldwide presence. Their products are marketed in all relevant world markets. In face of still rising healthcare costs, ageing populations and changes in lifestyle globalization was expected to be another opportunity how to utilize worldwide presence and bring revolutionary genomic based medicines into the market. Investors loved that vision and tech boom fueled pharma stocks as well. Now it is clear that there is a trouble in paradise. Blockbuster drugs are in maturity cycle phases, big pharmas pipelines are empty and some prospective molecules even failed to gain marketing authorization. Many of these problems stem from inefficient R&D.
Pharma managers admit that the industry goes through very difficult times. It can be defined as end of blockbuster era. Companies which have represented industry once belonged to largest world multinational corporations. Pfizer may be the best example. The company was 4th largest world corporation measured by market capitalization in 2001. Since than one bad news have followed another. New drugs (new chemical entities - original drugs) are granted 10 years market exclusivity period during which no other companies are allowed to market the same substance. In recent years especially established pharmaceutical companies failed to deliver new molecules into the market and exclusivity periods for their products are expiring. There are more reasons behind weakening pipelines. Drugs today are more complex, often produced by biotechnology, targeting specific pharmacology pathways. It is more sophisticated process to design and test new drugs now. At the same time regulatory requirements on conduct of clinical trials are more stringent. High level of regulation is industry pattern as public health is very sensitive issue. Other reasons of rising R&D costs are focus on indications with smaller patient groups, maybe also problems with recruiting of good scientists as profession is becoming less attractive.
By reviewing the relative and risks of "making or buying", firms can persuade their expertise and resources for improved profitability. Combining two strategic approaches accurately permit managers to coordinate their companies' skills and resources efficiently beyond levels obtainable with other strategies.
1- Concentrate company's possessed resources on its "core competencies" through which the company can achieve definable incomparability and offer "unique value" for customers. (Quinn, and Doorley, 1990)
2- Outsourcing strategically other activities of the companies - consisting of many conventionally believed primary to a company - which are neither special capabilities the firm nor affect critical strategic requirements. (Quinn, 1992)
Substantial gains can be achieved from effective combining of the two approaches. Directors leverage their firm's resources in four manners.
First, they expand returns on in-house resources by focusing investments and energies on the enterprise's best jobs. Secondly, if core competencies are well-developed a company can supply astounding barriers for present and forthcoming competitors that look for entering into the company's areas of interest, thus assisting and shielding the strategic advantages of "market share". Third, conceivably the utmost leverage of all is the full deployment of external contractors, investments, innovations, and specialized professional capabilities that would be unaffordable or even not possible to replicate internally Fourth, in rapidly shifting marketplaces and technological circumstances, this cooperative strategy reduces risks, shortens discovery and manufacturing cycle times, decrease investments, and generates better responsiveness to customer needs. (Quinn and Hillmer 1995)
Impact of outsourcing on the global market for pharmaceutical products
Outsourcing is clearly an important economic phenomenon and certainly a key aspect of globalization. most analysts connect outsourcing to various trends that have made the economy increasingly global. Thus, the issue of outsourcing is often connected to global commodity chains ( Gereffi and Korzeniewicz 1994 ); global networks ( Castells 1996 ); lean or flexible production practices ( Harvey 1990 ; Inda and Rosaldo 2002 : 6-7; Harrison 1994 ); the internationalization of production and the division of labour ( Jameson 1991 ; Beck 2000 ; Robinson 2003 ) which some thinkers see as undermining local labour's power vis-à-vis global corporations ( Smith 2005 ; Petras and Veltmeyer 2001 ; Rodrik 1997 ; Isaak 2005 ; Applebaum and Robinson 2005 ); and/or an increase in the level of international stratification ( Held and McGrew 2002 ). While undoubtedly important, these analyses tend to confine themselves to macroeconomic issues, particularly the flow of jobs from some nations to others. (Ritzer and Lair, 2007)
Future business models in pharmaceutical industry will likely rely more on outsourcing. There are
complex reasons behind low research productivity of largest pharmaceutical companies and using
Vladimir Patras: International Business
contract research may be solution. CROs rather than pharmaceutical companies were able to take
advantage of globalisation. As relatively small companies with flat organizational structures they are
able to manage clinical trials that often include all continents. They utilize their global presence in
selecting suitable combination of patients, conduct costs and healthcare infrastructure best fitting
particular study. Extensive IT use is requisite in flat global organizations and on the other hand this
leads to further innovations like electronic data capture or advanced systems of electronic data
management and reporting.
Market in which pharamacutical compnies operates can be consider to be much globalised in many ways. It competes
with global acting pharmaceutical companies. It operates on market that is subject of extensive
standardization. There are agreed international standards, harmonized legislation, and extensive use of
technology is also factor of market standardization. There are many unifying principles of local
markets as healthcare has some similar patterns worldwide. However, differences should also be
considered as there is different diseases/patients distribution, differences in organization of healthcare.
Anyway, most of clients originate from the US as most pharmaceutical and biotechnology companies
are headquarted from there. Rest of them are from Europe. On the other hand conduct of trials is really
global. All offices have roughly same core capabilities and determining is the external environment.
Outsourcing: Globalization and Beyond
George Ritzer and Craig Lair 2007
Most Americans view this as just another industry outsourcing jobs, though many considered the life science industry to be immune to outsourcing because of its dependence on innovative technologies and a highly educated labor force.
In fact, many states and municipalities identified the life science industry, and particularly biotechnology, as a high-growth economic engine that could staunch the erosion of their tax-based revenues. State legislators were passing bills that created lucrative tax incentives in order to attract biotech and medical device companies to their region.
Similar to the information and high-technology industries, life science jobs are now migrating offshore. This phenomenon is mainly attributed to life scientists returning to their native countries, such as India, China, and Eastern Europe, to start companies, with governments enticing them back with research grants and a funding source for their enterprises.
In the 1980s and the early1990s, foreign students (especially from India and China) were coming to the U.S. and Western Europe to earn their undergraduate and graduate degrees. It was estimated that in our top universities, 50% of the science students were foreign nationals.
After earning their degrees, many of these students were able to remain in the U.S. and work in pharmaceutical and biotech companies. However, these scientists over time became frustrated with their inability to advance to higher paying positions within these companies. They viewed certain issues such as language, citizenship, and racial bias, whether perceived or real, as creating an invisible barrier to advancing their careers.
Meanwhile, countries such as India and China were actively replicating the Singapore model for their life science initiatives. Over the last decade, the Singapore government focused on establishing a region of excellence for the life sciences by forming world-class life science research institutes and attracting top scientists from overseas with large research grants.
Additionally, the Singapore government is providing a pool of funds for startup companies, which has spawned a major biotech hub in Southeast Asia.
Of particular note is Singapore government-sponsored research in human embryonic stem cells. Unencumbered by the ethical and philosophical considerations impacting such research in the U.S., the Singapore government wants to be a world leader in the field. It appears they are close to reaching their goals with worldclass scientists moving operations to Singapore.
Scientists and entrepreneurs are being actively recruited and returning to their native countries in various value chains within the life science industry. A well-educated and well-trained labor force, particular in Asia, will result in bench-work jobs migrating to companies in countries having equivalent technical skills and providing such services at a much lower cost.
Similar to the information technology industry where the competitive environment resulted in the outsourcing of software development jobs to India, drug companies are now using Indian chemists to develop new molecular entities. India is known for having a pool of highly talented and trained medicinal chemists. Manufacturing generic drugs is already a major industry sector in India.
Venture capitalist Charles Hsu, Ph.D., of A.M. Pappas & Co. (Palo Alto, CA), noted that, inevitably, pharmaceutical companies will outsource many of their drug development programs as pressures mount to drive down costs.
In the past lofty profit margins provided little incentive for pharmaceutical companies to control their costs, according to Dr. Hsu. Currently, however, with politicians campaigning on a platform of controlling healthcare costs through government-regulated drug price controls, drugs being taken off the market because of adverse events, blockbuster patents expiring, and, shallow product pipelines lacking blockbuster products, Dr. Hsu opined that it was a logical step for pharmaceutical companies to take some belt-tightening measures and retool their R&D programs through outsourcing.
Last month, Pfizer (New York City) reported its first quarter earnings and told Wall Street analysts that it planned a $4 billion cost-cutting program. Recent FDA actions, including a recommendation that the company pull Bextra from the market and Celebrex include a stiff warning label linking it to possible heart attacks, no doubt played a role in this decision.
Wall Street analysts are speculating that Bextra and Celebrex could meet a fate similar to Merck's (Whitehouse Station, NJ) Vioxx. Such a measure could have a major impact on Pfizer's bottom line. However, the company insists it still intends to invest approximately $8 billion in its research programs.
With Merck's Vioxx pulled from the market and its cholesterol-lowering drug, Zocor, due to come off patent in a couple of years, rumors are rampant that Pfizer will make a hostile take-over bid for Merck. A few years ago, speculation about a merger of the two pillars of the American pharmaceutical industry would have been considered sheer lunacy.
Dr. Hsu insisted that any cost-cutting strategy employed by large drug companies such as Pfizer must include a change in the company's infrastructure and business model, making them more nimble and flexible in a rapidly changing business environment.
Developing countries are home to many life science companies, many of which have reached critical mass. They will, most likely, become the low-cost service providers for pharmaceutical companies looking to outsource some of their internal programs in the development chain from optimizing lead candidates to offshore clinical trials.
Biotechnology companies, on the other hand, are less vulnerable to outsourcing because the companies are heavily reliant on innovation in developing new technologies and therapeutics, explained Dr. Hsu.
Until there is global harmonization of intellectual property protection, Dr. Hsu doesn't believe that biotech research programs will migrate offshore.
As pharmaceutical companies change their business model, Dr. Hsu added, they might become more dependent upon biotech companies for research and preclinical development of novel therapeutic products.
If this is indeed the case, the pendulum may be swinging back to where investors focus their attention toward biotech companies with innovative and strong technology platforms as well as toolbox companies. The storm clouds over the large pharmaceutical companies could give rise to the silver lining for the cash-starved biotech industry.
Outsourcing and Globalization in the Industry
Wall Street BioBeat: May 1 2005 (Vol. 25, No. 9)