The great Indian outsourcing store

Pharmaceutical companies have been outsourcing many of their processes to multiple business partners for various reasons and have been deriving benefits. As more pharma companies look towards outsourcing, Nandini Patwardhan tries to ascertain whether outsourcing is the in thing for pharmacos.

As many global pharma giants turn to India for outsourcing their manufacturing, research, clinical trials, data management, Indian goliaths are themselves exploring outsourcing opportunities. Either as a company that outsources its activities, or as a business partner such as a CRO, consultant or a KPO, Indian firms have made inroads into the outsourcing industry.

The outsourcing canvas

Globally, pharmaceutical companies are facing increased pressures on profit margins, absence of blockbuster molecules, spiralling R&D costs, pricing pressures, and increased overheads. In such a scenario, outsourcing of business processes to third-party providers is a viable strategic option. The prominent service providers in India offer a gamut of services in drug discovery, clinical trials, drug development activities, manufacturing & formulations, pre-clinical trials, bio-informatics and lab services. "Big pharmaceutical companies such as Roche and Aventis are fulfilling their clinical trial requirements through existing CROs. The size of the domestic clinical trials market is estimated to be $100 million and will reach $300 million by 2010, according to CenterWatch," says Utkarsh Palnitkar, Partner & Industry Leader, Health Sciences, Ernst & Young India.

Dr Kiran Marthak, Director of the Ahmedabad-based VeedaClinicalResearch explains, "The CRO market can be averaged at Rs 300-400 crore, segmented broadly into bioequivalence and clinical research in India. The extent to which outsourcing services of Indian service providers are utilised is 55 percent for API manufacturing, followed by 35 percent clinical research and 20 percent of basic research."

According to Citigroup's report, Indian Pharmaceuticals: Searching for relief as headaches persist, globally around $15-20 billion worth of manufacturing activity and $3-4 billion worth of research (informatics, chemistry services and chemical custom synthesis) is being outsourced. Last year, Indian companies managed to bag manufacturing contracts worth almost $75 billion.

What are you outsourcing?

Sanjay Kulkarni, Managing Director of Stern Stewart & Co India, explains that typically, activities that get outsourced can be viewed along the pharmaceutical value chain.

According to Palnitkar, "Currently contract manufacturing is one of the most popular outsourcing concepts in the industry. Our country has witnessed an emergence of niche contract research companies in the last five years. There are also many opportunities in clinical research based on the product or therapeutic segment. To facilitate clinical trials many firms are into the business of patient recruitment and clinical monitoring for Phase II to IV trials." Outsourcing of lab testing and diagnostics is set to become a big business in India. There are opportunities for clinical data management and statistical analysis of the clinical data. To facilitate the above, specialised IT solutions are required, which has triggered the growth of analytics industry in India. In addition, HR functions like finance are being outsourced by pharma companies. (For more on HR Outsourcing read "Taking the Right Pick" on page 51) "However one needs to appreciate that while HR and finance outsourcings share many common structural and legal characteristics with other types of business process outsourcing transactions, they are a new animal in many critical respects" says Sanjay.

Deciding to outsource

"Any function that directly affects or impacts the product strategy, sales and growth is a core function and the remaining functions only facilitate it. Typically, the non-core functions are IT, finance, HR and payroll. Globally, companies started with outsourcing non-core business processes to more focussed service providers," informs Palnitkar.

The core functions of the big pharma are typically research, clinical development, chemical process development and manufacturing. The core functions ensure innovation in products in terms of new molecular entities, drug use and application, delivery systems, which intend to target a unique disease segment.

Sanjay explains, "The outsourcing decision is contingent on the key drivers at each stage of the chain for example access, quality, cost, and reliability." For instance, while the availability of certified Drug Manufacturing Facilities in India is large, the cost of this activity is also very competitive. Additionally, access to an educated workforce at competitive costs is another big advantage.

But, these are some of the factors that are considered while deciding on outsourcing especially when the outsourced operation is off-shored to a location such as India, or China. "When it comes to deciding whether to outsource to a country like India, global pharma companies analyse the number of ANDA approvals and DMF filings, which are good indicators that India can provide quality pharmaceutical products and research at lower costs," explains Palnitkar.

"Also the fact that India is a signatory to the TRIPs agreement and is committed to protect the product patents encourages the big pharma or MNCs to outsource to our country with minimal risk of intellectual property issues," he adds. In addition to these, parameters such as Good Manufacturing Practices (GMP), amount of resources that can be freed to focus on core-competencies, volume of operations, existence of vendor management mechanism, technology offered to the company, quality and increased productivity are some areas that are analysed before an outsourcing decision is taken.

Emerging models

Outsourcing enables pharma companies to capitalise on skills and services offered by various specialists in different business processes. at lower cost, in addition to time saving. What is more interesting however, is the number of outsourcing models evolving in India today. "In India, there is a noticeable trend towards local subsidiaries of innovator MNCs scaling down their captive manufacturing capacities and relying on domestic pharmaceutical companies to meet their requirements for APIs and intermediates," states Palnitkar.

Another trend in outsourcing being observed in case of global generics is that of off-shoring. Companies like Teva, Sandoz, Ivax, Pliva and Ratiopharm have either acquired capacities or invested in setting up their own manufacturing facilities in India. This model helps in bringing down the manufacturing cost. In fact, Sandoz, the generics arm of Novartis, has recently set up its third plant in India.

In addition, companies offering contract-manufacturing services in India are either entering into agreements with global generic companies for off-patent molecules or exclusive agreements with innovator companies for supplying manufacturing services for complex patent protected molecules. For instance, Nicholas Piramal has entered into a joint venture with Advanced Optics for supplying ophthalmic products to the regulated markets. "Another emerging model in the pharmaceutical outsourcing sector is disease management. This is based on foreseeing demand and customising treatment to enhance customer retention. A case in point is the Bangalore-based Medybiz which essentially is a distributor, but deals in patient relationship management (PRM)," says Palnitkar.

Long way

"This industry is constantly evolving and there is a definite movement towards an integrated approach. Broadly, outsourcing contracts have traversed a long path from 'Catalogue Ordering' to 'Fee for Service' to 'Preferred Vendors' to 'Risk-Sharing & Milestone based' to 'Strategic Alliance' to 'Integrated Offerings/Co-development'," adds Marthak. Outsourcing is increasingly becoming necessary for pharma companies. A major paradigm shift is on the anvil, as more companies are now moving up the value chain from tactical to preferred to strategic outsourcing.

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