The PharmSource Blog by Jim Miller

When considering the business strategy behind outsourcing one trend has been very clear: if its cut and dry, and the price is right, ship it offshore. This has been standard practice across industries for years now and companies are increasing this practice of sending jobs overseas in order to lower costs and resources.

A key factor in the growth of offshoring has been the ability to "deconstruct the value chain", i.e., the ability to break an activity into its component tasks. Deconstructing the value chain allows companies to send tasks that have low value-added, typically routine activities that require only basic skills, to countries with low labor costs. The resulting cost savings enable companies to remain competitive either by keeping prices down or adding additional features.

As reported in Pete Engardio's article, "Blueprint From India", in Businessweek.com, architecture firms are the latest companies to exploit the deconstruction of the value chain. Engardio reports that a growing number of architecture firms are sending to India tedious, time-consuming tasks such as turning schematic drawings into blueprints or making sure pipes are aligned; these mundane tasks can take up to 60% of the time spent in preparing a building design. The adoption of computer-aided design software has enabled and accelerated this trend. Offshoring those tasks leaves in-house architects available to take on more projects or concentrate on the creative aspect of the job, such as determining client needs and converting them into a building design. Engardio reports that 20% of U.S. firms have already adopted this strategy.

This architectural trend mirrors what is going on in the biopharma industry in the fields of discovery/medicinal chemistry and clinical research. By outsourcing the "cookbook" chemistry, companies are reducing costs while leaving more time for in-house scientists to work on the innovative aspects of drug discovery and design. In the clinical research realm, companies are rapidly moving data management offshore because it is highly routine, does not have to be done close to the patient and involves product that can be distributed electronically.

Bio/pharmaceutical companies and contract service providers seeking to "get ahead of the curve" should be analyzing the biopharma value chain to identify more low-value activities that are likely to be sent offshore in the future.

However, Western biomanufacturing CMOs are about to face some stiff competition. The vaccine market is the latest arena where developing country manufacturers (DCMs) are joining the race for revenues. Developing countries like India and China are seeing a proliferation in the number of vaccine manufacturers and in their capabilities.

DCMs already provide over 80% of the vaccines used by organizations like UNICEF, but these vaccines tend to be relatively simple technologically. For more advanced vaccines, DCMs traditionally have been reliant on collaborations with multinational corporations for support as well as technology advances. But the field is flattening and DCMs are starting to encroach on Big Pharma's turf. DCMs are acquiring the necessary know-how needed to create more sophisticated combination vaccines. And, as Dr KV Balasubramaniam of Indian Immunologicals points outs, DCMs are expected to enter the field of "new" vaccines in the upcoming years.

Thanks to low labor and capital costs and a plethora of qualified people, DCMs have a significant advantage when compared to Western CMOs. However, GMP compliance has been a major hurdle for many DCMs. In fact, this has been such a high barrier to entry that some management teams have shifted focus elsewhere or just sold off facilities to other DCMs. But it should only a matter of time before DCMs can overcome this obstacle and begin taking business more from their Western brethren.

CROs and CMOs shouldn't automatically assume that the industry will benefit in a big way. Pfizer's explanation of its restructuring plans emphasized its need to cut costs and make remaining costs more flexible. That suggests that CMOS and CROs that benefit from Pfizer's increased outsourcing activity are really going to have to work to maintain the business and keep it profitable.

Clearly, Pfizer will be looking for more than just vendors: it will be looking for partners to help remake its R&D processes and manufacturing operations. Service providers will be challenged to examine their own cost structures and business practices as rigorously as Pfizer has in order to find opportunities to continually deliver cost savings and performance improvements. These will be wrenching for many service providers, who have been benefited from big pharma's heretofore profligate ways.

Traditional practices like "take or pay" contracts may go out the window when working with big pharma companies, because such arrangements are costly and lack the flexibility element that is becoming more important. Further, the insistence on increasing the productivity of R&D spending will put pressure on margins and put Western CROs and CMOs in direct competition with low-cost vendors in Asia.

This new industry development also opens the door for many contract service providers to step up to the plate in order to build long lasting relationships with the big pharma companies. Now the question is "who will make the changes necessary to reap the rewards?"