Outsourcing Winners in 2014

The bio/pharmaceutical industry is dealing with some significant strategic shifts that are creating uncertainty and a growing sense of risk. Outsourcing is viewed as a strategic safety valve by some as bio/pharmaceutical companies address changing market fundamentals such as patent expirations for blockbuster drugs, pressure to accelerate drug development and reduce costs, and greater complexity in funding research and development (R&D). These upheavals are creating winners and losers in the outsourcing sector.

Eric Langer

Reality check

Much of the excitement about international outsourcing to destinations such as India and China is wearing down as expectations have not been fully met. Start-up contract manufacturing organizations (CMOs) in China are not growing as aggressively as predicted prior to the recession. Indian contract research organizations (CROs) are seeing project pipelines slow. The pre-recession large deals have not yet been duplicated. Companies such as Biocon (Bangalore, Karnataka, India), Jubilant Organosys (Noida, Uttar Pradesh, India), and the Tata Group (Mumbai, India), are finding drug-discovery and development deals slow going. Broad industry estimates suggesting that CRO/CMO growth rates would reach more than 30% have not materialized.

BioPlan Associates' 7th Annual Report and Survey of Biopharmaceutical Manufacturing, which evaluated trends in global manufacturing, found that outsourcing budget projections in 2010 are below projections from 2009 (1). The survey, which was fielded to 326 global bio/pharmaceutical companies in 2010, asked how the recent global economic situation has affected operations. Not unexpectedly, the survey found that economic conditions are driving greater demand for cost cutting and productivity. However, much of this emphasis is not translating to spending on outsourcing. Outsourcing budgets are down 1.2% in 2010 compared with 2009 levels (1). The recession has been declared officially over, but most companies are not likely to go on a spending spree and are likely to continue to plan to work leaner and harder. Outsourcing continues to be an option, but for various reasons, companies are not automatically shifting operations.

Increased commoditization in contract biologic activities is observed by some. "Outsourcing in the biopharmaceutical industry is moving toward the commodity and 'low-cost provider' model that also happened in the pharma (small-molecule) industry," said Bertrand C. Liang, CEO of Pfenex (San Diego, CA), a protein-production company, in a recent interview with BioPlan Associates. "Companies considering outsourcing are increasingly seeking specific production or R&D functional skills they don't want to retain in-house and on their own P&L [profit and loss statements]. The ideal situation would be for the client company to create the technology internally and then transfer the process to low-cost providers." Liang believes that the partnering concept in outsourcing is not particularly realistic unless clear expectations are set by both parties.

Likely winners and losers

The likely winners in outsourcing of bio/pharmaceutical R&D and production will be those vendors able to provide cost-effective services and the flexibility and technical competence to fill the highly technical, unique operational gaps clients are demanding. Outsourcing service suppliers will certainly have their losers as well because mergers and the economy continue to change the landscape. The global mergers (e.g., Pfizer/Wyeth, Merck & Co./Schering Plough, and Roche/Genentech) certainly are having an impact on outsourcing environments as these large companies sort out their facilities, capabilities, and staffing requirements. Vendors unable to weather this upheaval will likely succumb or be acquired.

Regionally, China and India continue to be poised for success. During the next 10 years, most international outsourcing will likely take place in these regions. India's jumpstart on other Asian manufacturers will likely benefit its providers first, especially in clinical trials and information technology-related areas. A recent analysis by BioPlan Associates describes Indian and Chinese companies that provide cost-efficient production and manufacturing of recombinant drugs 2–3). The performance of these companies, although lagging previous expectations, shows promise. Their success will act as a bellwether to measure the extent to which there is a more robust domestic environment, where technical expertise will be available and where outsourcing services will have a domestic market.

Politically, outsourcing and offshoring are viewed as liabilities, but operationally, there appears to be winners and losers on a microscale. According to one broad study, an one-percentage point increase in outsourcing reduced the wage of low-skilled workers by up to 1.5% and increased wages for high-skilled workers by up to 2.6% (4). Although this result may not directly translate to the bio/pharmaceutical industry, intuitively, lower-skilled technicians and operators would lose as wages are transferred to more highly skilled workers and those with managerial competence.

Proper planning can help to establish a foundation for surviving and thriving. "Companies who do a good job estimating external versus internal cost of technology/resources will be winners," said Xiao Ping Dai, manager of the cell culture and fermentation groups at Bristol-Myers Squibb (New York) in a recent interview with BioPlan Associates. "Those who just outsource without laying out the possibilities around outsourcing ... may fail. [Success requires] good cost analysis and working together with the CRO/CMO."

Similarly, CMOs recognize that strategic and long-term planning is required for success. Michael Larson, senior technology specialist of CMC manufacturing with ICOS Biologics (Seattle), noted in a recent interview with BioPlan Associates that survival requires recession-proof planning, "[Winning] CMOs will be those that have a solid long-term business plan ... Companies will continue to be conservative with regard to hiring for the next decade. I believe new technologies are going to take a hit [because] smaller companies don't have the money to invest in new technology. It will be up to Big Pharma to get new technologies implemented, and the tendency there is to be conservative."

Also, CROs with greater international expertise may also emerge as winners as sponsors turn to them to handle specific therapeutic indications or processes for complex trials. This shift is due in part to the difficulty of finding qualified patients for clinical trials in developed markets such as North America, where for example,there are fewer disease-naïve patients.

Eric Langer is president of BioPlan Associates, tel. 301.921.5979, elanger@bioplanassociates.com, and a periodic contributor to Outsourcing Outlook.

References

1. BioPlan Associates, "7th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production," (Rockville, MD, preliminary data, 2010).

2. BioPlan Associates, "Directory of Top 60 Biopharmaceutical Organizations in India" (Rockville, MD, 2008).

3. BioPlan Associates, "Directory of Top 60 Biopharmaceutical Organizations in China," (Rockville, MD, 2008).

4. I. Geishecker and H. Görg, "Winners and Losers: A Micro-level Analysis of International Outsourcing and Wages," VOX, Sept. 24, 2007.