What Happened to Outsourcing in Asia?

Over the past few years, China and India have been the up-and-coming destinations for international outsourcing of biopharmaceutical manufacturing. Last year, industry research pointed to China and India as the industry's top potential destinations for offshoring over the next five years, which put them ahead of traditional biomanufacturing hubs in the US and Western Europe. China was seen as a favorite likely destination for both US and European respondents to prior studies, with India close behind.

Eric Langer

In BioPlan Associates' 10th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production, however, that initial enthusiasm appears to have diminished (1). Of the more than 25 countries identified as potential destinations for international outsourcing, India fell to the fourth spot among all respondents, with only 14% of respondents indicating there was a likelihood or strong likelihood that they would consider outsourcing production there in the next five years. Surprisingly, that was a more positive result than for China, which was cited by just 10.6% of respondents, putting it in the ninth spot, behind countries such as Austria and Australia.

This year, the US took the top position for biopharmaceutical outsourcing, with 26.3% of global, non-US respondents, ranking it as the top destination. This ranking likely reflects European companies' plans, as respondents were asked to indicate potential international destinations (see Figure 1). Next on the list were Germany and Singapore, each indicated to be a "likelihood" destination by 15.8% of all respondents. Beyond those top three countries stood a group of countries (India, UK, Austria, and Ireland), each receiving the nod from approximately 14% of respondents.

Figure 1: Destinations for international outsourcing of biomanufacturing (all respondents). (ALL FIGURES ARE COURTESY OF THE AUTHOR.)

Trans-Atlantic differences

As noted previously, the US' position atop the rankings this year is reflective of the substantial European presence in this industry. When the respondent sample is narrowed to Western Europeans only, the US is easily the favored destination for outsourcing in the next five years cited by 35.3% of respondents, up slightly from last year's 31.8%. After the US, Europeans are most likely to look in their own backyard, with strong consideration shown for Germany (29.4% of respondents cited in 2013, from 22.7% in 2012) and Belgium (23.5% in 2013, from 22.7% in 2012).

European responses were evaluated indicating more positive consideration for country destinations as either a "strong likelihood" or "likelihood." The US was again the top response (23.5%), with European countries following: Germany and Ireland (each at 17.7%), followed by Belgium, France, and Sweden.

This year India was a consideration for outsourcing by just 11.8% of European respondents, down from last year's 22.7%. China's fall has been more precipitous: it was indicated to be a country in consideration by only 5.9% of respondents, down from last year's leading 36.4%.

US-based respondents are more favorable to Singapore, handing it the top position, with 32.3% of respondents considering it a "potential" destination. After Singapore came Germany (29%), followed by the UK, China, and India.

This list suggests that US companies appear to be seeking traditional biomanufacturing hubs rather than emerging ones at this time. Compared to last year, respondents in the US demonstrated a heightened potential for outsourcing to some destinations in Western Europe, such as Germany (29% vs. 25%), the UK (26% vs. 22%), Scotland (16% vs. 6%), and Italy (13% vs. 6%). Respondents, however, cooled on China (26% vs. 34%) and India (23% vs. 28%).

A dose of regulatory reality. After several years of study data showing China and India becoming more heavily favored outsourcing destinations, this year's results are striking and merit some attention. There are some signs that respondents' increased attention to traditional hubs, at the expense of China and India, is likely related to a renewed focus on regulatory issues. This may be drawing industry attention away from emerging manufacturing clusters, where there may be less confidence in the regulatory expertise.

As with years past, geographic location continues to be one of the least important factors: only 7% of respondents this year indicated "be local to me" to be a "very important" consideration, squarely in the less than 2-10% range found in the past 4-5 years.

As geography plays a lesser role, regulatory expertise is becoming a crucial factor in decision-making. This year, 45.6% of respondents said that it was "very important" that CMOs have regulatory compliance expertise, a significant rise from 38.1% who attached that level of importance last year. This comes amidst separate data suggesting that biomanufacturers are focusing more on regulatory issues to improve operational performance and avoid capacity constraints. It could also be a result of clients outsourcing more core activities than in earlier years, with regulatory compliance more rigid for these activities than for the lower value-added services that have typified outsourcing in the past.

Finally, although much investment has been made in facilities in China and India for biogenerics production, some companies have been using their existing facilities, looking to leverage well-understood facilities that might otherwise be under utilized, and which are able to quickly and cheaply produce clinical material. Much of this CMO-sourced material has been produced in the US, which may be slanting future expectations for outsourcing.

Looking ahead

Although there has been a noticeable shift in attention away from China and India as outsourcing destinations, there is reason to believe this situation will reverse. Those countries are accounting for an ever-greater share of global biomanufacturing capacity—together, they represent approximately one-sixth of capacity, according to BioPlan's WIKI resource on global biopharmaceutical facilities (2), which pegs China's share of biopharmaceutical manufacturing concentration at 8.6% and India's at 8.1%. Although that's significantly behind North America (35.9%) and Western Europe (26.1%), it's a growing trend that the industry is not ignoring.

It's important to remember that China is a relatively new player, which continues to suffer from legal and regulatory aspects that hinder commercial-scale contract manufacturing. It may take years for Chinese CMOs to come up to full cGMP standards and to be permitted to operate at commercial scale. These study results may simply be a reflection of the industry thinking that such progress may not come as quickly as expected. Nevertheless, it's short-sighted to believe that this situation will not change. China and India represent a majority of the world's population, and with its growing middle class, biologics production will likely continue to play an important role in their healthcare policy. While some emerging destinations may not find substantial growth in the short term, India and China will need to produce biologics for their huge local populations, and some of this experience will have Western markets taking a close look at their capabilities.

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, 10th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production (Rockville, MD, April 2013), www.bioplanassociates.com/10th

2. BioPlan Associates, Top 1000 Global Biopharmaceutical Facilities Index, www.top1000bio.com, accessed May 27, 2013.