Feature

Good Times and Expanding Horizons in Pharmaceutical Manufacturing (continued)

Offshore sourcing moves slowly Perhaps the survey’s most surprising result is the low expectation for offshore outsourcing. Overall, 53% of respondents indicate they have no current interest in outsourcing to India or China. The low level of interest by small companies is to be expected (63% of small company respondents say they have no current interest in sourcing from India or China) because they lack the scale to find and supervise offshore vendors. Nonetheless, the lack of interest was high even among Big Pharma respondents (54%). The lack of interest is greater among development services buyers (60%) than it is among manufacturing services buyers (45%). Still, our survey shows that offshore sourcing is making in-roads into the pharmaceutical industry. Overall, 16% of respondents indicate they are actively sourcing from India or China, and 27% say they are looking for vendors or are developing a strategy for sourcing in those countries. Not surprisingly, generic pharmaceutical companies seem to be the most active offshore sourcers: 32% of respondents from generic pharmaceutical companies report that they are actively sourcing from India or China. Clearly, respondents expect offshore sourcing to proceed slowly: only 11% expect that India or China will account for a quarter or more of their spending in five years. Nonetheless, respondents indicate that as they move in that direction, they will be quite willing to work with Indian and Chinese suppliers directly, not just with US companies that have offshore operations. Most service providers fully expect to face Asian competition. Among contractor respondents, 21% report they are now feeling competitive pressures from India or China, and 42% expect to face that competition within the next 5 years. Providers of development services are much less concerned than manufacturing services providers: 42% of development services respondents view India or China competition as “not an issue,” but only 21% of manufacturing respondents take that view. Among service providers concerned about Asian competition, most respondents expect to take action by emphasizing less price-sensitive services (57%). Others are considering establishing facilities or joint ventures in Asian countries. Growing sophistication The 2005 edition of the PharmSource–Pharmaceutical Technology outsourcing survey portrays a pharmaceutical outsourcing industry that is firing on all cylinders. Thanks to the rejuvenation of new product pipelines, pharmaceutical companies’ need for services is expanding rapidly, and contract service providers are reaping the benefits. The survey indicates that pharmaceutical companies are accompanying their increased expenditures with heightened attention to receiving the most value for their dollars spent. The preferred-provider concept is now well-established, and companies are turning to more-sophisticated technologies and strategies to manage their spending. In fact, respondents probably have understated the growing role of information technology and the effect of procurement professionals on the sourcing process: Those developments are mandated as much or more by efforts to comply with the Sarbanes-Oxley Act as they are by the quest for sourcing efficiencies. Similarly, it is likely that respondents have underestimated how the emergence of vendors in India and China will affect drug development. Development and manufacturing costs are under pressure throughout the industry: Big Pharma must cut costs to preserve margins while increasing the flow of new products, and Small Pharma is under pressure from venture capitalists and public equity investors unwilling to commit the growing sums required for drug development. Pharmaceutical companies will find business models that allow them to access lower-cost development and manufacturing resources offshore. During the past five years, the PharmSource–Pharmaceutical Technology outsourcing survey has been a bellwether of trends in the pharmaceutical contract services. On the basis of this year’s edition, contractors can look forward to another strong year but increasingly demanding customers. PT