Outsourcing to the Emerging Markets
The movement toward transparency is global, touching almost every aspect of society. Whether the topic is NSA eavesdropping in the U.S. or banking practices in the European Union, transparency and accountability go hand in hand. The pharma industry is no different. Last month, as part of its public transparency initiative, the European Medicines Agency (EMA) published details of audited manufacturers that had violated GMP requirements1. The agency maintains a community database known as EudraGMP that captures certificates for manufacturing, import, wholesale-distribution authorizations, GMP and good distribution practices (GDP). The database includes information dating to 2007 and is used by the EMA as part of its toolkit to evaluate inspected organizations. The EMA has decided to make the inspection records available to the public.
The EudraGMP identifies 34 facilities that were issued GMP violations in 2013 alone, spanning API, sterile, and non-sterile manufacturing operations. Violations included manufacturing, packaging, and quality control issues. Of these 34 facilities, 14 were located in India and 10 in China.
Despite these risks the outsourcing trend has continued to increase. In a 2012-2013 industry survey2, the percentage of companies pursuing an outsourcing strategy rose from 31% to 38%. This trend is expected to continue in 2014 with the dominant percentage planning on outsourcing expenditures in the $10M-$50M range.
Even if the outsourcing trend has increased, the drivers for it are changing. The BRIC countries first started their market changing run to prominence because of their ability to provide low cost labor and lower capital outlay for manufacturing operations, and an immediate boost to bottom-line profitability. While some of the larger, more established operations in India and China supplied product for the U.S. and Europe, most facilities were leveraged for the rest of the world market. As with all high growth markets there is a learning curve and the emerging markets are no different. Missteps such as the Baxter Chinese Heparin adulteration that resulted in 81 fatalities and, more recently, the Ranbaxy FDA penalty highlighting institutionalized fraud on a global level, point to a need for a more balanced risk assessment framework for outsourcing to the emerging markets.
Affordability Less Important
Affordability is still a key component of any CMO contract negotiation, however, compliance history has moved to the forefront of essential CMO attributes during the evaluation and selection process. In my work in Asia over the last decade, I have seen the large CMOs that catered to multi-nationals shift away from affordability to establishing defensible compliance systems based on U.S. and European regulatory knowledge. This is substantiated by several industry surveys. In the recent survey by Nice Insights2 337 U.S. manufacturers were polled on their CMO selection criteria. The results are shown below:
In the past three years, CROs and CMOs have taken notice that drug innovators across all buyer groups consistently valued quality and reliability in the top two positions. But what the numbers do not show is the make-up of the services being outsourced. Multi-national corporations leverage low-cost research labor in the emerging markets: affordability still trumps all when there is little or no regulatory or quality risk.
Outsourcing Service Mix is Shifting
A couple of interesting trends emphasize the shift to performance and capability vs. costs. First, customer service is moving onshore as several factors continue to work together to shift activity back to the U.S., including rising wages in China and India and consumers demanding contact-center service from agents who speak American-accented English and Latin American Spanish.
Outcome-based pricing is another trend gaining traction among highly experienced clients and outsourcers who have built mature relationships with their CMOs.
Paying for a predetermined business result among partner companies, means executing on contracts that have a sliding-scale of rewards for approaching desired outcomes—the advantage of this trend is that it won’t lock providers into an adverse all-or-nothing scenario.
After a decade-long period of consolidation, acquisition and restructuring, the short-term thinking that drove the outsourcing movement as an effective means of boosting profitability is evolving. The fact that India and China still lead the list of GMP violators underscores the time and effort required to affect a paradigm shift regarding quality. The short-term cost savings realized from outsourcing to India and China is losing ground to the value of quality of these services and on business performance. Performance-based contracts should have an impact on contract organizations that want to woo multi-nationals. For now, all contract organizations would do well to shift their focus to demonstrating compliance competence rather than being the lowest cost producer.n
1. India and China top 2013’s GMP failures, according to EMA data. By Dan Stanton, 08-Jan-2014, wwww.in-pharmatechnologist.com
2. 2014 Nice Insight Annual Pharmaceutical and Biotechnology Outsourcing Survey http://www.niceinsight.com/
About the author
He has been involved in the bio-pharmaceutical, pharmaceutical, medical device and diagnostics industry for over 30 years.
Mr. Chatterjee has guided the successful approval of over a dozen new products within the U.S. and Europe and is a frequent speaker at industry and regulatory events. He has published and is a regular editorial contributor to several internationally recognized industry journals. Mr. Chatterjee has spoken and published extensively on the application of PAT, Lean Six Sigma, Quality by Designand Process Validation approaches within the regulated life sciences industry.
Mr. Chatterjee holds a B.A. in Biochemistry and a B.S. in Chemical Engineering from the University of California at San Diego.