PHARMACEUTICAL INDUSTRY

Three reasons contributing to growth in the value of Contract manufacturing (outsourcing) in the pharmaceutical industry since 2008

Three reasons contributing to growth in the value of Contract manufacturing (outsourcing) in the pharmaceutical industry since 2008

Introduction

Pharmaceutical industry is constantly undergoing a change. In the past pharmaceuticals had a different strategy, companies use to build all the products internally and confine access to information or resources to third parties. The past situation is changing; in-house resources are getting exhausted with a very thin product pipeline and in addition many drugs are going off patent by 2008 hampering company sales and competitiveness. It takes $800 million and 20 years for a new drug/device to enter the market. Patient recruitment and medical personnel account for nearly 70 per cent of the clinical costs that are required to bring a drug to market (Cavalla, 1996). Threat from generics, low productivity of R&D process, higher costs for product approval and parallel imports are the major market feature for decreasing pharmaceutical profits. Global outsourced R&D expenditure is increasing every year leading to rise in business prospects for Contract Research and Manufacturing services (CRAMS).

The total pharmaceutical and biotech outsourced market is currently pegged at $33 billion and is expected to reach to $48 billion whereas R&D outsourcing expenditure is around 50% of the total market as stated below.

Table 1: Global R&D Outsourced Market (Source: Frost & Sullivan, “e” stands for Frost & Sullivan estimates)

US$ Billion

2001

2002

2003

2004

2005(e)

2006(e)

2007(e)

Global R&D Outsourcing Market

11.4

12.7

14.1

16.3

18.7

21.7

24.9

Outsourcing

Outsourcing - the current mantra of pharmaceutical industry - is being used more strategically as an ongoing part of a company's overall business strategy. Outsourced activities can be in various fields' right from the drug discovery till manufacturing of the products. Pharmaceutical firms have long outsourced functions such as manufacturing, packaging, clinical trials and sales force mobilization (Whittaker, Bower, 1994).

The U.S. market for outsourced pharmaceutical manufacturing is growing at the rate of 10 to 12% annually. Pharmaceutical companies will continue to fuel much of this growth as they outsource an increasing number of products and services. Biotechnology companies, which have almost doubled in number during the past five years, also contribute to this trend as they seek ways of bringing their products to market without making capital investments in their own manufacturing facilities (Milmo, 1998).

Why outsource?

Pharma alliance or partnership holds cost benefit advantage by reducing huge amounts of capital outlay for producing latest technology in-house. Outsourcing allows pharma companies to ramp up the R&D operations at a fast pace with minimal capital outlay. Benefits of Outsourcing are:

- Outsourcing reduce the overall costs by 30% to 35%

- Faster and cheaper to have discovery work outsourced, reduces drug development cost

- Reduces problems faced during the regulatory processes around the world

- Improve manufacturing efficiencies

- Reduce excess production capacity by divesting facilities

- Minimize investments in capital-intensive facilities

- Improve net earnings and cash flow;

- Divert resources to focus on other competencies like marketing

Outsourcing can allow pharma companies to establish consistency and efficiency across sprawling international networks of commercial, supply chain and manufacturing ...