The pharmaceutical industry has been slower than other sectors to adopt outsourcing, largely due to concerns over protecting valuable intellectual property. But rising costs and shrinking margins are leading more pharma companies to do so, says IMS in a recent report.
Four of the 10 largest pharma companies announced major initiatives to outsource manufacturing activities last year, according to an Outsourcing-Pharma.com story about the report. IMS identifies the increase as one of the top 10 strategic issues currently facing the pharma industry. Not only that, but other functions will likely soon follow. Says Murray Aitken, senior vice president for its Healthcare Insight group:
This shift towards outsourcing of manufacturing is likely to be followed by other functions within pharmaceutical companies, including some elements of R&D.
Actually, movement of pharma R&D offshore already appears to be happening, as I wrote back in December.
According to an Investor's Business Daily article I cited in that blog, 33 percent of pharma R&D spending is outsourced, and experts expect the number to grow to 41 percent by 2009. Pfizer announced it was closing two manufacturing facilities in the U.S. and one in Germany and offshoring much of that work to Asia. It also plans to increase R&D investments in South Korea, India, China and Japan. Rival Eli Lilly, which already outsources manufacturing, sales and IT functions, will outsource up to half of its R&D functions to third parties by 2010, according to an in-Pharma Technologist.com story I cited in another blog.
Increased outsourcing may help pharma companies gain business benefits other than cost reductions, notes IMS, including faster time-to-market for new products, entry into emerging markets and an enhanced focus on brand-building activities.
Of course, there are risks as well. While pharma companies appear less concerned than before about the loss of intellectual property, IMS says this "could well come back to haunt major pharmaceutical companies as the true cost and complexity of manufacturing becomes transparent." It's also possible, says IMS, that contract manufacturers could develop enough expertise to compete head-to-head with former clients.
Though it's not likely a direct concern of the pharma companies, IMS points out that removing jobs from the U.S. and Europe will affect those economies. Pharma accounts for 640,000 jobs in the European Union, including 100,000 in R&D, and a �34 billion (U.S. $53.4 billion) trade surplus. Because pharma drives so much economic activity, it's possible that outsourcing may attract the attention of regulators, says IMS.