Offshoring in The Global Pharmaceutical Industry: Drivers and Trends


Offshoring was adopted as a tool for reducing costs and seizing advantages years ago.  The financial services and software industries in particular have enthusiastically embraced this strategy.  For a variety of reasons, the pharmaceutical industry has been slow to take advantage of the benefits offshoring has to offer.  Why has this been the case?  Do the factors explaining their reticence still hold true today?  If not, how have they changed and what will the consequences be?  These are the central questions that this paper seeks to answer.  In exploring these questions, the following topics will be examined:

  • How does the global pharmaceutical industry operate?
  • What are the current levels of offshoring?
  • How is pharmaceutical research and development structured?
  • What factors are driving the recent move to offshoring?
  • How do major obstacles such as poor intellectual property rights affect offshoring?
  • In what direction are offshoring trends headed?

The paper is divided into six sections.  Section I outlines the global pharmaceutical industry and its current levels of employment and offshoring activity.  Section II provides an overview of the complex pharmaceutical R&D process highlighting the phases best suited for offshoring.  Section III examines the causal mechanisms, both domestically and abroad, that are driving firms to embrace offshoring as a resource maximizing strategy.  Section IV discusses the impact of TRIPS (Trade Related-Aspects of Intellectual Property Rights) on firms’ decisions to offshore to India.  Section V analyzes why India is the current and future recipient of significant offshored tasks.  Section VI explores the potential for offshoring various operations and future industry trends.

Profile of the Global Pharmaceutical Industry

            The global pharmaceutical industry is one of the richest and most innovative in the world with revenues of approximately $420 billion in 2003.  The lifeblood of the industry flows from its research and development efforts (R&D) with an annual investment of $49.3 billion, or 10 to 15 percent of total revenues. As the world becomes increasingly globalized the pharmaceutical industry must respond to emerging challenges.  Currently, the industry faces expiring patents, drying pipelines, lower returns on investment, urgency to introduce new drugs in a timely manner, and an increased need to access broad patient populations.  This stark reality has prompted a wave of offshoring by top multinational firms.  This section examines the current levels of global pharmaceutical employment and offshoring.

Global Pharmaceutical Employment

            There are few sectors that have been more successful or provided greater benefits for the entire world than the pharmaceutical industry.  As a result, it is a growing industry that employed approximately 1.7 million individuals worldwide in 2003. Based on current projections by industry experts this number is expected to grow by 2.8 percent annually, resulting in an estimated 2 million jobs by 2008. This projection is based on historic industry employment, anticipated revenue growth, and forecasted productivity improvements as calculated by the U.S. Department of Commerce.  Structurally, the pharmaceutical industry is becoming increasingly consolidated with relatively few, but large employers.  For example, the top 20 pharmaceutical companies constituted 59 percent of global employment in 2003. Employment varies dramatically by country with 79 percent of industry employment concentrated in developed nations.  The United States leads the way in industry employment (41 percent), followed by Europe (25 percent), and Japan (13 percent).Consequently, only 21 percent of industry employment is located in less developed nations, but this trend is beginning to reverse as more firms’ embrace outsourcing opportunities.  The wealth disparity between developed and less developed nations is striking, with pharmaceutical sales per capita in the U.S. 70 times greater than India, and 13 times greater than China in 2003, which may reflect the U.S.’s higher demand for pharmaceutical products.  Pharmaceutical industry employment is concentrated in three main areas: commercial (40 percent), manufacturing (31 percent), and research and development (15 percent).  Sales agents represent the largest percentage of the workforce (35 percent total; 88 percent of commercial).  The remaining 14 percent of employment is involved with back office services such as general and administrative functions (G&A) (6 percent), IT (3 percent), procurement (3 percent), and supply chain management (2 percent)

Employment by occupation is skewed towards the commercial and manufacturing sectors with generalists (37 percent) and support staff (30 percent) dominating the industry.  Researchers constitute the third largest occupation (16 percent) and are primarily employed in R&D.  The smaller-scale positions include analysts (5 percent), doctors (4 percent), and high-level managers (3 percent).  To be sure, increased offshoring is predicted to fundamentally alter the make-up of occupational employment as companies take advantage of skilled-labor in low-wage countries.

            The growth rate of employment in the pharmaceutical industry fluctuates depending on exogenous factors.  Developments that could impact employment rates include an unanticipated shift in demand, a change in distribution channels, or emerging technology.  A surge in blockbuster drug sales, improved marketing strategies, and relaxed regulation will most likely spur job creation.  As firms increase their offshoring activities it is unknown whether this will have a positive or negative effect.  However, it is possible to examine the current levels of offshoring by the global pharmaceutical industry, which the next section will discuss.

Current Levels of Global Sourcing

            Historically, the pharmaceutical industry has been slower to embrace offshoring, but over the last few years this trend has begun to reverse with significant movement toward global sourcing.  At the forefront of this wave are the large multinational corporations based in the United States, Western Europe, and Japan.  Most of these companies either have experimental programs in various countries or have outsourced labor-intensive functions such as IT and G&A.  In 2003, an estimated 10,000 jobs were offshored. It is projected that this number will roughly double to 21,200 jobs by 2008, reflecting the growing adoption of offshoring as a cost-saving mechanism. However, these aggregate numbers do not show which job functions are being offshored.  The following sections will examine the levels of offshoring in various pharmaceutical functions.

Unlike many industries, the pharmaceutical sector is uniquely positioned to remotely execute one if its core competencies – R&D, which represents 74 percent of offshored employment. R&D covers a variety of areas but the activities currently performed in less developed nations include clinical trials, clinical statistics, data management, medical writing, and discovery.  The pharmaceutical industry has recognized clinical trials as an area with the greatest potential for cost-savings and expansion.  For example, Quintiles, a well-known provider of clinical trials, has hired 850 employees in India, or 5% of its total employment, and plans to expand its data management center in Bangalore. Although globally sourcing a core function such as R&D is inherently risky, pharmaceutical companies have made it clear that they are more than willing to follow in the footsteps of industries that have successfully utilized offshoring.

After R&D, IT is the next largest offshored function, with 22 percent of employment performed abroad by pharmaceutical companies, but recall it only constitutes 3 percent of total pharmaceutical employment.  A significant portion of application development, data management, and maintenance have been offshored while fewer activities that require investment in new infrastructure have been relocated.  In May 2005, Wyeth outsourced its clinical data management to Accenture, where a large portion of its operations will be located in India.  Wyeth’s decision demonstrates the pharmaceutical industries willingness to outsource non-core functions such as IT to global hubs like India.  The smallest job function to be offshored by pharmaceutical companies (2 percent) is G&A, which includes basic financial operations such as payroll, finance, and accounting.

Employment-wise, numerous positions are currently being globally resourced.  Since R&D constitutes the largest offshored operation, many life science researchers, doctors, and nurses have been employed in low-wage countries to conduct clinical trials, drug discovery, and other research functions.  Analysts, financial experts, accountants, and generalists have been hired on a smaller scale to support R&D and human resources.  Therefore, it is crucial that global pharmaceutical companies work with competent and flexible local partners to conduct these operations.

While there is no distinct “pharmaceutical model,” companies are conducting their offshoring activities through a mix of captive and vendor arrangements.  One of the more commonly used arrangements involves a hybrid model where a pharmaceutical company initially controls procedures and management, but over time gradually transfers power to its on-site vendor or partner.  An innovative offshore outsourcing model created by Dr. Bianca Piachaud will be discussed in a later section because of its key insights and implications for the future of successful pharmaceutical offshoring.  Along those lines, the next section will outline the protracted R&D process in order to demonstrate why certain phases are better suited for global sourcing.

The Research and Development Process

            Research and development is the heart of the pharmaceutical industry.  This section will provide a definition of pharmaceutical research and a brief overview of the drug discovery and development process.  The goal is two-fold: first, to illustrate the lengthy and complex R&D process; and second, to show which R&D phases have the greatest potential to be offfshored.

 Pharmaceutical Research: A Definition

In 1990 preeminent scientists Harnden and MacArthur defined “research” in context of the pharmaceutical industry.  In their paper the authors categorized pharmaceutical research into three areas: (1) basic, pure or fundamental research which is done primarily to acquire new knowledge with no specific application in mind; (2) strategic research which is conducted with eventual practical applications in mind although this cannot be clearly defined at the outset; and (3) applied research which is directed towards specific practical aims and objectives.

Abstracting from the provided definition, and for the purposes of this paper, R&D activities refer to the entire process whereby a drug is brought to the marketplace.  Traditionally, R&D has been considered an independent function, but over the last decade it has become incorporated into different firm activities, and consequently demands flexible management styles.  R&D is a complex, multi-stage, integrative process, which is why it is necessary to provide a definitional framework to better understand the specific challenges faced by the pharmaceutical industry.  The next section will discuss the R&D process, which is composed of two distinct stages: drug discovery and drug development.

Drug Discovery: The Pre-Clinical Phase

            The process of testing and manufacturing a new drug requires the discovery of a new chemical compound with potentially valuable properties.  Before this stage is reached, many years and millions of dollars will have been spent investing in research about the aetiology and pathogenesis of the particular disease for which the drug is best suited.  Advances in biotechnology, chemistry, and molecular biology have contributed to a richer understanding of diseases reducing the time it takes to evaluate potentially useful compounds.

            After a compound has been identified, the pre-clinical phase begins, which evaluates the drug’s efficacy and safety before it is administered to patients.  In this phase, varying doses are tested on animals and/or in vitro systems such as yeast or bacteria, and require strict safety studies.  The studies relate to acute, sub-acute, and chronic toxicity tests to detect unwanted general and organ-specific effects; reproductive toxicity tests to reveal the effects on fertilization; mutagenicity tests to identify any damaging effects on DNA, genes and chromosomes; and prolonged carcinogenicity tests to discover whether the drug has the potential to cause any tumors. Needless to say, if a compound does not pass this rigorous round of testing, is it either altered or abandoned.

            Technical development also begins in the pre-clinical phase and can be divided into five stages: (1) chemical development, which involves the determination of new manufacturing processes so that production can be increased in scale without sacrificing quality or purity; (2) analytical development of quality assurance and the compounds stability over time and under different conditions; (3) pharmaceutical development, also known as the drug formulation process, which includes decisions regarding the route of administration and the dosage form; (4) the use of excipients, which are other substances mixed with the drug, as well as coatings; and (5) packaging. At this point, the pharmaceutical industry has scant pre-clinical research outside of the U.S., Western Europe, or Japan.  This is subject to change depending on the relative success of Phase I-IV clinical trials and drug development in low-wage countries.

Drug Development: Phase I-IV

            The compounds that survive the high attrition rate in the pre-clinical phase are then used in clinical investigations with human subjects.  The clinical development period is divided into four distinct phases.  Subsequent phases introduce stricter controls and standards to ensure the safety and efficacy of the compound.

            Phase I: During Phase I, which lasts an average of one year; the drug is tested on a small number of healthy (non-patient) volunteers.  Participants are typically young males because at this stage there is still a risk of reproductive damage since it is unlikely toxicity tests would have been completed.  The main goal of these trials is to obtain data on the compound’s safety, appropriate dosage range, and pharmacokinetic properties.  In this phase not all types of drugs are tested on non-patient volunteers.  For example, in the case of anti-cancer drugs, medicines are only tested on patients.

            Phase II:  This phase lasts approximately two years and the drug is tested in controlled studies involving 100 to 300 patient volunteers.  The studies have an extremely strict inclusion and exclusion criteria and treatment protocols to minimize the risk of harmful consequences.  The purpose of this phase is to allow researchers to assess the drug’s effectiveness on patients, experiment with various doses to establish the range that produces the desired effect, and to collect additional information on safety and drug side effects.

            Phase III:  This is the most critical of all phases, with studies that last approximately three years and involve large-scale trials with a more heterogeneous genetic pool that better reflects the actual population.  It is typical for 1,000 to 3,000 patients to be involved in these multi-center trials.  During this phase researchers more precisely determine the drug’s effectiveness, which means that information about optimum dosage and indications for use is refined.  Placebo studies or an alternative drug are also introduced in this stage.  The entire process is executed using a Randomized Clinical Trial (RCT), which has become the most accepted method of choice for the evaluation of new therapeutic remedies.

            Further and more detailed information on drug safety is another function of Phase III studies.   Since there are a substantially larger number of patients during this stage it is expected that the more common adverse side effects will be detected.  The monitoring of more rare side effects that are unpredictable from the pharmacology continues into Phase IV and well after the drug has been approved for public use.  Studies continue until there is enough research and evidence (about the drug’s safety) to file a New Drug Application (NDA) with the proper regulatory authorities.  In the U.K. pharmaceutical companies file a Product License Application (PLA).  These applications contain all of the scientific data for both the pre-clinical and clinical phases as collected by the pharmaceutical company.

            Phase IV:  Following the submission of a NDA the purpose of Phase IV studies is to provide data on the long-term safety and efficacy of a drug.  Additionally, researchers collect new types of information such as the impact of the drug on quality of life and pharmaco-economic statistics, which measure the drug’s potential market value compared with available therapies.  If the appropriate regulatory body approves a NDA, a new wave of clinical Phase II and III studies begin anew to develop further formulations.  The manufacturing company and healthcare authorities will also actively monitor the drug after it has been approved to discover any overlooked or unexpected adverse reactions.  The drug development process is lengthy and costly, with only a small percentage of drugs being approved for consumer use.  It is estimated that it takes 12 to 15 years from initial drug discovery to regulatory approval.  Thus, the time-intensive and expensive R&D process has prompted a wave of offshoring to key low-wage countries such as India and China.

What Is Driving The Move to Offshore?

“Many large pharmaceutical companies that were not pressured to explore lean operations or efficiency enhancements now have to review their corporate structure and key processes”

– McKinsey & Co.

Sourcing work globally, either in-house or by a third party, is nothing new to the pharmaceutical industry. However, the current level of offshoring falls short in both scope and magnitude.  But this is changing.  There are four central factors altering the way pharmaceutical and biotech firms evaluate the sourcing of their operations.  Expensive regulatory barriers and escalating cost pressures are motivating the pharmaceutical and biotech sectors to look past their conventional sites, and the cost differential between high-wage and low-wage countries and time to market considerations are luring their operations to countries like China and India.

Regulatory Barriers:  The Food and Drug Administration (FDA)

The costly and restrictive regulatory regimes in the U.S., Western Europe, and Japan are one of the primary drivers of offshoring.  For the purposes of this paper only the Food and Drug Administration (FDA) will be discussed since European based firms face similar regulatory obstacles and Japan’s pharmaceutical industry is far more reticent to offshore to low-wage countries.  The FDA is a government organization that certifies drugs for both safety and efficacy.  The efficacy requirement was passed after the thalidomide scare in 1962 but even in the absence of that requirement drug companies would have no incentive to sell ineffective or flawed products.  It makes sense that doctors would not prescribe unsafe or ineffective medication and patients would have no incentive to buy them.  So far, regulatory efficacy requirements have not significantly improved the overall quality of prescription drugs, but instead lengthened the time necessary to secure approval and limited their market availability.  The 1962 amendments to the Food, Drugs, and Cosmetic Act shifted “primary decision-making authority in pharmaceuticals from market mechanisms to a centralized regulatory authority.”

            The impact of the new legislation was immediate; by 1967 the average review time for a drug application had more than tripled from its pre-1962-amendment levels.  The bureaucratic agency had become more risk-averse, which created distorted incentives for its employees to focus more on their careers than the efficient approval of helpful drugs.  The danger of accidentally approving a flawed drug affected their judgment in approving any drugs – even the helpful ones.  The delays cost the pharmaceutical industry millions – total development costs per successful drug more than doubled between 1963-1975 and 1970-1982.In 1995, Henry Grabowski calculated that reducing FDA review time by only one year would cut annual industry costs by $361 million.

            Lastly, thousands have lost their lives because of the FDA’s regulatory risk-aversion, and Robert Goldberg offers this chilling approximation:

By conservative estimates, FDA delays in allowing U.S. marketing of drugs used safely and effectively elsewhere around the world have cost the lives of at least 200,000 Americans over the past 30 years.  That figure does not include deaths that might have been prevented by the use of drugs such as Prozac, which is associated with the decline in suicides of individuals suffering from depression.

It is ironic that the government agency charged with safeguarding the lives of Americans is also responsible for thousands of their deaths.  If past trends are any indication of the future, it is expected that the length of time it takes to approve a drug will continue to increase.  The immediate result is slower market delivery and leaner profit margins.  Thus, offshoring is becoming a more attractive option for besieged pharmaceutical companies faced with rising investment costs.

Rising Costs of Research and Development

According to the Tufts Center for the Study of Drug Development, the cost of developing a new product increased from $131 million in 1987 to $802 million in 2001.  The Bain Drug Economic Model estimates that investment required for one successful drug launch at $1.78 billion dollars, including the typical $250 million launch.  On average, one out of every 1,000 compounds that enter pre-clinical testing will survive to the clinical phase.  Of this, just one out of every five will eventually receive regulatory approval.  Once it reaches the marketplace, only three of ten new drugs generate a return on investment.

  Failure to make it to the market stems from a variety of sources, such as harsh negative side effects or weak therapeutic effects.  For those drugs that do reach the clinical testing phase their future remains uncertain, owing to the increasing difficulty of obtaining approval from regulatory agencies.  It is the norm in the industry that, for every one hundred drugs that enter clinical studies, 30 percent will be rejected during Phase I, a further 37 percent during Phase II, 6 percent in Phase III, and an additional 7 percent during the regulatory review period.  In total, only 20 percent of drugs that reach the stage of being tested on humans are approved for marketing.

Although these meager yields conform to pharmaceuticals’ identity as a notoriously R&D intensive industry, a historical perspective casts an even more grim light on current productivity levels.


Estimated R&D Investments by Research-based Pharmaceutical Companies

(Source: PhRMA, 2002; US FDA, 2000)


Figure 1 illustrates the industry’s anemic level of recent drug discovery.  Although the funding for R&D has been increasing, pharmaceutical companies have not been able to maintain past levels of drug discovery.  Each successive year requires more spending to produce the same output.  The depleted drug development pipeline is especially ominous considering that current efforts to combat the dearth of new products will not come to fruition anytime this decade.   The FDA approved only 21 new molecular entities (NMEs) in 2003, compared with a peak of 53 in 1996, according toe the FDA’s Center for Drug Evaluation and Research.

Fewer drugs are being discovered and the ones that are developed are costing more to get approved.  These increased R&D costs can be seen throughout the development stages.  Figure 2 displays the burgeoning cost of passing regulatory hurdles.

Figure 2



Trends in Preclinical, Clinical, and Total Cost per Approved New Drug

(Source: J.A. DiMasi et al. and Journal of Health Economics 22 (2003) 151-185)

Inherent in a system of patents with limited durations is the reality of patent expiration.  This check on revenue has historically been offset by continual inflows of new drugs; but that is no longer the case.  Tremendous pressure is being placed on drug discoverers to speed innovation.  To put this challenge in perspective, consider that 35 blockbuster drugs will lose their U.S. patent protection within the next four years alone. These losses are estimated by the market research firm Datamonitor to total $70 billion globally.

In addition to a rise in the cost of developing new drugs and a decrease in the frequency of their discovery, the increasing use of generic pharmaceuticals is putting pressure on firms to cut costs.  According to a recent February 2005 IMS Health Report:

The sale of generic pharmaceuticals has been growing significantly faster than branded drugs.  Generic drug revenue has grown in the US market from 15 percent in 1999 to 17 percent in 2004 while the portion of generic prescriptions dispensed has grown from 50 percent in 1999 to 54 percent in 2004.


Lower priced generics cater to the demands of price conscious third party payers and individual consumers alike, as shown by Figure 3.

Figure 3


Generics’ Share of U.S. Prescription Drug Market: 1984-2005

(Source: 1984-2000 data: IMS Health, National Prescription Audit PlusTM 2001; 2004 projection: S&P analyst Herman Saftlas; 2001-2005 forecasts based on a regression line calculation by National Economic Research Associates.)

The shift from branded drugs to generics is a sign of the growing strength of managed care organizations, a growing variety of generic versions available when a patent expires, and more aggressive sales and marketing techniques by manufacturers of generics. Multi-state purchasing pools in particular are significantly strengthening the leverage buyers have over pharmaceutical companies.  As the US population ages, the larger segment of Medicaid-eligible consumers will heighten this pressure, as highlighted in a recent A.T. Kearney report:

From 2003 through 2007, pricing strains will pare $9 billion from the same [top] 10 pharma firms’ revenues, as key customers (e.g., state governments, the elderly, and retail consumers) balk at paying top dollar.  Most states have new programs to curb spending, the elderly are increasingly resisting price increases, and a growing number of American consumers are buying medicines abroad.

The increasing cost of R&D makes low-cost alternatives such as offshoring to

developing nations all the more attractive.

Cost Differential

            There are two key factors encouraging relocation to low-wage countries.  Chief of these is the opportunity for labor and other cost arbitrage.  Many companies cite the large gap between what it costs them to employ equivalent employees at home and in low-wage countries as the primary driver of moves overseas.  This gap is normally one of the more appealing aspects of relocating to a less developed country, but the unusually high labor costs of the pharmaceutical industry make it especially attractive in this case.  “Those under the most pressure to outsource are the companies with the highest G &A costs, as the main motivation to outsource is cost pressure,” says Mike Wyzga, chief research officer at Genzyme.

While there exists huge potential to save money in G&A expenses, offshoring clinical trials promises to dwarf savings in other areas.  The pharmaceutical industry spends the majority of its R&D dollars on the phases requiring clinical trials.Furthermore, these phases’ relative importance has been increasing, since “The proportion of industry R&D expenditure allocated to clinical studies increased between 1996 and 1998 from 32.5% to 39.5%, respectively.”  SRI International, an independent nonprofit research institute, estimates that by sourcing in a low-wage country, 10 to 40% can be shaved off early drug work such as toxicology studies.

India, for example, has many talented chemists from years of reverse-engineering drugs developed in the United States and Western Europe, and churns out over 122,000 each year.While this wealth of labor does not extend to scientists with managerial experience – integral components of the discovery process – there is an abundance of qualified labor in other areas such as life sciences and analytics.  GlaxoSmithKline (GSK) is leveraging Indian talent in its alliance with Ranbaxy, under which Ranbaxy identifies promising potential drugs and performs preclinical trials, while GSK performs later stage developments and retains the rights to market the drugs in all countries other than India. Creative partnerships like the one between Ranbaxy and GSK demonstrate the vigor of the Indian pharmaceutical industry, which will be discussed later in this paper.

Time to Market

            Without patents, the pharmaceutical and biotech industries would collapse.  Patents provide the monopoly power to producers that enable them to recoup their enormous R&D costs.  Without exclusive rights to produce and sell patented goods, generics would dominate the market.  Consequently, each year of a drug’s patent-protected life is extremely valuable.  This sheltered time period is affected by two dynamics: first, patent lengths, which have been fixed globally by the WTO at no less than 20 years; and second, the time from the date a patent is filed and its debut on the market.  Of these, only the later is variable.  Offshoring has the potential to significantly reduce this development time.

Figure 4


Patent Timeline

(Source: Gregory J. Glover and Bruce N. Kuhlik. “Patents and Hatch-Waxman: Understanding the Debate Between Innovative Drugs and Generic Copies.” Presentation to the National Governors Association (Washington, DC), 19 April 2002.)


Mounting development requirements make any option for speeding this process even more attractive.  It has been estimated that each extra day a drug is on the market generates around US $1 million.

Figure 5


Period of Market Exclusivity Between Introduction of Breakthrough Medicine and Competing Innovators.

Source: PhRMA, 2000; The Wilkerson Group, 1995.

Figure 5 illustrates the declining time period of exclusivity.  The Pharmaceutical Research and Manufacturers of America (PhRMA) comments on this phenomenon:

The average period of effective patent life for new medicines is substantially shorter than the 20-year period that constitutes a “full patent term” in the United States.  Furthermore a generic drug manufacturer may file a patent challenge as early as four years after the new medicine is approved, and in some cases as early as three years after approval.

Offshoring can alleviate this time crunch by speeding clinical trials.  Drug companies in Western Europe, the United States, and Japan face daunting regulatory requirements for approval.  In order to meet these standards, extensive clinical trials must be conducted.  The populations of developed countries are far less conducive to these trials than developing countries.  Finding untreated, or drug “naïve” patients that have the health characteristics sought by pharmaceutical companies is exceedingly challenging in developed nations.  For example, on expert interviewed by McKinsey & Company, a global business consultancy stated “It is basically impossible to recruit diabetes patients who have not received treatment in the US.  In contrast there is a large patient pool available in India.” Drug companies are taking advantage of this fact by contracting with Indian firms.  However, the relationship between India and the drug industry extends further.  For example, Pfizer, in recognizing the long-term potential of India as a location for clinical testing, has partnered with the Bombay College of Pharmacy to create an Academy for Clinical Excellence.  “The academy is to be set up in the premises of Bombay College of Pharmacy, with modules offering training programs in clinical research methodology, data management and bio-statistics.”  In late 2004, GlaxoSmithKline’s chief executive Jean-Pierre Garnier commented that “There is no alternative to really streamlining research and development departments…We are trying to move 30 percent of our clinical trials to low-cost countries.”

Complementing this superior access to patients for clinical trials, offshoring enables companies to work around the clock on promising compounds.  According to one expert, “If you can speed the development of a blockbuster drug by one month, this equals roughly $100 million in additional sales at a 40 percent profit margin.”

Fewer drugs are being discovered, it is costing more money to push them through development, and the length of the process is increasing, thereby eroding away drugs’ patent protected lifespans.  Consumers, especially bulk buyers, are exerting greater pressure on pharmaceutical companies to reduce or cap prices.  Each of these factors negatively affects pharmaceutical and biotech firms’ profits, but together their impact cannot be ignored.  More and more, offshoring is being looked to as the solution.

Overbearing regulation, escalating cost pressures, the cost differential between high and low-wage countries, and the potential to reduce time to market are driving pharmaceutical and biotech companies to offshore.  Next, the question becomes where to offshore.

Why India?

The first part of this paper fleshed out the current offshoring activities of the global pharmaceutical industry; but what countries are receiving the lion’s share of these jobs?  India is a strong contender given its large, highly educated, English-speaking workforce, which has generated success with IT, software, and financial services offshoring.  Its preeminence in the pharmaceutical offshoring market allows us to focus on it exclusively.  This is largely because of the inherent tradeoff between focusing on one country versus a more general overview; and, the former allows for far more interesting questions and insights to be drawn.

A recent report by Preston and Singh states that global manufacturing offshoring will increase from $14 billion to $27 billion by 2007.  India’s inherent advantages in both contract manufacturing and research make it an attractive destination for the mass production of drugs and clinical research.  The existing Indian pharmaceutical industry is well known for its ability to quickly reverse engineer patented drugs and the availability of low-cost, trained chemists.  Indian companies have also built manufacturing facilities, which could quickly be updated to international standards.  In fact, there are 70 USFDA approved plants and over 200 units certified as following Good Manufacturing Practices, which is the highest number outside of the U.S.Indian companies would also make excellent partners for multinational pharmaceutical companies since they filed a total of 126 Drug Master Files (DMFs) with USFDA in 2003, ranking only second to the U.S. and constituting 20 percent of all drugs entering the U.S. market. While this does not take into account the usefulness or value of the produced drugs –it does signal India’s ability to discover, develop, and manufacture drugs in a timely manner.  Put simply, India possesses a talented workforce and efficient manufacturing infrastructure that is suited for offshoring.

The Indian government now allows 100 percent of foreign direct investment (FDI) to directly flow to the pharmaceutical industry.  Reduced import tariffs and price controls have also made India a more attractive destination for FDI. The movement towards a friendlier investment climate was motivated by the low-levels of R&D investment by domestic pharmaceutical companies (1.9% of total revenues).  Historically, Indian firms devote only a small percentage of revenue to R&D, instead focusing on reverse engineering blockbuster drugs for international sale.  The needs of the Indian and global pharmaceutical companies complement each other – Indian firms require large inflows of FDI and international companies need to significantly reduce R&D and manufacturing costs.

India’s Pharmaceutical Industry

India is the world’s largest producer of generic anti-AIDS drugs and its overall generics industry totals more than $4 billion. India’s pharmaceutical industry supplies 85 percent of its domestic market and generates approximately $900 million a year from sales in India alone.  These figures convey the importance India’s pharmaceutical sector has attained.  India’s prominent pharmaceutical companies have already achieved a degree of sophistication that surpasses that needed to simply to perform basic tasks.  The Indian pharmaceutical industry is welcoming working relationships with leading global firms.  For example, Ranbaxy recently formed an agreement to work with GlaxoSmithKline to commercialize compounds they develop together, which is interesting because the two were locked into a patent lawsuit just a few years ago.  Deloitte commented on the Indian pharmaceutical industry, stating:

Prospects for the Indian pharmaceutical industry will be bright if it can move beyond the commodity production model and share in the significant financial benefits stemming from co-development and ownership of new, patented product.”

At the moment, CROs assume the largest portion of offshore tasks.  As more tasks are outsourced, CROs importance will continue to grow.

Contract Research Opportunities

As outlined in a previous section, the drug discovery and development process is expensive and extremely research intensive.  Since R&D is such a critical function firms are now partnering with Indian biotech and pharmaceutical companies to leverage their low cost of innovation.  According to a McKinsey Quarterly study, R&D costs for Indian pharmaceutical firms are 75 percent less than those of a multinational firm.  Furthermore, India is an ideal destination for clinical trials accounting for more than 66 percent of total R&D costs.India boasts not only cost-competitiveness but also a world-class infrastructure of healthcare professionals: 500,000 well-trained English-speaking doctors, 16,000 hospitals, 171 medical colleges, and a heterogeneous pool of genes, making it a well-suited location for conducting clinical trials.

India’s uncontaminated, “drug naive” patent population, is another factor contributing to the growth of clinical research outsourcing.  Unfortunately, this stems from India’s high levels of poverty and low per capita expenditure on drugs (less than $5 per year).  It is also less expensive to recruit patients, nurses, and investigators.  It is projected that India offers a 50 percent cost savings for Phase I research and 60 percent for Phase II and III.  However, there are regulatory barriers limiting the growth of clinical research outsourcing to India.  The Drugs and Cosmetic Rules (Schedule Y) describe India’s clinical trials as, “One step behind other countries.”It is predicted that the Indian government will revise this legislation in the near future.  Until then, multinational firms are primarily outsourcing Phase III trials, which are extremely costly and involve a large number of patients (1,000 – 3,000, on average).  Due to the current TRIPS legislation and lack of adequate intellectual property rights, global firms are using India to test drugs for worldwide diseases and not the development of “blockbuster” drugs.

 Intellectual Property Rights: Considering TRIPS

            The drug industry, like the software industry, is based on information, protected by trademarks, patents, trade secrets, and copyrights.  Without adequate intellectual property rights (IPR) protection, no level of cost savings could motivate pharmaceutical or biotech companies to operate in low-wage countries.  Such concerns were a principle factor in dissuading pharmaceutical and biotech firms from sourcing operations in India – the risk of losing protected information was too great.  IPR insecurity can be the result of inadequate enforcement mechanisms and opposing political pressure – as is the case in most of the developing world – or an IPR regime that simply does not recognize certain types of patents (e.g. product patents in general or patents on pharmaceutical products specifically).  Beginning in April 1972, when the Indian Patents Act (1970) came into effect, until May 2003, when the provisions of the Patents (Amendment) Act of 2002 were adopted, India did not recognize product patents for pharmaceuticals. Recognizing only process patents meant that a drug patented in the U.S., Europe, or Japan could legally be produced in India as a generic.  This eliminated the monopoly patent holders normally enjoy.

This process-only system had two important effects.  First, it encouraged the development of a large and highly successful domestic pharmaceutical industry adept at reverse engineering drugs produced by foreign pharmaceutical companies (and under patent protection elsewhere), and able to cater to the low-income population of India.  India’s pharmaceutical industry is a world leader in generics and performs many functions at the caliber necessary to collaborate with major global pharmaceutical companies on complex projects.  However, it has almost no capacity to conduct the type of R&D that is responsible for the generation of the drugs it copies.  Second, India’s process-only patent regime discouraged foreign pharmaceutical companies from conducting work or investing in India; doing so exposed them to an unacceptable level of risk of IPR loss.

This all changed with the adoption of a WTO agreement on IPR called TRIPS (Trade Related-Aspects of Intellectual Property Rights).  In 1994, WTO member countries adopted the TRIPS Agreement, which mandates that member countries adopt minimum standards of IPR protection.  It also created an enforcement mechanism for resolving disputes between countries.  The goal of TRIPS is that “protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation…in a manner conducive to social and economic welfare, and to a balance of rights and obligations.”

The basic provision of TRIPS is the requirement in Article 27 that all member nations make patents “available for any inventions, whether products or processes, in all fields of technology,” subject to standard requirements of novelty, usefulness, and nonobviousness.  Pursuant to the broad language of this basic provision, all members must extend full patent protection to pharmaceuticals.  One of the most significant victories in TRIPS for the pharmaceutical industry was the inclusion of pharmaceuticals as patentable inventions.  However, TRIPS also contains certain exceptions to Article 27’s broad patent coverage.  Exceptions exist for certain public health issues, for compulsory licensing.

Membership in the WTO and acceptance of the TRIPS agreement has generated political turmoil in India.  In 1996, India became a signatory to the TRIPS agreement but had no obligation to comply at all for one year, except for article 70, sub-clauses (8) and (9) which mandated the immediate establishment of an interim mechanism to provide exclusive marketing rights for agricultural, chemical, and pharmaceutical products. The United States became frustrated waiting for India to comply with TRIPS and sought consultation through the WTO.  In response, the Dispute Settlement Body of the WTO examined whether or not India had in fact defaulted on its TRIPS obligation.  In its defense, India argued that developing countries were entitled to delay the process of enforcing and approving applications for chemical and biological patents for four years under article 65 (2).  The WTO disagreed, sided with the U.S., effectively forcing India to amend the patent legislation to avoid trade sanctions.  In order to comply with TRIPS, the Patents Act of 1970 was amended by the Patents Act of 1999, which established the interim mechanism for granting exclusive patent rights as required by the WTO.  Yet, India was still not compliant with TRIPS under article 70(9), and passed the second Patents Act in 2002. India was not required to fully comply until January 1st, 2005.

Although TRIPS provides patent protection for pharmaceuticals, its adoption has not and will not result in the collapse of India’s generic pharmaceutical industry.

India did not recognize patent protection for pharmaceuticals in existence prior to 2005 and TRIPS does not require it to do so retroactively.  Therefore, according to U.S. pharmaceutical spokesperson Mark E. Grayson, after 2005, “India can still make generically all drugs in existence prior to 2005, even if such drugs might be introduced into the market as late as 2015.  All the current [AIDS] antiretrovirals existed prior to 2005 and thus India’s generics industry will have a large potential market even after 2005.

The disconnect between the spirit of TRIPS and India’s present IPR regime betrays India’s reluctance to embrace robust intellectual property protections.  However, India’s compliance, despite being half-hearted, has improved its appeal as a location for offshoring.  While TRIPS will certainly alter the pharmaceutical industry in the long-term, its short-term effects will be checked by enforcement difficulties, especially a lack of qualified patent examiners.  Pharmaceutical companies are already increasing investment in India even with its limited reforms.  “We are investing in India because of its vibrant science and because we anticipated the adoption of meaningful intellectual property rights,” said Sir Tom McKillop, CEO of AstraZeneca.[

The Future of Offshoring

The global pharmaceutical industry is seriously embracing the advantages of offshoring to low-wage powerhouses such as India.  The reality of shrinking profit margins, drying pipelines, patent expirations, and increased R&D costs has made offshoring an attractive cost-reducing strategy.  Multinational firms are primarily offshoring R&D activities, most notably clinical trials, and IT services.  Despite vocal concerns, firms are overcoming current risks in order to realize the gains offshoring can provide.  This section discusses the following: (1) a strategic offshoring model; (2) global sourcing potential; (3) offshoring benefits; and (4) concerns and risks of offshoring; and (5) trends.

A Strategic Offshoring Model

The current economic environment offers more exciting and valuable opportunities for strategic offshoring than ever before.  This phenomenon has placed more focus on the rise of strategy concepts like core competencies, which encourage companies to compete for future partners and breakthroughs.  The goal is to align partners with complementary needs versus conducting all activities in-house.Offshore outsourcing is a powerful tool if used properly, which means exploiting its strengths and understanding its limits.  A strategy that is based on the premise that the cost of an internal activity can be reduced by its externalization is simplistic, at best.  Caution must be exercised to ensure long-term competitiveness is not sacrificed for a short-term advantage.  To achieve this end management must strike a balance between internal resources and outsourced functions so that they match corporate culture and goals.  Thus, an effective strategic offshoring model must be executed, and Dr. Bianca Piachaud proposes one of the best.

Piachaud’s goal is to create a mechanism by which pharmaceutical firms can implement and sustain a strategic sourcing partnership.  The systemic framework is broken into seven stages that are designed to facilitate a coherent and holistic approach to implementing and managing the buyer-supplier relationship.

Stage I:  Deciding to Outsource.  A firm must first decide whether or not it will outsource certain internal activities.  Management must consider the consequences of this decision and its implications on R&D activities, design, engineering, and assembly.  This also requires an analysis of the technological positions of competitors and existing regulatory barriers.   Therefore one of the first steps is the creation of a mission statement, which describes offshoring strategies, underlying rationale, and expected benefits.

Stage II: Core and Non-Core Activities.  Correctly selecting and developing core competencies is a building block of sustaining long-term competitive advantage.  Yet, it can be challenging to differentiate between a core competency and a principle function of any organization.  This task is especially difficult in the pharmaceutical industry because critical functions span across a variety of spectrums.  Piachaud outlines the core capabilities of the modern pharmaceutical industry as: (1) knowledge pertaining to distinctive therapeutic classes; (2) project management; (3) the ability to access external sources of expertise and technology; (4) maintaining collaborative partnerships; (5) integrating domestic and international activities; (6) R&D methodologies; (7) knowledge management; (8) sales and promotion techniques.

Stage III: Selecting a Partner.  Management must be keenly aware of a partner’s expertise, resources, motives, competencies, and weaknesses.  Firm selection must examine the following: (1) physical factors such as capital, employees, geography, and physical assets; (2) technological factors such as product lines, process capabilities, patents and R&D; (3) marketing factors such as distribution channels, customer knowledge, and brand image; (4) existing alliances with competitors, customers, and suppliers; (5) similarities and differences in corporate cultures.

Stage IV: Managing the Outsourcing Arrangement.  All aspects of a sourced relationship are governed by the contract, which requires the pharmaceutical firm and service provider to settle on all parts of the agreement.  Firms must also take into account all possible contingencies, including the resolution of disputes that may develop once the contract has been executed.  At every step of the contract creation legal experts must be utilized by both parties to craft a document that satisfies everyone.  India’s poor legal environment translates into painfully high transaction costs, which hamper firms’ abilities to engage in these relationships.

Stage V: Evaluate Performance.  A service provider’s performance will naturally be measured and quantified, but it is more important to observe long-term trends.  When both current and long-term performance levels are noted the quality of the service provider will be obvious.  To this end, Maromonte identifies four specific criteria that should be used when evaluating supplier performance: (1) quality performance; (2) delivery performance; (3) cost performance; and (4)-product advancement performance.

Stage VI: Working Together.  Even the most planned partnerships will experience difficulties or unexpected problems.  The most common problems include: disagreement between pharmaceutical companies and CROs on the terms of the contract; subcontracting by CROs of part of an operation; misunderstandings through written and oral communication; and personality clashes.  To avoid these types of problems management should be open to changing strategic objectives when needed.  Consistent directions and expectations, which all stem from clear communication, are central to an effective relationship.

Stage VII: Organizational Learning.  The creation of competitive advantage requires two vital elements.  First, an organization must function in a coordinated manner that integrates core competencies (R&D) with skilled managers; and second, the value adding networks that link manufacturers, retailers, suppliers, and others to one another must be constructed efficiently and effectively. Working with third-party vendors from a systemic, continuous learning perspective is crucial to long-term partnership success.  Organizational learning then becomes deeply embedded within all business functions aligning in-house and outsourced activities.      

Global Sourcing Potential

There will be an estimated 2 million jobs in the global pharmaceutical industry by 2008, and of these 13 percent could be globally sourced, representing 254,000 employees. Certain positions cannot be offshored since they require a local, physical presence.   It is estimated that thirty-five percent of employees in the pharmaceutical industry are company representatives who sell products to doctors, hospitals, and insurance companies. Other positions require local knowledge for marketing and product development as well as regulatory filings and procedures.  Most large multinational firms have strong marketing and regulatory departments in their primary markets.  Lastly, jobs that entail complex interaction among product developers, sales representatives, and drug researchers are not suited for being performed remotely.  In that case, what areas are the most amenable to global sourcing?

IT is the function with the greatest potential for outsourcing at an estimated 61 percent of employment, although this is moderated by its low proportion of total employment (3 percent) in the pharmaceutical industry.  Application development, data maintenance, and other basic IT functions could easily be outsourced.  On the other hand, certain functions must remain local such as business analysis, functional requirements, user acceptance testing, and user based training.  It is doubtful any hardware outsourcing will occur since it requires the cost of hardware abroad to be significantly less expensive to add value.

Research and development, especially clinical trials, is expected to increase in upcoming years.  Although there is no set limit on the percentage of trials that can be done abroad, experts agree that it is unlikely drugs will be approved if more than 40 percent of a trial are performed internationally.  Regulatory approval aside, a large percentage of clinical trials must be done locally because it is necessary to communicate with individuals who assist in the shaping of the trials, as well as those who promote the drug once it is approved.  As mentioned in an earlier section, conducting a clinical trial in a low-wage country reduces the cost per patient and streamlines the recruitment process.

The pool of jobs that could potentially be offshored is inherently limited, because performing certain job functions remotely is either inefficient or impossible owing to physical constraints.  As leaders in the pharmaceutical industry begin slowly but surely outsourcing various functions, smaller firms will follow.  At the moment, there is a highly uncertain reward-risk calculus that forces firms to compare the relative benefits against the potential loss of their competitive edge.

The Benefits of Offshoring

The global pharmaceutical industry is quick to recognize the numerous benefits promised by offshoring.  Ken Martin, CFO of Wyeth, commented on the advantages of outsourcing offshore in an interview with A.T. Kearney stating, “Often expertise is a big reason for it.  Sometimes it is cost.  Sometimes it is timing – how fast you can get up and running.  Each situation is different.” Cost savings are typically the driving reason for a firm’s decision to outsource and have been outlined at length in previous sections.

If a firm is deficient skill-wise it is often easier to contract with companies that specialize versus cultivating expertise internally.  Jeffery Black, CFO of Endo Pharmaceuticals elaborates, “Some of the outsourcers can do things more efficiently than we can…you certainly can get expertise that you cannot expect one person or a small group of people to have.”  Increased speed and flexibility are also attributed to working with vendors and partners in captured markets.  For example, when Endo was founded it consisted of 100 flexible-time sales representatives, which the outsourcing contractor was able to increase to 300 the following year.  Two years later, Endo lowered the headcount to 230 while converting the workers to fulltime.  Carol Ammon, former Endo CEO, commented, “As our product line evolved, we were able to upsize, downsize, and right-size and get the right profiles pretty quickly without really dealing with any severance, relocation, or any of that.”

Outsourcers bring a new, fresh perspective to a corporate structure, which can result in radical improvements in efficiency, cost, and speed by eliminating entrenched habits and processes.  It is also possible for outsourcers to implement new and better methods in a more efficient, non-political manner.  Working with partners also eliminates the need for large capital outlays to build new infrastructures.  In this way resources are utilized more efficiently and directed towards core competencies.  Also, outsourcing during periods of over capacity at in-house facilities allows firms to contract on an “as-needed” basis.  Advances in science have introduced novel research techniques.  Outsourcing enables firms to exploit faster, and more effectively the results of basic research conducted in universities and external laboratories.  Even with all the potentially positive benefits of outsourcing the risk-averse culture has tempered the enthusiasm of many large firms.

Offshoring Risks and Concerns

            Large pharmaceutical companies are correct to be wary of outsourcing sensitive and vital operations.  There is a low tolerance for error industry-wide; simple mistakes can compromise results, or in the worst-case scenario harm patients, resulting in a massive and expensive liability.  Joe McCracken, SVP of business and commercial development at Genetech, makes it clear that:

We have a very low threshold for error.  We have to do everything right, and we are in a hurry.  We feel like people are waiting for us to get important new products approved for the treatment of life-threatening, life-altering diseases.  This is really the key driver of our business and why we are in one location in South San Francisco, and why we are not interested in outsourcing….the cost savings do not justify the risk.

Data integrity has a magnified effect in the pharmaceutical industry, and companies must carefully outsource their IT functions to the best, most error-proof partners.  Russ Bantham of the Pharmaceutical Research and Manufacturers of America (PhRMA) cites industry fears about maintaining data integrity, saying, “Misreading, losing, or mis-entering one piece of data could result in a multi-billion dollar lawsuit.  Along those lines, delays in any process whether it is regulatory, a flawed process, or ineffective drugs is highly costly.  If the FDA finds flaws in any aspect of pharmaceutical research, companies face setbacks.  If these errors are discovered while the drug is out on the market, it can result in the loss of billions.  Highly rigorous and expensive regulations worldwide, as previously discussed, can become complicated with the use of third parties.  Relying on foreign vendors and partners can make compliance more burdensome, costly, and risky.  Privacy laws recently passed in several countries might hinder data sharing during the highly regulated development and manufacturing processes.

The cost of an unsuccessful partnership is more than just a financial lost, since the company loses crucial time and opportunities that it could have done elsewhere.In outsourcing arrangements there is also a loss of partial control as it passes from client to provider.  As a result, the information available to the project manager is typically less detailed and complete if it had been retained in-house.  Poor communication can also lead to problems with quality and delays.  Thus, there is an element of trust in any relationship, and certain problems can become magnified if the partners do not know each other well.

Firms also worry about weak intellectual property protections and may not risk losing a strategic formula or manufacturing advantage because it chose to outsource.  If the legal system is particularly weak there will be little if any recourse a firm can take if its information is leaked to a competitor or generic manufacturer.  There is also the challenge faced by upper-management to juggle 20 to 30 individuals during the life of a project, working with multiple languages, and time zones.  However, at this point in time, optimistic pharmaceutical companies are outsourcing both routine and core functions.

 Trends in Outsourcing

Pharmaceutical firms have realized that outsourcing significant amounts of their operations to low-wage countries is becoming an integral component of sustaining profit levels.  Few major pharmaceutical companies do not already have pilot programs in place or plans to offshore sizeable components of their operations.Offshoring is expected to increase by 16 percent annually, driven by robust increases in the augmentation and relocation of both back-office and core processes.

Just as today’s financial services and software industries could not imagine operating with business models that did not utilize offshoring, it will not be long before the pharmaceutical industry incorporates the unrealized gains of offshoring into many elements of its operations.  This new perspective on the location of operations and how they are controlled by pharmaceutical companies – in house, outsourced, or a hybrid – ensures that the benefits low-wage countries offer can be enjoyed by all types of firms in the drug industry.  The relationship utilized by a drug company is a function of several factors: amount of employees required; the offshored function’s sensitivity to IPR loss; long term goals of the drug company; core competencies and expertise of the drug company; and scope of the functions to be offshored to the same firm or location.  Wyeth’s recent partnership with Accenture demonstrates that a pharmaceutical company need not set up shop in or hire a firm from India to take advantage of the cost, time, and expertise the country has to offer.

Wyeth’s expertise is in drug discovery and development, not in the type of large-scale transaction processing that clinical data management requires, whereas Accenture is a global leader in this type of data processing.  Confident in the potential synergy of this partnership, Wyeth hired Accenture to run its clinical data management operation for 10 years, and Accenture agreed to base a portion of its remuneration on running the operation quicker and more inexpensively.Accenture’s benchmarks for receiving full compensation include:

Reducing data processing cycle times by 50 to 75 percent, exceeding industry norms to position Wyeth in the top five percent based on clinical data management efficiency, enabling Wyeth to accommodate many more clinical trial activities, and complying with other detailed performance metrics for data quality.”

Accenture’s ability to attain these lofty goals clearly supports outsourcing’s potential to increase profits, but how is this American company’s excellence related to the cost advantages of sourcing to low-wage countries?

Although Accenture is based in the US, and it agreed to maintain current staffing levels, its ambition in accepting this project was driven by its capacity to capitalize on the advantages India offers. “Guided by its global delivery approach, the Strategic Delivery Model, Accenture is complementing [Wyeth’s] workforce with an additional 400 skilled resources from the Accenture Global Delivery Centers,” which draw from the 48 countries where Accenture has operations.  The benefits Wyeth has realized from this indirect offshoring through outsourcing include more than quadrupling the number of drug-testing filings submitted to the FDA, cutting Phase I clinical trial times down from 18 months to just six, and drastically increasing its early development success rates.

Other companies have chosen to work with CRO’s based in India, thus maximizing the savings potential from low-wages and a large pool of highly employed workers.  Biotech companies in particular can benefit from outsourcing specialized screening and preclinical development processes to India, since this eliminates the need to build these costly capabilities in house.  This practice is becoming more routine as pharmaceutical and biotech companies observe the savings it generates for their peers.  Yet there is still substantial room to expand before reaching the potential offshoring maximum of 40 percent of clinical trials, a figure restricted only by implicit regulatory limits.

In 2003, outsourcing represented 26 percent ($13.6 billion) of industry R&D spending, up from 22 percent in 1999. The largest recipient, by far, is CROs, whose market grew from $1 billion in 1992 to $8 billion in 2002. Additionally, CROs held more than 70 percent of the outsourcing market in 2003, and are expected to gain at least 80 percent in 2008.

Not all companies have relied solely on others to perform their offshored R&D.  Pfizer recently doubled the amount of money it invests in its Indian clinical research operations to roughly US$13 million.  In 2004, GlaxoSmithKline performed 10 percent of its clinical trials in low-wage countries.  It plans to increase this to 30 percent by the end of 2005 Jean-Pierre Garnier, CEO of GSK stated that:

We do about 60,000 patients in total trials each year – so the savings per person if you switch, say, 20,000 of those patients to India is in excess of US$10,000 per patient.  So that’s savings of US$200 million right there.

This degree of motivation to move operations offshore is not uncommon, and it is expressed by both pharmaceutical and biotech firms.  Companies were originally driven to offshore for cost-saving reasons, but are now beginning to capitalize on revenue-enhancing opportunities. “This will further pressure those that have not adopted global resourcing to either find new sources of distinctiveness, reduce costs domestically, or engage in offshoring.”

Offshoring is quickly becoming an essential component of the pharmaceutical industry.  Pilot programs are commonplace and plans to expand overseas operations are a standard response to increasing cost pressures.  Next to the major pharmaceutical companies themselves, India’s pharmaceutical sector and its economy in general are the biggest beneficiaries of this trend.  The drive to outsource more, both in magnitude and in scope, is inevitable, and India is the place to do it.  Firms will still be saying “yes” to the “should we offshore” question in ten years, but “India” is not necessarily the permanent answer to the “where” question.


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