Evolution of outsourcing in the Pharma Industry

In the fight for a larger pie, pharmaceutical companies have moved from being a mature industry making billions, to one that is finding it increasingly difficult to sustain performance. Today, the pharmaceutical industry faces numerous challenges like lengthy and risky initiatives in R&D, negotiating a diverse and stringent set of regulatory frameworks in new markets, creating new Intellectual property in view of increasing competition and declining sales in developed markets. Pharmaceutical companies have tried to address this by massive consolidation to achieve greater economies of scale and a rapid scale up in sales and marketing activity to broaden reach. However, given the declining revenues both these initiatives seem to have paid marginal returns, at least in the short run.

With crisis intensifying on all fronts, Pharmaceutical companies are increasingly adapting new business models that incorporate offshoring a number of activities across its value chain. A late entrant to the outsourcing arena, pharmaceutical companies started their outsourcing initiatives with support functions like IT and finance and have gradually moved towards outsourcing activities in drug discovery, clinical trials, contract manufacturing, market research and analytics. However, as opposed to only cost arbitrage, offshoring in pharma industry is also focused on providing "accelerated value" and enhancing toplines. With a booming domestic healthcare industry, established leadership in contract manufacturing and a large English speaking talent pool, Indian offshore service providers are well poised to capture the opportunity in the pharma industry.

Drivers and Opportunity

Emerging areas in offshoring that would gain traction in the next five years primarily include:

Source: Inputs from ValueNotes' Report "Bioinformatics Outsourcing for Life Sciences: India Opportunity"

Lack of adequate skilled workforce with pharmaceutical companies in the US and Europe is building a strong need to offshore scientific research in drug discovery, clinical trials and bio-informatics. Ability to provide economies of scale coupled with domain expertise in chemistry, IT and allied areas is channelizing work to India. A combination of offshore-onshore delivery model enables analytics service providers to provide cost savings as compared to companies based out of the US and Europe. Unlike in other BPO services, cost arbitrage will remain a secondary driver for offshoring as compared to quality, which will continue to be the primary bottleneck for greater offshoring in Pharma.

In 2007, global spending on R&D by pharmaceutical companies was estimated to be over $100 b. Out of this, drug discovery, clinical trials and allied activities accounted for a share of 30-35%. According to IMS Health, in 2007 the total spending on promotional activities by top 20 pharma companies exceeded $20b, thus taking the opportunity in outsourced analytics services to over $3 b. Overall, the total outsourcing opportunity from the pharma vertical is estimated around $40 b to $50 b. Although, the current levels of offshoring by larger pharma companies are low, it is expected to grow by CAGR of 10% to 15% across the value chain. The larger pharma companies will continue to be the targets for offshore service providers in the near term. However, the opportunity with mid-sized pharma companies is also significant and is expected to unfold rapidly post 2010.

Future Outlook

The vendor landscape serving the demand for offshoring in pharma industry ranges from niche service providers within each of the service horizontals to large IT service providers. Indian service providers are aggressively ramping up their operations to serve the latent demand. Leading niche players across the value chain have posted growth rates of over 100% in the past two years. With increasing demand and entry of large players, the industry is likely to witness a consolidation wave across various service areas. However, whether outsourcing will act as a panacea for the troubled pharma industry, will depend upon the ability of the service providers to balance cost arbitrage and quality, while they scale up operations and provide more complex services.