India calling

India is often thought of as the hub for industrial outsourcing. But is it right for pharma? Rob Plastow has been looking the impact on industry and country.

Outsourcing in the service industry has become commonplace. It is a trend that has seen the offshoring of IT services and call-centres to developing countries over the past 10 years become a successful and attractive proposition for many organisations.

Outsourcing has also attracted criticism from domestic staff fearing job losses and political groups opposed to the speed of globalisation – while some consumers have voiced concern over the change in behaviour they have to make when using foreign call-centres.

Yet the benefits to be had are all too obvious for businesses, particularly in specific areas that transpose well to foreign placement, most noticeably technology. Pharmaceutical companies are also becoming ever more aware of the potential gains. But what will this mean for the industry, and for the areas it outsources to?

India

India boasts the world’s second largest pool of English speakers and a renowned standard of higher education. The economic difference is a magnet for industry as clinical trials can be completed for 60 percent of the North American cost (where trials usually cost 40 percent of the spending in new drug development).

There is, however, more to India than numbers. The economic difference can come at a cost elsewhere and have political repercussions if not approached with the proper level of discernment. In an age of growing awareness amongst consumers, reputation is something that can be heavily scrutinised – but it can also be a major differentiator when viewed favourably.

With the right approach, outsourcing can benefit the economies of the outsourcer and the vendor, encouraging them both to grow. When taken for granted it can lead to a widening of class divisions and much unrest. It is a delicate procedure underneath what otherwise looks to be a simple equation of profits.

At present, 88 percent of audited prescription drug sales (US$518 billion) are jointly accounted for by North America, Europe and Japan. The Indian economy is growing well but is US$515 billion in its entirety. Its infrastructure is understandably not as well equipped as a result. Its population is currently over a billion and set to rise to around 1.6 billion by 2050, which will see China get relegated to second place in terms of populace.

For number crunchers, the fact that the per capita income is also two-thirds that of China, currently around US$610, would suggest that companies will continue to outsource to India for some time to come.

Poverty and development

Over 300 million people in India live on less than a dollar day; 50 percent of children are malnourished; and 90 percent of the elderly do not have family or state pensions to support them. The pharmaceutical industry’s role in India will be subject to scrutiny.

Many pharma companies are being lured to develop a middle class market that, while growing, is still in the minority – targeting it to purchase medicines at Western prices the majority of India’s population cannot afford. As the economy strengthens the middle class will grow, but only if the poor add to their number. Determining healthcare availability by ability to pay will not help.

The transition is more profitable with a long-term outlook that aims to benefit the Indian economy as well as the companies. A strong Indian economy may look to Western countries for imports. The fact that 150 million people in India already earn US$1000 per annum shows the development of the country due to the impact of outsourcing.

An emerging market is the provision of over-the-counter drugs, as many household medicines are not available in India. The government is currently looking to expand the list of drugs that can be sold outside pharmacies. At the same time they are also looking to reduce the scope of price controls on essential drugs. The Indian courts are in the midst of assessing whether the criterion of turnover in selecting the drugs to which price controls should affect, is acceptable. The outcomes could be very beneficial to pharmaceutical companies, but they could also widen the gap between the qualities of medical care available to the rich and poor. An awareness of and attention to such possibilities is therefore important.

Indian pharmaceuticals

In general, existing Indian pharmaceutical companies operate on a generic drug basis and the market is appealing for outside companies to compete in. They would no doubt be welcomed by the Organisation of Pharmaceutical Producers of India (OPPI), which is combating the counterfeiting of medicines and the proliferation of spurious drugs either fake or poor that plague the industry at present. It is also reported that the Indian pharmaceutical industry is lacking sufficient numbers of inspectors and that many harbour suspicion some officials tip off counterfeiting manufacturers before raids.

Here, the involvement of ‘Western’ companies would improve the standard of medicines available in the country, as well as provide greater profits.

The outsourcers

Anthony Farino, US Pharmaceutical and Life Sciences Advisory Services Leader; Paul Horowitz, Partner, Advisory Services and David Gordon, Director, Advisory Services, PricewaterhouseCoopers discuss the implications of outsourcing for the pharmaceutical industry.

Q. What are the particular benefits to pharmaceutical companies in outsourcing?
A. The benefits are cost savings and ability to devote management and financial resources to development. These are universal and not specific to pharma. A key concern for our pharma clients, however, is managing sales, general and administration expenses as major new drugs become harder to produce from pipelines and political pressure around the cost of drugs creates downward pressure on prices and revenue.

Many of our pharma clients are extensively executing or initiating outsourcing programs to manage and reduce their cost structures. For example, outsourcing of clinical trials is becoming more common in India due to significantly lower trial costs (by some estimates costing only 60 percent of what a similar trial would cost in the US). India also has large population concentrations in major urban areas offering ready access to trial subjects and a population that offers vast genetic diversity.

Q. Why else is India such a popular site for outsourcing?
A. Of all the offshore locations, India has the most developed market both in terms of local vendors – who increasingly are offering best of breed solutions, services and quality levels – and established facilities of the large multinational vendors (e.g. IBM, EDS, Accenture, etc.) and the captive operations of many multinationals, some of which (such as GE Capital and BA) are now offering services to third parties. Additionally, India has a commercial and legal environment which is supportive and conducive to both the vendors’ and their clients’ needs.

Beyond these advantages, India also has the world’s second largest pool of English speakers (making communications significantly less of an operating issue than in other countries), and an excellent higher education system, which produces a large number of graduates with advanced degrees in the sciences and in information technology. While India is still ‘the king’ of offshoring and outsourcing, a number of other countries have recently made major strides and are being considered by pharma companies as an alternative to India.

Q. What other countries are beginning to show promise?
A. Central Europe is a key area and in many ways, particularly for EU-based companies exploring outsourcing, already well established. China, as always, is the one to watch. Many companies are exploring establishing captive offshored centres primarily aimed at serving regional needs. Whether this in turn blossoms into an established finance and administration (F&A) outsourcing vendor community is unproven.

Latin America is also a very real emerging area for outsourcing, based on proximity to US borders and a growing and more robust pool of technical expertise. Finally, many large multinationals are establishing shared service centres and other offshored facilities in the Philippines. Like China, it remains to be seen if a world-class vendor community develops as well.

Q. Pharmaceutical companies are obviously very concerned with compliance; does outsourcing cause any extra concerns in this regard? If so, how can these be overcome?
A. Finance and administration, as opposed to clinical trials and research, is affected by the myriad data protection rules that impact all other industries. In the key area of protecting intellectual property and (perhaps more importantly from a reputation risk perspective) clinical data, the issues and risks are industry specific. Regardless, the concerns and risks associated with protecting data and complying with the relevant regulations ¬– are high and very real.

Part of the answer is where and with whom you outsource. Reputation and the experience of peers and competitors is key when evaluating vendors, as is a full understanding of a vendor’s policies, methodologies and systems that allow them to fully comply. Finally, clients need to bring in expertise to ensure that the issue is fully addressed. Often this expertise resides in-house; often a consultant ought to be engaged.

Q. As outsourcing has become more widespread, how is the domestic workforce reacting to the changes and has there been much backlash?
A. We are all part of a global economy. With India moving from being a largely impoverished nation to being more highly educated, highly motivated, as well as having a workforce that is increasingly being well compensated, where do you think they, or China will look to purchase goods and services, assuming we position ourselves as such? The workforce will actually be better positioned for future growth if we view outsourcing as a way to reduce operating costs, appease shareholders and, eventually, add to the bottom line and at a more global scale than ever before.

Just recently, we met with an executive of a leading pharmaceutical company that is nearing the completion of a large F&A outsourcing project. He made the point that with clear, timely and direct communication, they were able to manage the workforce more effectively and mitigate the negative reaction to the point where many of those affected became valuable members of the transition team and had an opportunity to work in roles that added more value to the company.

Q. Do you believe that the outsourcing market is a fair playing field for big and small companies?
A. That depends on the definition of fair. Vendors will pay more attention to winning and servicing large accounts. Vendors will make a greater effort to accommodate a client’s specific needs within tighter economic constraints if the total contract value (TCV) of the outsourcing is larger. For companies seeking to outsource where the potential TCV is low and potential future business is low, the one-to-many outsourcing model where the client is seeking primarily cost arbitrage and is not overly concerned with the process to achieve the end result, will become more prevalent. This is because only larger and more complex clients will be able to negotiate and implement more bespoke arrangements with vendors.

Q. What does the future hold for outsourcing? How widespread do you see it becoming?
A. Outsourcing was already widespread before it became a topic of public debate. Outsourcing is a valuable and necessary tool for business and the economy in general and will become more prevalent as corporations and governments look at what are their strategic core activities and what can be done by someone else.

Some prognosticators foresee virtual companies. The reality will be more prosaic. Corporations will outsource those activities where they believe that the rewards (i.e. cost savings, capital reallocation, management focus) versus the risk warrant the effort. Those activities that are easy to separate and pass over the wall go first and those that require extensive contact will go later as managements discover that governance models can be put in place to address concerns. Finally, those activities that require the vendor to make decisions about the client’s business will be outsourced, as we are already beginning to see.