Western companies opting to work with partners in Asia rather than setting up their own operations there are finding a better choice of service provider, but the China vs India debate rumbles on. Jim Banks reports.
In seeking cost savings, pharmaceutical companies have looked at two options: offshoring and outsourcing. The former, which involves setting up a company's own operations in a low-cost base country, is now being replaced with the latter as service providers, especially in India, prove themselves to be worthy partners.
India in particular has been gearing up its capabilities for many years, and its services in the production of fine and speciality chemicals, excipients, testing and API manufacture have helped establish its reputation for high quality.
As a result, the trickle of interest in outsourcing among Western companies has swelled, with reports of positive returns on investment and good working relationships. It is now an option that few companies would say they are in a position to ignore.
'It is now a daily decision for Western pharma companies - "should I outsource to India or should I maintain my supplier relationships?"' says Marcel Velterop, head of marketing and business development for Dr Reddy.
Velterop is responsible for marketing Dr Reddy's custom pharma services as well as its generic work. Since he took on the role in early 2004, he has seen a major change in attitudes towards outsourcing to India in the raw materials sector, among others.
'Back then there was hardly any activity, but now demand is growing, and the UK is at the forefront,' he says. 'It has a more open-minded attitude towards working with India. But there has also been a remarkable shift, with more interest from traditionally conservative countries like Germany, France and Switzerland, where companies now want to explore relationships with India.'
Much of this growing interest is centred on India, the most mature and largest market for the provision of pharma services. 'When they look at India, companies see the cost advantage, but they also find that there is an improving level of service and speed of execution,' says Velterop. 'This hidden value is very important.'
Cost is certainly a major advantage for Western companies working with Indian partners, but this alone could not have fuelled the kind of growth witnessed by the country's outsourced pharma services sector.
For many Western companies, the fact that English is widely spoken in India is a big plus, as communication is greatly facilitated by the absence of any language barrier. However, this only opens the door. Once inside, multinational pharma companies need a reason to stay, and India is in a position to give them what they need. The pool of educated, experienced people there is the country's major asset in the long term, and it is growing.
A growing number of Indian service providers benefit from the experience of senior personnel who have worked in the pharma sector in the USA or Europe, and who therefore bring with them a keen understanding of how to work with multinational pharmaceutical companies. This ever-increasing depth of experience is set against cultural factors that are a catalyst for the forming of workable relationships.
'Initially, you look to leverage the cost advantage, but I find in India that there is a natural service orientation, and as a cultural trait people aim to please,' says Velterop. 'There is a h4 work ethic in India, and people don't shy away from working long days. This makes for a very easy experience for Western companies.'
It seems that the market could be about to move into a new phase of outsourcing, which is no longer to be considered a novelty. The logic behind working with partners in low cost-base countries is simple in terms of cost savings, but this is no longer the sole motivation behind exploring outsourcing partnerships.
Now, the pharma industry can look to the experiences of those early adopters who took a lead on moving processes to India, and more readily quantify the benefits that have accrued. Increasingly, the numbers speak for themselves, but if you look beyond cost there are many more reasons to pursue such a strategy.
'India's success is based on a number of factors,' explains Velterop, 'but track record and experience is showing that it lives up to expectations in terms of value and service, though it depends on who you deal with. Word of mouth is starting because, overall, people are seeing the benefits of outsourcing.'
Of course, the quality of an outsourcing arrangement will depend to a great extent on whether a firm can find the right partner. This means identifying potential candidates that have not only the right infrastructure and skills but also the understanding of how to support the working relationship.
India has shown itself to have the right stuff on both of these issues. It has the highest number of FDA-approved facilities outside the USA, which is testament to the quality of the infrastructure, and Indian firms have developing h4 ties with international pharma companies.
Not all partners in India meet the minimum specification that Western companies lay down during the selection process, but in terms of openness, quality and experience, India has a significant lead over its rivals in Asia for outsourcing in the chemicals and raw materials sector.
'I believe it is easier to identify good partners now,' says Velterop. 'Pharma companies are careful, and check policies, safety, licences to operate, environmental records and so on to ensure that they select a sustainable platform. India has a very good reputation in areas such as API supply.'
India's performance with regard to regulatory compliance is a further boon, and this, along with its growing transparency and cultural accessibility for Western firms, means the country is well equipped to fend off challengers for its share of the bulk pharma and raw materials market. Nevertheless, such a challenge is likely to emerge in Asia over the next few years as China's influence continues to grow.
China is a nascent bulk pharma market, though it is not yet challenging directly for export business. 'If you draw on parallels with other industries, it would be hard to say that China won't be a major factor in the pharma industry in the years to come,' adds Velterop, 'but its domestic consumption is rising rapidly, so the focus is firmly on the domestic need first.'
China, which is the fastest-growing major economy in the world and has become the largest producer in many key industries, has started to make inroads into the bulk pharma manufacturing market, and is now looking to expand its influence in other sectors of the industry.
In the context of the wider chemical market, 2004 saw the Chinese Government go to considerable lengths to find the right conditions for restrained growth, and this year is set to see the fruits of those labours. For instance, in 2005, China will begin production at its three major ethylene plants, which are to be operated as joint ventures.
The advantages that China has to offer, in terms of a large and relatively inexpensive workforce, and increasingly its pool of resources and expertise, will ensure that the country focuses more on developing its natural resources and its processing capacity to provide chemicals and raw materials to the pharma industry.
However, problems remain in terms of transparency, for instance, and there is some way to go before the relationships between large international pharma companies and Chinese suppliers reach the level of maturity that exists with partners in other Asian countries.
The one certainty is that everyone involved in the industry will have to develop a strategy to cope with the huge potential impact that China could have in this and other markets. It is likely that in the pharma market Chinese entrepreneurs will increasingly look at the possibilities for export, first with Asia and then to the USA and Europe. However, there is some way to go before China achieves the reputation of being an accessible and easy place to work that India enjoys.
In fact, the gap that India has opened up over its nearest big rival could be enough to see a chain form, rather than the two countries competing directly for the same kind of business. 'China needs to address issues of communication and openness,' says Velterop. 'Indian pharmaceutical companies now source their early phase base chemicals from China, so it has involvement in the early part of the supply chain.'
Whether China can move up this chain over the next few years will depend on how well companies there understand the changes that must be made in order to move from bulk manufacturing to custom pharma services.
At present, firms in China are geared towards the processes and buildings blocks required for the large-scale manufacture of generic drugs. Providing outsourced services to clients with distinct projects, each with its own parameters and lifespan, involves a different mindset, infrastructure and service orientation.
Questions remain over whether Chinese companies will be able to make this step rapidly, particularly in light of the surging domestic need for pharmaceuticals, but the country's role in the chain of production will certainly become more significant.
So, as international pharma companies start to turn words into action by outsourcing to Asian service providers, the choice in terms of quality and versatility is set to become even wider as the years pass.