The elongation of the pharmaceutical supply chain is an important influence on the current and future state of outsourcing.
To keep pace with changing requirements of sponsor companies, contract manufacturing organizations (CMOs) have broadened geographically
to create a global footprint. Several Asia-based CMOs recently invested in manufacturing and development operations in North
America and Western Europe, and select Western CMOs have similarly strengthened their positions in Asia. To gain a perspective
on the critical issues, challenges, and factors affecting outsourcing, Pharmaceutical Technology conducted a roundtable of leading CMOs that have pursued this strategy in primary (i.e., intermediates and active pharmaceutical
ingredients) and secondary (i.e., finished drug product) manufacturing and development.
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Participants in the roundtable were: Steve Hagen, vice-president of pharmaceutical development and manufacturing at AMRI (Albany,
NY); Tim Tyson, CEO of Aptuit (Greenwich, CT); David Andrews, sales director at Dishman USA, and Christian Dowdeswell, sales
director at Dishman Europe, part of Dishman Pharmaceuticals and Chemicals (Ahmedabad, Gujarat, India); Abhijit Mukherjee,
president and head of pharmaceutical services and active ingredients at Dr. Reddy's Laboratories (Hyderabad, Andhra Pradesh,
India); N. Santhanam, chief operating officer of Piramal Healthcare (Mumbai, India); Terry Novak, president of North American
operations and chief commercial officer at Patheon (Toronto); and Ed Roullard, vice-president of SAFC Supply Solutions, part
of SAFC (St. Louis, MO).
Cost differentials between Western and Asian suppliers
CMOs in Asia have generally been perceived as being able to offer lower costs compared with their counterparts in North
America and Europe, but rising costs for labor, transportation, and energy have eroded some of this differential. What cost
pressures have arisen in the market and what has been their effect on the competitive dynamics of outsourcing to Asia?
»Mukherjee (Dr. Reddy's):
The custom-manufacturing landscape has become extremely competitive around the world. The cost differential between India
and the West still exists to an extent, but the West has become far more competitive with respect to price by embracing process
and manufacturing efficiency, driving the cost out of their production. They are accomplishing this by utilizing a global
network of suppliers for their materials as well as achieving operational efficiencies. Today, the selection of a supplier
is no longer driven by pricing, but rather by the total service offering. Service providers from Asia need to demonstrate
their technical sophistication and manufacturing efficiency in a way that was not required in the past. Cost is no longer
the single competitive advantage for any CMO. To be successful, cost along with strong quality, safety, health, environmental,
sourcing, and supply-chain programs must be evident.
Adam Smith's theory of the "invisible hand" is actively at work between the Western and Asia marketplaces. Costs have definitely
increased in Asia, driven by many factors, the most significant being an increase in labor costs for chemists and engineers.
Labor costs in Asia continue to be lower than those of Western suppliers, but the gap is closing due to shifting demand, competition
for resources, and the spread of relative wealth as these economies develop. The existing differential has customers setting
explicit strategies for utilization of Asian outsourcing partners for projects requiring commoditized capability. And, those
in the West with common technologies, common quality, and common supply-chain capabilities are feeling the most competitive
pressure. However, those companies that are able to provide unique technologies or provide supply-chain security for critical
raw materials are able to differentiate to an extent that ensures, at worst, mid-term viability as a value-added supplier.