Facing an estimated loss of $14.7 billion in revenue through 2013 as a number of patents for blockbuster drugs are set to expire, pharmaceutical and biotechnology companies are seeking ways to increase profitability. The various routes to grow revenue and cut fixed and variable costs are increasingly converging in emerging markets. Cost reduction efforts typically result in large markdowns of overhead – IBIS World Industry Reports predict an average 1.2% annual decline in employment within the industry through 2015. Emerging markets have long represented a source of inexpensive labor; however, they also represent a new and rapidly expanding consumer base for drug producers. Industry research shows that growth of pharmaceutical markets in the so-called E7 countries (Brazil, Russia, India, China, Mexico, Turkey and Indonesia) outpaced growth in mature markets in 2010, and is on pace to claim even larger market share through 2015.
Although there has been relatively more focus on CROs performing clinical trials in emerging markets, CMO activity is continually increasing in these regions with the bulk of the global API supply now being manufactured in China and India. Legitimate concerns have been raised about the globalization of biomedical and pharmaceutical manufacturing operations. These concerns are essentially of three types: regulatory, legal/political, and cultural.
Companies actively outsourcing projects are concerned about compliance in countries that with a less developed regulatory system than their western counterparts. Additionally, there are concerns that political stability and/or market interference by governments of centralized economies will disrupt operations – dealing serious blows to productivity, reliability and, ultimately, profitability. Cultural concerns most commonly manifest in communications, and are increasingly important as drug companies not only manufacture but also market products in these areas. Achieving clear communication of manufacturing requirements over the course of a project, and producing engaging and effective marketing represent significant linguistic and cultural hurdles.
Nice Insight reviewed six global CMOs based in emerging markets and examined their performance in Quality, Regulatory Compliance, Affordability and Accessibility through the first three quarters of 2011. The CMOs studied were APAC Pharmaceutical, Dr. Reddy’s Custom Pharmaceutical Services, Hisun Pharmaceuticals, Jubilant Life Sciences, Piramal Healthcare Pharma Solutions, and Wuxi AppTec. The data for those companies was compared against CMO industry benchmarks. Examining the customer perception data for all CMOs in the Nice Insight Brand Index, the mean rating for Quality was 67%, Affordability was 65%, Regulatory Compliance averaged 69% and Accessibility averaged 67%.
An examination of the data for these six companies revealed no significant variation from industry benchmarks. Across the four outsourcing drivers studied (Quality, Affordability, Regulatory Compliance and Accessibility), the mean customer perception scores were 66% (-1%), 64% (-1%), 67% (-2%), and 69% (+2%), respectively. There was variation across the global CMOs, but no individual score deviated more than seven percentage points from the global benchmark.
While the data for Quality and Regulatory Compliance in emerging markets conformed to commonly held notions in pharmaceuticals and manufacturing generally, customer perception scores for Affordability and Accessibility were more interesting. Despite price often being cited as justification for outsourcing manufacturing to less mature markets, perception of the pricing of the companies covered was perceived as slightly lower than average. This hints at the existence of hidden costs to outsourcing in emerging markets. This cost may result from additional effort required to vet overseas CMOs, which might exist in a less than transparent legal and regulatory environment, or from hurdles to various forms of communication. Navigating cultural and linguistic barriers, and complex legal systems requires time and specialized knowledge.
Despite those hurdles, scores for Accessibility averaged two percentage points higher than the CMO benchmark. Accessibility is a measurement of the ease and effectiveness of communication between sponsor and CMO. Given obvious language and cultural barriers, perhaps these companies have taken additional steps and put particular focus on addressing communications issues that other CMOs take for granted. The continued development and promulgation of global standards and protocol by the ICH, IPEC and other organizations has helped lower these barriers to communication. Technological advances including the proliferation of the electronic common technical document (eCTD) for NDAs, INDs, BLAs and other documents have also helped improve communication.
As the global pharmaceutical market evolves, the perception and performance of CMOs in emerging markets will also change. Continued efforts at harmonization of global standards and protocol should also lower barriers. What seems certain, however, is that the scope of operations in these markets will continue to expand. Regardless of the current perception of Affordability and other market drivers, the growth of the E7 and other countries as markets for drugs sharpens the need for some presence on the ground. The data showed that commonly held notions about Affordability, Regulatory Compliance and Accessibility in these markets do not necessarily reflect realities, and so the use of research tools and the implementation of a rigorous vetting process are essential in contract manufacturing abroad. Moreover, turning toward CMOs in emerging markets for cost benefit might not be as relevant as choosing a partner whose capabilities and culture align with sponsor’s tactical business goals.