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Outsourcing Trends in the Biotech Industry

Written by on Monday, April 2nd, 2007

Outsourcing has been a heavily debated topic  in the high tech industry over the past few years, particularly given the ups and downs of the Silicon Valley economy; however, outsourcing trends in the biotech industry have not received much attention.  According to blogger Nishith Srivastava, though, outsourcing is becoming commonplace in the biotech world as well.

Why is the popularity of outsourcing growing in the biotech industry?  Srivastava suggests that biotech companies are outsourcing for the same reasons that high tech companies are, writing that:

The increasingly global nature of the pharmaceutical/biotech industry endorses Outsourcing, as most companies tend to exploit the market by gaining competitive advantage. Pharmaceutical companies with little or no experience have realized that mastering the entire skill range within an industry is not viable. Moreover, flexibility is becoming increasingly important within the industry. As a result, companies have started focusing on their core competencies in which they can add greatest value. The growth of the pharmaceutical contract service industry in recent years has led to a significant increase in the number of services and functions available for outsourcing. The cost pressures have led to pharmaceutical manufacturers reassessing their financial situation and, in the wake of the resulting downsizing trend, to the development of a contract service industry specifically targeted at the pharmaceutical industry.

How big an impact is outsourcing anticipated to have on the biotech industry in the future?  Srivastava anticipates that outsourcing will continue to have some role in the biotech world, but he does not anticipate it to have quite the same impact as outsourcing has had on the high tech industry.  Srivastava writes:

[M]any challenges exist for the successful implementation of outsourcing within the pharmaceutical industry. The industry is characterized by inherently high risk; only one in 5,000 compounds actually becomes a product, commercial drugs cost $300 million to develop, and less than 50% of new products return the development cost. Tight governmental regulations compound this risk. Unlike other industries, there have been no transformational developments to drive outsourcing—even marginal performers can succeed. An immature contractor segment also characterizes this marketplace.

Srivastava raises some interesting points, and certainly the high tech and biotech industries have their differences, but it is difficult to see why outsourcing would not continue to play a larger role in biotech in the future.  Outsourcing is being embraced increasingly by even the conservative world of lawyers and law firms–I was just at a dinner where a colleague from out of town spoke of how his large firm is starting to outsource legal work to India, and I hear stories on a daily basis about how law firms are starting to embrace this new form of labor.  If the legal world is integrating outsourcing into its business model , I can only imagine that other industries will not be far behind.  My prediction is that the popularity of outsourcing will continue to grow in biotech, as well as in most other industries, which each share in the need to provide goods and services at a lower cost.




Comment from Daniel Abramzon
Time April 2, 2007 at 11:56 pm

Risk management is the name of the game in pharmaceuticals. Drug development is a very risky and expensive field that requires many competencies to be developed at risk. One may have to start construction on a billion dollar plant, six years in advance, to manufacture a drug that is still in the early development stage and has an 80% chance of failure. If the drug fails, the capacity will have to be sold off on the cheap which can result in tremendous losses. It is therefore very attractive to outsource production to a contract manufacturer who may service a number of customers so that if one customer’s drug fails, the capacity can be taken by that of another. Thus, the pharmaceutical company is able to pass the risk onto another entity. The same can be done for marketing, R&D, etc. The future pharmaceutical companies will look more like Dell then like Pfizer. The central contribution of the pharma company will be competency management. They will manage a network of contractors, vendors, marketing/distribution firms, etc… all of whom will share some small measure of risk without any one entity being exposed to all of it.

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