Peter Pollak started a revolution in the late 1980’s. He set out to convince Big Pharma they no longer needed to produce all their chemical intermediates and APIs, but rather could outsource a portion to Lonza and “leave it to us.”
It was possibly the best marketing pitch of its time. Mr. Pollak’s strategy led to the creation of a vast and complex network of pharma outsourcing suppliers, a marketplace grossing more than $20 billion a year. India has emerged as a hub for generic production while Europe remains the center of Pharma’s fine chemical world.
But the chemical custom manufacturing (CMO) industry has been suffering during the past 10 years from the same ailment its Big Pharma customers have: the low level of new chemical entity (NCE) approvals meant less business to bid for, leading to an overall market slowdown and finally, patent expiration of dozens of lucrative originator drugs with aggregated sales well in excess of $100 billion.
Further, production costs of western CMOs for the generic APIs typically did not match their Indian counterparts. India’s rise to dominate the generic API market in the was swift. From the span of 1995 to 2005, India became a leader in exporting bulk generic APIs to the world. India’s chemical engineers and scientists were able to drive down production costs significantly, setting state-of-the art design and operational standards for chemical manufacturing of APIs. And in the past six years, the collaboration between Indian suppliers and Big Pharma intensified, with instances of Phase II and III projects being outsourced to India for secondary supply. Many pharmaceutical outsourcing departments made it a point to groom Indian CMOs (and Chinese suppliers, in some cases), thus raising competitive pressure on European and American CMOs. In many respects, they have succeeded.
The situation I describe has been the modus operandi for many years now, so I was quite surprised when Andrew Witty, the chief executive officer of GlaxoSmithKline, announced in April 2011 that his company would bring steroid bioprocessing back from India to GSK’s Montrose, Scotland facility, a site scheduled for shutdown. The move was driven by a series of operational efficiencies in the UK site that made the economic rationale viable. Despite trimming 40% of the workforce, the site was still able to push through the necessary process improvements to compete on costs with India, while retaining the quality standards expected from a Big Pharma site.
Witty added a layer in July 2011, launching a plant expansion in Toronto, Canada, and claiming the west can compete with the east in API manufacturing. GSK is not stopping here; in August 2011, it was reported three UK district councils were vying for GSK’s investment into a multi-million-GBP biopharmaceutical production site in their respective localities, creating jobs and reinforcing communities which have been decimated by layoffs over the years.
I agree with Mr. Witty’s assessment, the high labor cost countries (HLCC) can compete with low labor cost countries (LLCC) given three basic premises apply to the production site:
- Lean site with minimal overhead
- Relentless focus on continuous operational and process improvements
- (Nearly) fully loaded production site
Lonza’s Chemical production site in Visp, Switzerland, is proof that HLCC can compete with LLCC. Possibly the best run chemical API site in the industry, Visp achieves benchmark levels of financial and operational performance that few, if any, can achieve despite very high labor costs. The three premises I enumerated are applied religiously by the chemical business unit team.
Are those the early signs of what some have predicted, that an increase in wages in LLCC will gradually reduce their attractiveness, resulting in a slowdown that culminates in a reversal of delocalization trends?
I would encourage industry executives to debate this topic at CPhI’s inaugural Contract Partnership Executive Summit (not affiliated with Contract Pharma magazine), being held on October 24, 2011 in Frankfurt, Germany, the day prior to the main CPhI Worldwide Exhibition.
This inaugural event is exclusively designed for C-Level executives of Pharma outsourcing, providing them the opportunity to debate and discuss, amongst peers, the future direction of the industry, and how to strategically position their businesses for the challenges ahead. Such a forum is sorely needed for an industry that will likely undergo major changes by 2015, from large-scale cross-border M&A transaction to industry consolidation among western players.
Andrew Badrot is chief executive officer of CMS Pharma, a provider of M&A advisory services and business strategy consulting to pharmaceutical custom manufacturing organizations. He can be reached at email@example.com.