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Dec 1, 2009 (Vol. 29, No. 21)

Finding the Right Outsourcing Balance

Guidelines on Deciding which Chemistry Development Programs to Off-Shore

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    Experts recommend not basing outsourcing decisions on FTE costs alone. (Organix)

    Presenters and attendees at the “ChemOutsourcing” conference held recently in Long Branch, NJ, vigorously debated what should be outsourced and what should remain in-house. This quandary is faced by most companies when they consider outsourcing chemistry development programs. Firms also need to sort out what should remain close to home and what can be off-shored.

    “We outsource everything,” said Ving Lee, Ph.D., co-founder and senior vp of R&D for Limerick Biopharma, a virtual company. Most of the work occurs in North America and Europe, he added. “We don’t off-shore much to Asia because of the communications issue and the time-zone difference. We have to ensure that the movement between the biological and chemical side of a project is seamless, so we take advantage of time zones throughout the world.”

    For companies like Limerick, outsourcing is a way to focus on core competencies, hiring outside expertise for everything else. As-needed expertise is the foundation of virtual companies, keeping quality high and helping them focus on core competencies, despite tight budgets. Yet, outsourcing is not a panacea.

    Scott Zook, senior director, CMC API development at Neurocrine Biosciences, advised companies to understand what they are outsourcing and why, as well as the ramifications of the outsourcing decision. “Outsourcing adds a different facet to the deliverable because you are relying on your outsourcing partner to deliver materials on your behalf.”

    Because the chemical industry is a mature environment, the challenge, Zook suggested, is to identify companies that specialize in your area of interest. “API manufacturers can, theoretically, make any chemical,” he observed, so the differentiators become timing, costs, their regulatory authority track record, and whether there are unresolved statements of deficiencies. Beyond that, the decision rests upon the contractor’s ability to fit the needs and corporate culture of the outsourcing firm.

    Regarding what to outsource, companies often keep discovery activities in-house to ensure both speed and confidentiality. Development, however, is a logical candidate for outsourcing and off-shoring because the need for speed is less critical, according to Bhaskar Venepalli, Ph.D., president of CiVentiChem.

    Start-up Anacor Pharmaceuticals off-shores its early development work to China and India, according to Umar Hayat, Ph.D., senior manager of chemistry, manufacturing, and controls. The reason, he said, is costs. “Very often, management watches expenses, and time and quality are hidden issues that are difficult to see.”

    “We have to get over the concept that off-shoring is a panacea,” Dr. Lee stressed. “Many companies look at costs, but FTE costs alone are of limited relevance,” emphasized Peter Meltzer, M.D., president and CEO at Organix. The personnel costs for off-shore work may be substantially less than in North America or Europe, but they reflect only one factor in the true cost of off-shoring. For example, the (FTE) costs in China may be half of those in the U.S., but the level of expertise assigned to the project may vary considerably.

    Typically, in the U.S., a development team consists of several Ph.D.-level scientists and a highly experienced Ph.D.-level team leader. All team members contribute intellectually as well as at the lab bench. But in Asia and parts of Latin America, team members may be reluctant to question the team leader.

    Likewise, Dr. Hayat added, scientists are unlikely to participate in discussions when their senior executives are present. “Consequently, resolving scientific problems and developing value-added intellectual property is less effective. A Ph.D.-level team is generally two to three times more productive than a less qualified team,” Dr. Meltzer added.

    China and India have not yet attained the level of routine quality expected by U.S. firms, but they are working quickly to improve quality and to deliver product that meets FDA standards, Dr. Hayat said. “The trend toward off-shoring is stabilizing,” as companies consider issues other than costs. That said, those issues are nearly 50 percent resolved,” so off-shoring may be poised for a rebound.

    The cost of long-distance management is another issue that generally is underestimated, at least initially, Dr. Meltzer said. “Remote management incurs extensive travel costs and the associated costs of lost time. Management of less-qualified teams may also require day-to-day oversight, problem solving, and attention to minor problems that generally do not occur with a highly qualified CRO team.”

    Additional components of the true costs of off-shoring include flexibility, import/export regulations, responsiveness, and intellectual-property (IP) concerns. “Personally, I think we will see a shift back to the U.S.,” Dr. Lee said, as companies identify the total costs of off-shoring. That prediction mirrors a shift that is already occurring in other industries. Increasingly, U.S. and European manufacturers are beginning to work closer to home in a trend known as near-shoring. 

    There are several reasons for the shift, but American companies must add one more. As Dr. Lee reasoned, the U.S. dollar will be low for a long time. “Currency fluctuations are wiping out the savings of going to China and India. Their costs are ratcheting up, too,” he pointed out. He also speculated that with U.S. unemployment at a 26-year high, there will be increasing pressure by the U.S. government to keep more jobs in the U.S.

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