Hiding the Costs of Outsourcing

March 20, 2013
Be sure to weigh all of the pros and cons as well as ROI before making the decision to outsource

Since the motive for outsourcing is cost savings, it might be a good thing to examine, the actual “bottom line.” Often, income is viewed in a narrow manner. A “stay-at-home” mother or father may wish to find employment to supplement the family income or stave off boredom. Too often, the income is lauded, but the cost of babysitters, a second auto (gas, insurance, tolls and maintenance), and wear and tear on work clothes is ignored or unrecognized. Too many “income helper” jobs do not add to the net income of the family or are below minimum wage (when all expenses are considered).

It is very much the same for the pharmaceutical industry: We don’t take into account the entire cost of outsourcing. In the case of our industry, it isn’t always as obvious as a household budget. First, let us examine the largest positive aspect; namely, lowering of direct costs to the company. The obvious attraction of an API plant NOT dedicated to a single company’s product line is that the equipment is utilized more efficiently. In a dedicated (in-house) synthesis set-up, there is often major downtime; many companies have “campaigns” where a large number of batches are produced over a short time period, then that drug lies dormant for six months or a year.

If specialized equipment is needed, that means the plant is severely under-utilized, adding to overhead with no return of investment. With a contract facility, working for a number of companies, the cost per batch are reduced. This can be seen wherein several companies are producing competing products (with the same API, e.g., acetaminophen). If the individual companies synthesized their own API, the cost per kilogram would be higher than a plant which “mass produces” the material. So, under ideal conditions, outsourcing makes good business sense.

There are, however, other costs associated with outsourcing that are just now becoming noticed by the “customers” of the products. With the supply chain now stretched to many thousands of miles, simple travel costs increase. Even if there were no increase in the number of Agency personnel, the travel costs have become extensive. An investigator from the FDA, for example, has to travel, not to one U.S. state or Canada, but to China, Brazil or India for an inspection. The increased airfare, time involved and added hotel/meals add a substantial price tag to outsourced materials; one that is paid by all taxpayers, including the patients who are getting cheaper drugs.

Add to that the fact that transportation is getting more expensive, delays due to distances shipped, sequestering time for customs inspection and added security. Added security? Indeed, the heparin fiasco of a few years back was but one problem with adulterated product. The cost in lives and medical care far outweighed the cost savings of getting the product from China.

Recently, a Northeastern state attempted to save money on drugs supplied through its pension plan to retirees. It bought a chemotherapy drug from a Canadian pharmacy to save money. It was later discovered that the counterfeit drug was, instead, merely a placebo. (The company’s owner was arrested in Florida….claimed he was “assured” the drug was fine.) This shows a disturbing trend in counterfeiting: We are moving away from ED drugs to critical materials.
From the counterfeiters’ points of view, it makes good financial sense; cancer treatments cost orders of magnitude more than “lifestyle” drugs. The embarrassment in the bedroom has been replaced by death in the cancer ward. This shift of interest is causing more and more to be spent on the QC of more and more lots and more units from each lot. The cost of more and larger labs is borne by taxpayers, only seldom by the companies saving money by the substitutions.

However, a number of companies that outsource are seeing profit margins shrinking; they need to do more incoming raw material and finish product tests than they did when purchasing from U.S. firms, where they accepted COAs. [It is infinitely easier to perform vendor validation in your home country. China, for instance, will issues visas for FDA inspectors, but, there is a definite time lag between requests and actual inspections; time enough for a company to “clean up its act,” so to speak. In a U.S. inspection, the FDA is allowed to drop by, if it suspects problems.]

Published in the March 2013 issue of Pharmaceutical Manufacturing

About the Author

Emil Ciurczak | Contributing Editor