Tighter budgets, increasing competition, Asian companies' penetration and increasing operational expenditures: these are the major reasons why companies from the healthcare sector, such as the original equipment manufacturers (OEMs), are constantly seeking new ways to drive down their costs. Although outsourcing, also known as contract services, has not been the newest option to the medical device industry when it comes to cost reduction, it has, over the past few years, evolved from being a short-term solution into an important strategy with long-term benefits.
In Latin America, contract services organisations are gaining importance, and the sector is perceived to have great potential. However, doubts concerning the risks and opportunities that can come up with outsourcing are still the main drawback for the expansion of the segment.
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Contract services can substitute or improve several functions within a company, such as manufacturing processes, administrative tasks, research and development steps, and logistics, for example. The most common types of contract services companies are contract research organisations (CROs) and contract manufacturing organisations (CMOs).
The CROs usually offer their clients a wide range of research services, which can include product development and formulation, clinical trial management, central laboratory services for processing trial samples, data management services for preparation of a new drug or product application, and many other complementary services.
In other words, CROs can be involved from the conception of a new product until its market approval from a regulatory organisation, while the sponsor will not need to maintain a staff or any other type of resource to accomplish these tasks.
CMOs, seen in the past as a short-term solution for production capacity constraints, can currently offer services ranging from product design, process optimisation, sourcing of raw materials, manufacturing, assembling of products' parts, packaging and sterilisation, marketing support and logistics. For the logistics, there are companies which are specialised in providing the service, called third-party logistics (3PL) firms, which are external suppliers that perform all or just a part of the OEM's logistics functions.
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By GlobalDataEmerging markets
Latin American countries are proving to be one of the most promising markets for these specialities, together with other emerging countries such as China and India. This can be explained, in great proportion, by the region's competitive costs when compared to the US or European countries. Furthermore, in the case of CROs, the superior patient recruitment rates and lower costs per patient on the region are also taken into consideration. This is in addition to the highly qualified and experienced scientific investigators, turning Latin America into a very attractive region for conducting clinical trials.
For medical manufacturing, Asia still remains as an attractive market, for its vast population, abundance of factory workers, and lower wages than the Latin American ones. Nevertheless, the distance between these Asian countries and the US, where great part of OEMs are, is much bigger than the distance from Latin American countries and the US. Therefore, lower shipping costs and faster delivery time from Latin America to the US can offset the lower remuneration of Asian countries, since the OEM will be ready to have a quicker response to market changes and needs.
In addition, the region has easy access to raw materials, making the entire process even easier. It is important to point out, however, that not all Latin America countries are at the same pace when it comes to the development of medical devices markets.
Brazil, Costa Rica and Mexico, for instance, are countries with a more stable economic situation than Argentina and Venezuela, which explains why they are more advanced in terms of medical devices CMOs. Since the range of activities a CMO can fulfil is so wide, as well as the variety of products that can be manufactured within the medical devices segment, it is difficult to point out who are the main players competing at this market.
In the CRO sector, on the other hand, it can be mentioned that Latin America has the presence of multinational and well-established companies, such as Quintiles Transnational Corp. and Pharmaceutical Product Development Inc (PPD), in countries like Argentina, Brazil, Chile, Mexico and Peru, for example. Quintiles Transnational Corp. has recently acquired a leading Central American CRO, Bio-Trials, based in Panama, validating the increasing importance of the region. Smaller local players are also benefiting from the favourable movement towards outsourcing.
Market influences
A number of main drivers and restraints are influencing the contract services market. There are several reasons motivating OEM companies to drive down their costs. Budget constraints are certainly the main driver influencing the outsourcing segment growth. Since contract services can cover a diverse range of activities within a company, there are outsourcing options to all types of organisations willing to reduce operating expenses.
Outsourcing enables the company to manufacture products, or conduct clinical trials, for example, without any added costs associated with equipment, fixed assets or human resources. Additionally, the Latin American region offers more competitive prices, higher recruitment rates and easier access to raw materials, in comparison to the US or other countries from Europe, shifting medical devices companies' attention to countries like Argentina, Brazil, Colombia and Mexico.
Besides this, the region probably offers one of the most diverse gene pools in the world, comprising citizens with Hispanic, European, Asian, Arabic and African origins. The enrolment of this wide variety of ethnic groups can help optimise and reduce the time of clinical trials development.
The third driver pushing the market is the faster time of response the OEM will have after outsourcing, since the contract services companies are specialised in performing that particular activity they were requested for. Outsourcing its production, assembling, packaging and even logistics processes will enable the OEM to have a better focus on strategic issues instead of operational facts, what will certainly result in more competitive advantage for the company.
In contrast, there are regulatory delays and bureaucracy hurdles of the market, which are restraining the expansion of research outsourcing. The slowest regulatory approval processes are considered to be the ones from Brazil and Mexico. To exemplify, the approval of a clinical study in Brazil takes from six months to a year, while in other Latin American countries it takes only three months.
The delay of regulatory agencies in these countries can lead to contract losses, once medical devices companies, in most cases, cannot afford to wait that long.
What's more, one of the main concerns of OEM companies that are willing to opt for contract services is the loss of manufacturing quality control and proprietary knowledge. Outsourcing production activities, clinical trials or any other role that directly involves the company reputation and information confidentiality needs to be dealt with extremely carefully. The circumstances are indeed comprehensible: it can be harder to have control over the manufacturing quality of the third-party providers, and it is a delicate situation to share confidential information with them.
Competition from Chinese and Indian CROs/CMOs is expected to cause impacts on the Latin American market. This is essentially due to the Asian characteristics of lower wages in comparison to countries such as Mexico or Brazil. Nonetheless, as mentioned, Latin American countries are closer to the US, one of the main markets for medical devices, facilitating logistical procedures.
Risky business?
So can outsourcing be considered a risky option for OEMs, or does it represent a positive alternative? One of the main advantages of contracting services from a third party is the reduction of costs with fixed assets and staff members. Outsourcing allows OEM companies to focus on their core competencies, while the CMOs or CROs are taking care of the manufacturing or clinical trials.
A further advantage of contract services is the access to skilled personnel and specialised services, which can increase the efficiency of the production process, improve the clinical trials practice and reduce delivery time. These facts can certainly boost the competitive advantage of companies that decide to outsource as a strategy to leverage business activities.
On the other hand, one of the main concerns about contract services is the possibility of losing control over the manufacturing quality. Besides being a crucial point to any strategic planning, this challenge can be easily surmounted. Checking the CMO's certificates of good manufacturing practices, and other regulatory issues can ensure the organisation is concerned about excellence and about providing good quality services.
Another main issue that worries companies willing to outsource is lack of proprietary knowledge security and technology transfers.
However, this is unlikely to happen if OEMs have good communication with their outsourcer, which establishes a more reliable bond between both companies. It is important to ensure that the core intellectual property is not used incorrectly, by carefully structuring a legal agreement.
Contracting services from CMOs and CROs can undoubtedly become a very risky business if some safety measures are not taken. It is essential that OEMs always have a second option for a contract services organisation, so as to avoid becoming completely dependent on one service provider.
The choice of contracting services from a third party can be risky and uncertain. But if basic precautions are taken, outsourcing can become the answer to most cost-related problems. Being able to focus on core activities will bring them extra tools to handle market adversities. The ones who will benefit most from these processes are the patients, who will witness more product launches and better treatment options.
