The next dollar hunt: pharma pops the IT pill

Updated: Mar 28 2005, 05:30am hrs
After the BPO boom, the pharmaceutical industry could be the next big vertical for the Indian IT giants who make top dollars by doing outsourcing work for western companies. Increased competitiveness along with the pressure to cut the lead time in developing a new drug and validating it through clinical trials besides cost pressures have seen multinational drug majors heading to India to outsource their work to IT companies who have the domain knowledge.

To be fair, leading Indian pharma companies are also treading the same line as their MNC counterparts. According to an estimate, the drug companies outsourcing operations in India is currently pegged at $20 million but is projected to cross $2 billion in the next 10 years. A significant share of this would go to IT companies.

According to a Gartner Dataquest report, the total IT spending (hardware, software, external services, network equipment and internal services) by the US pharmaceutical industry is expected to touch $5.5 billion in 2005. Naturally, this entails a lot of opportunities for IT firms like Tata Consultancy Services (TCS), Wipro, Satyam and Cognizant Technology Solutions who cater to the pharmaceutical industry, according to industry insiders.

Says R Chandrasekaran, managing director, Cognizant, Pharmaceutical companies are fast catching up in terms of offshore outsourcing, and rank after financial services, manufacturing, telecommunication and retail industries. Over the last two years, because of cost pressures and time-to-market imperatives, many large pharmaceutical companies have begun to offshore in a big way. The healthcare and life sciences vertical for Cognizant put together contributed to about 21% of its total revenue of $586.7 million last year.

J Rajagopal, director, global life sciences and healthcare, TCS, says that the pressure to reduce costs and the time-to-market are primarily driving the outsourcing trend in the pharmaceutical industry. Pharmaceutical companies have for many years been concerned about the time to market. Once the drugs clear the clinical trial stage, it is a question taking the drugs to the market. This time to market can be reduced by outsourcing some of the activities to IT companies, he says. For TCS, its life science vertical contributes around 3% to 4% to its revenue but is the fastest growing vertical.

Pharmaceutical companies outsource IT functions across the pharma value chain. However, the key outsourced areas include IT systems around clinical trials, manufacturing, market research, and sales and marketing. Industry experts say outsourcing helps the pharmaceutical companies in reducing the costs by 30% to 35%

Increasingly, there are a lot of activities in the R&D IT area also that pharmaceutical companies have begun to outsource. Specifically, many MNC pharmaceutical companies are looking to do clinical trials and research in India, resulting in many contract research organisations (CROs) coming up. A significant number of pharmaceutical companies have Indian operations for clinical trials and research, says Mr Chandrasekaran.

However, the main concerns around outsourcing R&D IT arise from regulatory compliance and intellectual property issues. Pharmaceutical companies look at specific capabilities like regulatory expertise and information security from vendors to support their R&D IT activities, says Mr Rajagopal.

The Indian pharmaceutical industry is also gradually taking advantage of IT and are looking at using IT throughout its value chain of drug discovery, clinical trials, manufacturing, sales and distribution and product management.

According to the pharma industry sources, drug companies are expected to increase IT spending by roughly 5 to 7% during the next one year. A major chunk of this investment would go to clinical trials. According to a survey conducted by a western agency, the priority area for pharma companies would be performance and security of information infrastructure. Taking the example of storage hardware, among those planning to change storage systems in the next 12 months, the top reasons cited for making the change included increasing capacity, optimising data availability, disaster management and standardising systems, according to a report by Life Science International.

The investment in clinical trials is increasing because drug firms want to shorten the gestation period of validating a new molecule and cut cost. It is here that IT is coming to play a central role, says the report.

According to industry estimates, pharma companies worldwide spend over $8 billion to $10 billion per annum on clinical research alone. Since India is fast emerging as a hot destination for clinical trials due to its low cost and varied demographic profile, a huge share of this investment is expected to flow to India. Already, big names such as Astra Zeneca and GSK, Novartis, Pfizer, Sanofi Aventis, Roche, Bayer, Chiron, Eli Lilly, and Merck have decided to make India their regional hub for clinical trials and research.

A recent study by international consultant AT Kearney says that pharma outsourcing is going to be the next big boom in India. According to them, the wide gap in salaries between the West and India would be a major trigger, to lure MNC pharma companies to India.