Originally Published MDDI August 2005
Guide To Outsourcing
Asian countries, particularly India and China, are making vast regulatory and industry improvements to attract more outsourcing business. And Western countries are responding favorably.
Ames Gross and Rachel Weintraub
|Table I. GDP percentage growth rates for
selected Asian countries (click to enlarge).
As competition in the global medical device market intensifies, U.S. medical companies are increasingly seeking ways to reduce costs in manufacturing, R&D, clinical trials, and other areas. Many Asian countries, such as China and India, offer the one-two punch of a low cost of doing business and a skilled labor force.
By investing in a global presence, U.S. companies can also gain an opportunity to provide goods and services to Asian countries. The region's large aging populations provide promising opportunities for U.S. medical device companies outsourcing to Asia. Japan's elderly, for example, account for 19.48% of its population, versus about 12.5% in the United States.
Many Asian countries are experiencing increases in gross domestic product (GDP) and overall wealth (see Table I). In turn, many citizens are demanding higher healthcare standards and services. Most Asian governments are striving to improve their healthcare in order to meet these domestic demands. They are also placing greater importance on international standards and regulations to improve the quality of their medical device market.
This article analyzes the advances Asian countries have made to attract foreign companies seeking to outsource various services. It also provides real examples of medical device companies that have successfully ventured into this potentially lucrative market.
|Table II. The medical device market size for
selected countries in Asia (click to enlarge).
Following its entry into the World Trade Organization (WTO), China's State Food and Drug Administration (SFDA) made greater efforts to improve the regulatory environment for medical devices. The medical device industry in China is currently valued at more than $3.5 billion. The country also has become a popular destination for outsourcing as it boasts increasingly sophisticated medical product technology and improved product quality. Table II illustrates the size of medical device markets throughout Asia.
India has experienced a 10–12% growth rate in its medical device market for the past several years. Currently, its device market is valued at more than $2 billion. India's inexpensive labor force and highly skilled English speakers have attracted many U.S. companies. This has led to the emergence of numerous Indian outsourcing companies.
For instance, Wipro, a very large company in Bangalore, India, started out in 1945 as a producer of vegetable oil. Today, Wipro is a successful outsourcing company that offers various services: call centers, high-tech consulting, and manufacturing, including medical device production. In 2003, Wipro nearly doubled its workforce to almost 30,000. And in 2004, the company's revenue increased by 40% from 2003, to more than $1 billion.
Warming to Global Manufacturing
Many U.S. companies choose Asia as a manufacturing location to benefit from the reduced labor costs. For example, the salary of a mechanical engineer in the United States averages about $50,000 per year, while the same type of position in India would only pay $7300 per year. Likewise, a project engineer in the United States may earn a salary of around $50,000, but a project engineer in India makes only about one-tenth that salary, or $5000 per year (see Table III). The salaries in India can average about one-tenth the salaries in the United States but the cost of living is also significantly lower. The gross domestic product per capita income in 2004, for example, was $3100 for India and $40,100 for the United States.
|Table III. Average yearly salaries: U.S. versus India (click to enlarge).|
The Chinese government has set up special economic zones (SEZs), which offer significant tax breaks for foreign companies initially setting up an establishment in China. India's government is also in the process of creating SEZs, based on China's system. The Indian government hopes that its less-stringent labor laws will help encourage more direct foreign investment into India.
Moving product manufacturing to Asia can offer many benefits to medical device companies. Along with the large and typically highly skilled workforces that China and India offer, many manufacturers in these countries are paying particular attention to manufacturing standards, such as good manufacturing practices (GMPs) and International Organization for Standardization (ISO) guidelines.
To provide a safe, yet low-cost, market for contract research and manufacturing, Indian pharmaceutical companies are increasingly becoming compliant with FDA standards. There are currently more than 60 FDA-approved pharmaceutical plants in India. GMP-compliant manufacturing plants number more than 200. These numbers are increasing as Indian companies strive to attract more medically oriented outsourcing contracts.
Medical device companies can benefit from relatively cheap labor and highly skilled employees from China-based outsourcers. Nypro Inc. (Clinton, MA) is a molder of plastic components for various industries, including fluid-management valves for medical devices. The company has been doing business in China for more than 30 years. It now has more than a dozen facilities in China employing around 7000 people, about half of the company's total staff. In 2004, Nypro first began manufacturing some of its medical parts in China, hoping to expand in the Asian market. Currently, Nypro's medical device operations contribute around a quarter of the company's total annual revenue.
A 50-year-old company and producer of plastic components for medical devices, Dielectrics Inc. (Chicopee, MA) will establish its first facility in China soon. Dielectrics Asia, a joint venture with a Taiwanese company, is expected to be in full operation in Xiamen, China, by the end of 2005. While the company currently employs 250 people at its U.S. office, it plans to hire at least 50 new employees for its China facility. Dielectrics hopes the venture will expand its Asian customer base throughout China, Taiwan, and Japan.
Outsourcing manufacturing has raised strong political concerns about the loss of American jobs. However, in a global economy, it is generally advantageous for companies to perform different tasks in different locations. For instance, in the automobile industry today, various parts are made at different factories and then assembled at one or more locations. To take advantage of lower costs and specialized manufacturing capabilities, more and more medical device companies will eventually follow this trend, too. The truth is that once one company in an industry begins taking advantage of global outsourcing, other companies must follow suit—if only to stay competitive. After all, if Company A is experiencing strong benefits from outsourcing, it is likely that Company B will as well.
Research and Development Opportunities
Within the past 10 years, R&D spending has nearly doubled in the medical device industry. Medical device companies are constantly under pressure to keep their R&D expenses in check and often look to contract research organizations (CROs) in Asia as a cost-saving solution. These R&D outsourcing companies work with U.S. manufacturers to codevelop new medical products and technology.
China and India both offer various R&D outsourcing benefits, as both countries boast a large, well-educated labor force. And now, some U.S. companies are expanding R&D outsourcing requests and asking for assistance with core concepts and feasibility testing.1 The growing trend of outsourcing R&D has even led some CROs to establish their own engineering departments, sometimes with dozens of employees. Outsourcing R&D also allows U.S. companies to consider medical device development and technology options beyond their immediate abilities. A medical device company may have limited manpower or facilities for conducting in-house R&D, and so having more-extensive R&D work completed in Asia may be a viable option.
In Bangalore, India, Siemens (Malvern, PA) set up a new R&D facility in 2004 to expand research in the medical and information technology sectors. R&D at this new location, which is the ninth corporate technology facility for Siemens, will include developing user-friendly medical imaging systems. Siemens employs nearly 10,000 people in India and around 5000 in R&D across various sectors. Siemens's R&D operations in India include developing products to meet local and global standards and creating original products for the Indian market. In 2003 alone, Siemens spent more than $6 billion on R&D in India.
Philips Electronics (Andover, MA), one of the largest healthcare technology and equipment suppliers in China, has plans to expand its China presence even further by focusing on the rural, western Chinese provinces that tend to lack adequate medical facilities and supplies. Last year, the company set up a joint venture with Neusoft (Shenyang, China), a Chinese software technology and digital medical products company. The joint venture will develop and produce x-ray, computed tomography, and ultrasound equipment for domestic and global markets. The facility employs around 500 engineers in the R&D department, and the company expects to double the number of employees over the next few years. Philips has even set up a panel to establish strategies for its China-based business, which earned revenue of more than $8 billion in 2004, nearly half from domestic sales.
A primary concern for medical device companies when they consider outsourcing R&D is protecting their intellectual property (IP). India is making great strides to improve its IP environment, and on March 23, 2005, the nation passed a new patent law for pharmaceuticals. A few India-based CROs are establishing their own IP standards to attract more overseas customers.
India's new patent law will enable more transparency and security in the country's pharmaceutical industry, which comprises about 20,000 foreign and domestic drug makers. The Patents Amendments Act will cover all the remaining provisions India must meet in order to comply with the Trade-Related Intellectual Property Rights (TRIPs) Agreement (as put forth by WTO), including the granting of pharmaceutical patents. The new bill has two main objectives: (1) to introduce a patent regime for all products, including pharmaceuticals, and (2) to introduce the granting of compulsory licenses. Previously, only methods or processes of manufacturing could be patented for some products in India. Under the new provision, specific product patent protection may be granted in almost all areas, including patent protection for most pharmaceuticals. The increased IP protection offered by the new patent bill may encourage foreign companies already in India to begin expanding their R&D sectors. Moreover, the bill is another step closer to patent protection for medical devices in India.
Conducting Clinical Trials
Many companies look to India for clinical trials because the country offers a large, diverse population and varied gene pool. Patient recruitment is often an easier and faster process in India than in the West, and companies can save as much as 50% in clinical trial costs. Over the past few years, clinical trial spending by U.S. medical companies has been increasing at an annual rate of about 10%.
Many multinational pharmaceutical companies conduct clinical trials in India, and currently, 75 hospitals in the country are involved in clinical trials. For example, Eli Lilly (Indianapolis) has held trials for its human insulin and insulin lispro products that involved more than 600 patients in India. Presently, Eli Lilly has close to 20 ongoing clinical research projects and trials in 35 hospitals in India.
Pfizer (New York City) plans to begin clinical trials for a new malaria cocktail drug in India, involving about 300 patients from some of the northeastern areas of the country. The pharmaceutical giant is also holding clinical trials for other drugs, including those to treat breast cancer, osteoporosis, and schizophrenia. It is estimated that Pfizer has invested over $12 million in clinical trials in India to date.
In January 2005, India's Ministry of Health and Family Welfare passed the Drugs and Cosmetics Amendment Rules, permitting foreign and domestic companies to conduct clinical trials for pharmaceuticals in India and other countries simultaneously. Previously, a pharmaceutical had to undergo a clinical trial one phase higher in another country first, before the previous trial phase could be conducted in India. Under the new amendment, Phase II and III clinical trials may occur within India and outside simultaneously. However, because the purpose of a Phase I trial is to test the safety of the drug, all Phase I trials still must be conducted outside of India first, before testing the drug in India. This guideline will help protect Indian citizens from being subject to untested and unproven drugs.
The ministry also set up a group to monitor clinical trials in India and to ensure that companies comply with good clinical practices. Furthermore, clearances to conduct trials will be granted on a case-by-case basis, and foreign companies will not be permitted to conduct clinical trials solely in India. This new amendment demonstrates that India is quickly becoming a common location for pharmaceutical clinical trials. It also serves as an indication that medical device trials may soon follow suit.
Providing Laboratory Services
More and more U.S. laboratories are outsourcing their work to labs outside the country. It is estimated that at least 10% of all U.S. laboratory work is sent abroad. Some hospitals and clinics outsourcing laboratory work to India have experienced as much as 75% savings. Indian laboratories tend to have greater capabilities than in-house hospital labs in the United States. Further, they can conduct a much larger array of tests. However, many U.S. hospitals still hesitate to outsource their laboratory work since many facilities in India do not yet meet international good laboratory practice standards.
Many U.S. dental labs, which create such products as dentures and crowns, also look overseas to reduce expenses and increase productivity. In 2004, China's government passed a regulation classifying dental laboratories as Class II medical device manufacturers. Therefore, all dental labs in China must register with the government and must meet specific safety and quality standards.
One Shanghai-based laboratory, DentUSA, makes dentures, parts for bridges and crowns, and partial frameworks. The company has been actively seeking customers in the United States through various marketing techniques such as mailing promotional CDs directly to U.S. dental laboratories. The 300-person laboratory handles about 500 cases per day, with a one-week turnaround (including shipping time). DentUSA offers all the latest technology and ADA- and CE-certified products. The company's managers, who are required to speak fluent English and have 15–20 years experience working with U.S. labs, train the local Chinese technicians. DentUSA performs work for domestic and international clients, with close to half its business coming from U.S. laboratories.
Because of rising costs for U.S. healthcare, not to mention long waiting times for many medical procedures and treatments, some U.S. citizens are looking overseas for medical services. The practice, known as medical tourism, is quickly catching on. Patients have found that they can get a bargain for quality medical services. In particular, India's medical industry offers more than 15,000 hospitals, 300 medical colleges, and more than 1 million physicians. Moreover, it is estimated that India generates an additional 25,000 doctors and nurses each year. Medical tourism in India, currently growing at an annual rate of around 25%, is predicted to bring in at least $2 billion within the next 6–7 years.
Apollo Hospitals Group, based in New Delhi, India, is the largest healthcare provider in Asia. The hospital chain established the first successful liver transplant program and first cancer therapy program in the region. Apollo's cardiac center offers a dozen state-of-the-art operating rooms and claims a nearly 100% success rate in the 50,000 heart surgeries it has conducted to date.
According to the Confederation of Indian Industry, medical tourism attracted about 150,000 foreigners in 2004. Medical companies in India that cater to foreign clientele generally offer comprehensive packages including airfare, airport transfers, hotels, treatment, and possibly a post-treatment vacation, usually all for less than the cost of the same procedure conducted in the United States.
For instance, one U.S. patient paid $40,000 for a heart operation and one-month stay in a U.S. hospital. The patient later needed a second heart operation. The cost of having the second operation performed in India was $8000, including airfare. The patient saved 80%. In another case, an uninsured U.S. citizen was told that heart surgery would cost him $200,000 in the United States. The patient elected to have the procedure done at Escorts Heart Institute in India instead, at a cost of only $10,000.
Elective treatments, such as cosmetic surgery, corrective vision surgery, and dental procedures, generally not covered by insurance, also attract many western citizens to India. Such patients travel to India to benefit from the significantly lower costs, highly skilled physicians, and state-of-the-art medical equipment. Moreover, some U.S. insurance companies, such as BlueCross BlueShield, have begun collaborating with some hospitals in India.
While medical tourism offers many benefits—decreased waiting time for surgery and lower costs—there are some risks involved. All-inclusive packages offered to overseas patients do not include follow-up or long-term care. Patients suffering from complications or side effects will often be forced to seek further medical assistance in their home country and will be subject to subsequent fees.
This growing industry is also increasing the demand for quality medical products in Asia, creating new opportunities for foreign medical device companies hoping to expand into the region.
More and more U.S. medical companies are outsourcing to Asia each year. Not only can these companies reduce expenses, but they may also benefit from Asia's fast-growing economies and medical markets. While IP protection and manufacturing standards, such as GMPs, can present issues, U.S. companies can still outsource some aspects of their business. Moreover, Asian countries such as China and India are constantly striving to raise their medical device standards and regulations in order to attract more foreign companies. In April 2005, India and the United States even signed an open skies agreement, deregulating flight restrictions and allowing for increased air travel between the two countries. As long as Asian countries continue to offer advantages—whether by improving production efficiency or by reducing costs—U.S. medical companies will continue to outsource to Asia.
1. Ames Gross and Rachel Weintraub, “The Lure of Asia: Lower Costs and Much More,” MD&DI Guide to Outsourcing 26, no. 7 (2004): S-54–S-57.
Ames Gross is president of Pacific Bridge Medical (PBM; Bethesda, MD), a medical consulting firm dedicated to assisting companies in Asia. Rachel Weintraub is a senior associate at PBM. E-mail [email protected] for more information.
Copyright ©2005 Medical Device & Diagnostic Industry