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Under the background of globalization, pharmaceutical outsourcing is the product of the value chain redistribution of pharmaceutical industry driven by cost pressure. Global pharmaceutical expenditure growth is slowing down, research and development costs are rising, the number of newly patented drugs is decreasing and the competition of generic drugs is becoming increasingly fierce, which makes patent and generic drug enterprises face increasingly intense cost pressure. The pressure of drug price reduction has given rise to the redistribution of the pharmaceutical industry chain. More and more pharmaceutical companies outsource non-core but high-capital investment drug research and development and drug production to reduce costs, and contract research and development outsourcing (CRO) and customized contract outsourcing (CMO) enterprises have flourished.

Pharmaceutical production requires high investment in equipment, manpower and facility engineering, accounting for about 20-30% of the total cost, which is the focus of optimizing the cost structure of pharmaceutical enterprises. Outsourcing drug production can help pharmaceutical companies reduce cash flow expenses, shorten the time to commercialize drugs, and devote more resources to higher-value marketing and research and development. Contract customized outsourcing providers (CMOs) are commissioned by pharmaceutical companies to provide services such as process development, formulation development, investigational drug use, chemical or biosynthetic API production, intermediate manufacturing, preparation production, and packaging for the production of products.

The advantages of outsourcing pharmaceutical production are as follows: for patent pharmaceutical enterprises, when the output of some new products is uncertain, outsourcing production can save the cost of investment in plant, fixed assets and manpower, and avoid the risk of overcapacity caused by excessive investment. For generic drug companies, which face downward price pressure on the “twilight drugs” they are producing, outsourcing production can provide a cushion against falling margins.

The shift of production outsourcing to Asia has accelerated, with low costs as the primary driver. Pharmaceutical manufacturing cost includes labor cost, raw material cost and fixed assets input. In these aspects, Asian enterprises represented by China and India have significant advantages, and it is imperative for CMO industry to migrate to Asia.

Labor costs: China and India are only a fraction of those in the US and Western Europe, although labor costs in China are rising by double digits every year, but still have a considerable advantage.

Raw material cost: Typical material cost for intermediate production in the US is $50 /kg, only $23 /kg in India and China, and $18 /kg in China.

In general, producing drugs in China can save European and American companies 30-50% of their costs.