As competition in the global medical device market intensifies, U.S. medical companies are increasingly seeking out ways to reduce costs in manufacturing, R&D, clinical trials and other medical services. Many Asian countries offer a lower cost of labor (China and India) and skilled labor force. Combining this with the region’s fast-growing economies and quickly aging populations (Japan’s elderly population is currently 19.48 percent, versus about 12.5 percent in the U.S.), these conditions provide promising opportunities for U.S. medical device companies outsourcing to Asia.
Many Asian countries are experiencing increases in Gross Domestic Product (GDP) and overall wealth. 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 a greater importance on international standards and regulations in order to expand the quality standards of their medical device market.
Following China’s entry into the World Trade Organization, the State Food and Drug Administration (SFDA) has made greater efforts to improve the regulatory environment for medical devices, an industry currently valued at over $3.5 billion in China. The country continues to be a popular destination for outsourcing as it boasts increasingly sophisticated medical product technology and improved product quality.
India has been experiencing 10 to 12 percent growth rate in its medical device market for the past several years. Currently, the device market has an estimated value of over $2 billion. India’s inexpensive labor force and highly-skilled English speakers have attracted many U.S. companies and led to the emergence of numerous Indian outsourcing companies. For instance, Wipro, a very large Bangalore, India company, started out as a producer of vegetable oil in 1945. Today, Wipro functions as an outsourcing company, offering numerous services, such as call centers, high-technology consulting, and manufacturing, including the production of medical devices. In 2003, Wipro nearly doubled its workforce to almost 30,000 and in 2004 the company’s revenue increased to over $1 billion, up more than 40 percent from 2003.
There are numerous reasons for outsourcing manufacturing to Asia. Many U.S. companies choose Asia as a manufacturing location in order to benefit from the reduced labor costs. For example, the salary of a mechanical engineer in the U.S. averages about $50,000 per year, while the same type of position in India would only pay $7,300 per year. Likewise, a project engineer in the U.S. also earns a salary of around $50,000, though a project engineer in India only makes about one-tenth the salary, or $5,000 per year.
Moving product manufacturing to Asia can offer many benefits to U.S. 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 Practice (GMP) and International Organization for Standardization (ISO) guidelines. In China, the 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 setting up SEZs, based on China’s system. The Indian government hopes that the less stringent labor laws with help encourage more Foreign Direct Investment into India.
In order to provide a safe, yet low-cost, market for contract research and manufacturing, Indian pharmaceutical companies are becoming increasingly US FDA compliant. 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.
Nypro, Inc. (Clinton, Massachusetts), a manufacturer of plastic moldings for various industries including fluid management valves for medical devices, has been benefiting from China’s cheap labor and skilled employees for over thirty years. The company now has over a dozen facilities in China employing around 7,000 people, about half of the company’s total staff. In 2004, Nypro first began manufacturing some of its medical devices at one of its China facilities, hoping to expand its Asia and China market. Currently, Nypro’s medical devices 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, Massachusetts), has decided to establish its first facility in China. Dielectrics Asia, a joint venture with a Taiwanese company, is expected to be in full operation in 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 new JV will expand their 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. After all, if one’s competitor is experiencing strong benefits from outsourcing, does that company have any choice if it wants to stay in business?
Research and Development
Over the past ten 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 co-develop 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 their R&D outsourcing requests and asking for assistance with core concepts and feasibility testing. 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 R&D, but can have more extensive R&D work completed by outsourcing to a company in Asia.
In Bangalore, India, Siemens set up a new R&D facility in 2004 to expand their 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 5,000 in R&D across various sectors. Siemens India R&D operations include developing products to meet local and global standards, and creating original products for the Indian market. In 2003 alone, Siemens spent over $6 billion on R&D in India.
Philips Electronics, one of the largest healthcare technology and equipment suppliers in China, has plans to expand their China presence even further by focusing on the rural, western Chinese provinces, which tend to lack adequate medical facilities and supplies. Last year, the company set up a joint venture with Neusoft, a Chinese company (Shenyang, China). The JV will develop and produce x-ray, computed tomography (CT) and ultrasound equipment for the domestic and global markets. The new JV facility currently 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 their China business, which earned revenue of over US$8 billion in 2004, nearly half from domestic sales.
The largest concern of medical device companies outsourcing R&D is intellectual property protection. However, India is making great strides to improve its IP environment and on January 1, 2005, passed a new patent law for pharmaceuticals. A few CROs are even beginning to establish their own IP standards in order to attract more overseas customers.
India’s new patent law will allow for more transparency and security in the country’s pharmaceutical industry, comprised of around 20,000 foreign and domestic drug makers. The Third Amendment Bill will cover all the remaining provisions India must meet in order to comply with the Trade-related Intellectual Property Rights (TRIPs) Agreement, 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 Indian Parliament hopes this new Bill will attract more foreign companies to India and encourage those already in India to begin expanding their R&D sectors. Moreover, this new bill is another step closer to patent protection for medical devices in India.
Many companies look to India for clinical trials, as 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 percent 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 percent.
Many multinational pharmaceutical companies currently conduct clinical trials in India, and currently, 75 hospitals in the country are involved in clinical trials. For example, Eli Lilly has held trials for their human insulin and insulin lispro products, which involved over 600 patients in India. Presently, Eli Lilly has close to 20 ongoing clinical research projects and trials in India, located at around 35 hospitals throughout the country.
Pfizer plans to begin clinical trials for a new malaria cocktail drug in India, sourcing around 300 patients from some of the northeastern areas of the country. The pharmaceutical giant is also holding clinical trials for some of their 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 in India and outside of India simultaneously. However, since the purpose of a Phase I trial is to test the safety of the drug, all Phase I trials still have to 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 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, and also serves as an indication that medical device trials may soon follow suit.
More and more U.S. laboratories are outsourcing their work to overseas labs and currently, it is estimated that at least 10 percent of all U.S. laboratory work is sent overseas. In particular, many U.S. dental laboratories look overseas in order to reduce expenses and increase productivity. Moreover, in 2004, China’s government passed a regulation classifying dental laboratories as Class II medical device manufacturers. Therefore, all dental labs in China should be registered with the government and must meet specific safety and quality standards.
One Shanghai-based laboratory, DentUSA, (which makes dentures, parts for bridges and crowns, and partial frameworks) has been actively seeking out U.S. customers through various marketing techniques, such as sending out promotional CDs directly to U.S. dental laboratories. Currently, the 300-person laboratory handles around 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, required to speak fluent English and have 15 to 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.
Due to the rising costs of U.S. healthcare and long waiting times for many medical procedures and treatments, some U.S. citizens are looking overseas for medical services. In particular, India’s medical industry offers over 15,000 hospitals, 300 medical colleges and over 1 million physicians. Moreover, it is estimated that India generates an additional 25,000 doctors and nurses each year. The “medical tourism” industry (patients go overseas for cheaper, quality medical services) in India, currently growing at an annual rate of around 25 percent, is predicted to bring in at least $2 billion within the next 6 to 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 cancer therapy program in the region. Apollo’s cardiac center offers over a dozen state-of-the-art operation rooms and has nearly a 100 percent success rate (so they say) 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 U.S.
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. By traveling to India for the second operation, the cost was $8,000, even including airfare; hence, the patient saved 80 percent. In another case, an uninsured U.S. citizen, was told that heart surgery would cost him $200,000 in the U.S. Instead, the patient elected to have the procedure done at Escorts Heart Institute in India at a cost of only $10,000.
Elective treatment, such as cosmetic surgery, corrective vision surgery and dental procedures, generally not covered by insurance, also attract many Western citizens (U.S., Europe, Australia) to India. Such Western U.S. 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 Blue Cross Blue Shield, have begun collaborating with some hospitals in India.
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 and manufacturing standards, such as GMP, can still be issues, some U.S. companies 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 U.S. 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 reducing costs, U.S. medical companies will continue to outsource to Asia.