Final Word: Outsourcing to Developing Countries

Are you really going to save money?
Nov 01, 2006


Steven S. Kuwahara, PhD
Many biopharmaceutical companies have been caught up in the rush to purchase raw materials, particularly active pharmaceutical ingredients (APIs), from low-cost producers in developing countries, particularly India and China. While wanting low-cost raw material is certainly understandable, many companies have outsourced because of "groupthink" rather than because careful investigation showed that it made sense.

Sometimes, the cost of raw material is just a small fraction of the total manufacturing cost, and any advantage may be quickly devoured by complications related to the outsourcing. In one case, a company was told that a reputable supplier would be able to provide significant savings for an API. The supplier claimed to have many sources in India and China. The company agreed to purchase the API from the supplier, but only if pilot samples could be provided for testing before any lots were imported.

The first pilot sample, from the supplier's source in India, was 80% pure and failed heavy metals testing. The second sample passed the heavy metals test, but was only 60% pure. A third sample was 80% pure but had a color unlike all of the other previously seen samples. All three samples were accompanied by certificates of analysis (COA) stating that the APIs were of "USP Grade," and showed test results that confirmed this.

The supplier then told the company that it would obtain material from sources in China. The first sample was 85% pure and contained an insoluble impurity that turned out to be diatomaceous earth. This sample also had a COA showing that the product met USP requirements. When the API manufacturer was contacted, the sales person noted that the product would pass USP testing, if the diatomaceous earth were removed. The company responded that it did not wish to pay API prices for diatomaceous earth. So the supplier went to another API manufacturer. The fifth API sample was found to be 95% pure but failed the heavy metals test because it contained mercury.

This experience confirmed the purchasing company's quality control manager's philosophy that, "only a fool accepts an unvalidated COA." The incident consumed a considerable amount of time and resulted in the company's missing the target date for manufacturing its first clinical trial lot. Because of this delay, Phase I clinical trials were late and the company was bleeding money while it returned to the original API manufacturer and procured a new lot.

One of the more disturbing points related to this situation was that this was an API that is used in several products. The existence of six API manufacturers seems to attest to its wide usage. Five of the six producers, however, provided samples that could not support the claims given in their COA. One is then led to wonder about the number of products being marketed worldwide whose API could not meet USP standards.

The "groupthink" that has led some companies to flock to developing country suppliers focuses on the cost of raw material. The consequences of problems that may be encountered are often ignored in the rush to save money. And all too often, the results are additional costs. Although these costs may be absorbed by large, established companies, small start-up companies need to be more careful, as they may not have the resources to deal with the impact of these "savings."

Steven S. Kuwahara, PhD is a principal at GXP BioTechnology LLC, PMB 506, 1669-2 Hollenbeck Ave. Sunnyvale, CA 94087-5402, 408.530.9338