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FIGURE 1 Value chain for innovator companies.

R&D costs, and it has become increasingly difficult to develop blockbuster drugs, such as Pfizer’s Lipitor, which was introduced almost a decade ago in 1997. At the same time, the patents of many drug products are expiring, opening the market to competition from manufacturers of generic versions. The generic share of prescription drug units rose to 72 percent in just 18 months after generic substitutes were approved. [1] These pressures have convinced companies to consider offshoring parts of the value chain as a tactic to create competitive advantage.

This paper focuses on U.S. and European pharmaceutical companies that engage in offshore activities. Biopharmaceutical companies only recently have begun to embrace the offshoring paradigm because of complexity in the technology, their small size, and the regulatory environment surrounding their products. These factors are addressed further in later sections.

Global Employment in the Pharmaceutical Sector

Global employment in the pharmaceutical industry is estimated to account for 1.7 million full-time equivalents (FTEs). The industry is dominated by the top 20 global MNPCs, which account for 59 percent of employment. The United States, Europe, and Japan dominate the global pharmaceutical industry, and the United States has the largest single workforce by region (41% of the global workforce). [2]

Using data from the McKinsey Global Institute [2], one can see that manufacturing of the active pharmaceutical ingredient (API), or drug substance, and final dosage, or drug product, plus R&D occupy 44 percent of the workforce (Figure 2). Because these are the activities that require engineering and science expertise, they are the areas of focus in this paper. Because the industry is highly integrated throughout the value chain, these activities include engineering, such as chemical engineering, mechanical engineering, bioengineering, and materials science and engineering, as well as science, such as chemistry and biology. Furthermore, we are not aware of specific data that show the extent of involvement of each engineering and science discipline in pharmaceutical manufacturing and R&D.

Framework of Analysis

How and where a company chooses to operate its offshore activities depends on company-specific factors as well as location. Company-specific factors include the attitude of senior management and a company’s regional capabilities and growth strategy. Location-specific factors fall into four categories: cost structure, business environment, workforce, and the local market. In our framework, we divide location-specific factors into drivers, enablers, sustainers, and barriers to offshoring activities at different stages of the value chain (Figure 3). We consider how these factors change over time and their impact on the global pharmaceutical industry.

The Merriam-Webster Dictionary defines offshoring as “The action or practice of moving or basing a business operation abroad.” [7] The McKinsey Global Institute prefers the term “global resourcing,” which has a more specific definition: “Decision of a company to have a location-



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