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Outsourcing Risks Worry the Wary

Senior finance executives in the pharmaceutical industry say their enthusiasm for outsourcing is tempered by regulatory, data security, and process integrity risks.

Meeting the demands of regulatory compliance. Drug companies must comply
with rigorous and expensive regulations worldwide. Using third parties could
make compliance more cumbersome, costly, and risky. Not only is every step of
the manufacturing process subject to regulatory specifications, but recent privacy
laws have been passed in several countries that might impede data sharing.

Given that some changes are quite recent, companies are scrambling to comply.
For example, the FDA is currently implementing an electronic signature regulation
under which all electronic records must be documented in accordance with FDA
guidelines. Christopher-Paul Milne, assistant director of the Tufts Center for the
Study of Drug Development, says that since the new rule probably extends to all
data in New Drug Applications and to the personal records of investigators and
patients, it heightens concerns about outsourcing HR and IT operations.

Adjusting to the Sarbanes-Oxley Act. Some CFOs pause before outsourcing
finance and accounting functions until they understand the ramifications of the
Sarbanes-Oxley Act, which holds senior management accountable for the accuracy
of financial statements. To outsource finance activities now requires great confidence
in the vendor’s controls.

David McGirr, chief financial officer at Cubist Pharmaceuticals, reflects this wait-and-see attitude. “Sarbanes-Oxley has just
tightened the focus on financial control and processes. While we’re all learning to
live with Sarbanes-Oxley — and the rules are still being written — it’s going to be very hard to outsource some finance functions,” he says. “When it all settles down,
and people become comfortable, maybe that will change. But for now, speaking very
personally, I would not want to be outsourcing much from the finance function
because it’s too delicate.”

By contrast, Jeffrey Black, chief financial officer at Endo Pharmaceuticals, says that outsourcing a portion of internal audit has
made it easier to comply with Sarbanes-Oxley by giving the company access to
experts. “We were able to address some of the concerns of Sarbanes-Oxley and draw
on expertise from outside groups with experience in implementation and
monitoring the rules,” he says.

Security of proprietary knowledge. No firm wants to risk losing a key formula
or manufacturing edge because it outsourced. This is especially true in offshore
destinations where legal systems may not offer the same intellectual property
protection. “Clearly if you go offshore, the ability to protect your proprietary
information — such as your patents — is subject to much higher risk,” says
Maurice Greaver, president of Greaver & Associates. “In low-cost countries, if you’re not careful,
you could go to the market and they’ll be selling medicines that are identical
to yours.”

The management challenge. The potential difficulty of managing a collaborative
partnership throughout its life also dampens enthusiasm for outsourcing, especially
with the complications of distance, language, and time differences that accompany
offshoring. Christopher-Paul Milne, assistant director of the Tufts Center for the
Study of Drug Development, believes that outsourcing may be more trouble than it is
worth because as many as 20 or 30 people per project often must be retained
in-house to supervise the transition and manage the relationship.

Despite these risks, forward-looking companies can still capture much of the
value of outsourcing by contracting with third parties for services that are highly
routine and don’t have a direct impact on security, regulatory compliance, or
product delivery.

This article is excerpted and adapted from Outsourcing among Pharmaceutical and Biotech Firms, a report that summarizes the findings of interviews with executives and professors at 13 companies and institutions. CFO Research Services and A.T. Kearney, a global management consulting firm, developed the hypotheses for the research jointly. A.T. Kearney funded the research and the publication of the findings; CFO Research Services produced the final report. You may download a copy of the full report by filling out a brief form.

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