Outsourcing of Medical Products to Asia

Outsourcing - both domestic and offshore - is a steadily growing trend among medical technology companies in the developed countries as it is in other industries. Manufacturers outsource not only to lower labor and production costs, but to increase efficiency, reduce lead times, gain access to new techniques and technologies, and to focus on core competencies as part of an overall corporate growth strategy. Counter balancing these drivers are valid concerns about intellectual property protection and regulatory compliance oversight, and discomfort over the loss of direct control over supply and production processes.

The critical role the manufacturing outsourcer plays in the customer's business requires that the customer's team negotiating the outsourcing contract be knowledgeable not only about the company's business and current and future as regulatory compliance, taxation, business continuity, and audit and risk management. A thorough and flexible contract should facilitate a good working relationship between the medical device company and its manufacturing outsourcing partner, as well as clearly describe the mechanics for unwinding the relationship if and when necessary.

About outsourcing

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 protection and manufacturing standards, such as GMPs, can present issues, U.S. companies can still outsource some aspects of their business.

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 United States 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 by reducing costs U.S. medical companies will continue to outsource to Asia.

In today's increasingly competitive global economy, medical device companies are continually seeking ways to drive down production costs while at the same time improve quality and accelerate time-to market. Outsourcing the manufacturing and assembly of medical devices or components thereof to a third party - whether onshore or offshore - may serve as an efficient and cost effective way to achieve these goals.

Offshoring continues to be identified by medical device companies as a method to reduce costs and overhead. Many companies have found, however, that the benefits of offshoring are greater when labor intensive processes are involved (rather than highly automated ones).

Important contract issues

The following contract issues would be of prime importance to the Foreign Companies :

(a) due diligence around security and compliance

(b) intellectual property, attachment and ownership rights under local law and

(c) business continuity options.

Increased regulatory oversights have also lead to a heightened emphasis on quality and control in manufacturing offshoring. The supplier's understanding of, and willingness and ability to comply with, existing and new applicable laws and regulations, as well as the customer's existing and new protocols and SOPs, are emerging as critical down-selection criteria in most manufacturing outsourcing transactions.

The process typically can be broken down into three phase:

(1) the prenegotiation phase,

(2) the negotiation and contracting phase and

(3) the post-contract phase.

It is critical to have clear understanding of how much time each phase may be require.

For the US Company , the pre-negotiation phase typically begins with the identification of an outsourcing opportunity and continues to down-selection of the preferred supplier or the commencement of contract negotiations. During this early phase, the focus would be on

(a) defining success criteria (as determined by its key objectives, such as cost savings or high quality),

(b) defining requirements and specification,

(c) establishing performance criteria (e.g., output requirements and delivery dates) and

(d) performing due diligence (e.g., site visits and reference checks).

The negotiation and contracting phase involves the actual creation, review and fine-tuning of the contract documents. The customer can enhance its negotiation leverage during this phase by ensuring that it has other options, either through extending time lines or pursuing other supplier alternatives.

Critical milestones of the post-contract phase include transition commencement and completion, and go-live and contract governance implementation. Key success drivers for this phase include putting in place effective task and supplier teams (so that project managers are able to communicate directly with both teams) and establishing a flexible change of control process.

Any outsourcing transaction gives rise to many issues for the legal, business and technical teams to consider. Some of the key legal issues are include :

Due Diligence

Scope of :
- Performance Standard
- Manufacturing Locations
- Regulatory Requirements
- Termination Rights
- Business Continuity
- Pricing

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