CR - Business Model

7/28/2019 CR - Business Model

1/8

CONTRACT RESEARCH OUTSOURCING: OPPORTUNITY IN INDIA

Tuesday, 11 November 2008

Soaring drug discovery development costs and timelines, prolonged regulation-

mandated testing, complex review processes, rapidly escalating R&D expenditures

and competition are hurting the margins of pharmaceutical companies. In an

attempt to improve falling revenues, the pharmaceutical industry has resorted to

outsourcing various services to inexpensive but highly skilled destinations. This

trend spans the entire value chain from contract manufacturing to research to

sales.

New drug pipeline economics - impetus for pharma outsourcing

In the US and Europe, the cost involved in introducing a new drug to the market is

between US$0.5 to 1 billion, and takes at least 10-15 years. Approximately 50-60%

of the cost is towards clinical development.

The cost of developing a drug is high because the costs of failed efforts are added

to the costs of the successful drugs. Between 1993 and 2003, development costs

doubled and the number of drugs that were approved came down by 35%. This has

provided an added impetus to the global pharma companies to outsource to

cheaper locations. Further, the need to optimize drug pipeline economics will drive

efforts to lower costs at different points of the chain by a variety of methods,

including moving parts of the process to cheaper offshore locations.

Increasing time-to-market for new drugs: For most pharmaceutical

companies speed is the key to success, particularly for a patented drug. In the US,

the time to market for a new drug increased from 7.5 years in the 1970s to 12.5

years in the 1990s. This can be reduced by as much as 30-40% if some of the work

is done in an offshore location such as India.

Reducing new drug approvals: Rapidly drying R&D pipelines and widespread

commercialization of the easy-to-manufacture drugs (off-patent) have increased

pressures on global pharmaceutical companies. According to the Pharmaceutical

Research and Manufacturers of America (PhRMA), R&D spending in the US rose147% from 1993 to 2004, whereas the number of drug approvals rose only 38%.

While companies have accelerated their R&D activities, the rate of approvals has

not kept pace with their R&D investments.

Global contract research market


2/8

Global pharmaceutical firms have long outsourced functions such as manufacturing,

packaging, clinical trials and sales force mobilization. Increasingly R&D activities are

now also being outsourced and offshored.

According to ValueNotes estimates, the global market for pharma outsourcing is

pegged at $77 billion for 2006, with contract research being one of the fastest

growing segments.

Source: ValueNotes Research Report: Pharmaceutical Outsourcing in Drug

Discovery & Development

Of the top 25 drugs, we estimate that about 12 drugs have been discovered /

developed by a company other than the one that has launched it.

The global contract research market in 2006 was estimated around $7.9 billion with

an annual growth rate of 16.8%. (Drug discovery is estimated to be $4 to 5 billion).

The increase in contract research outsourcing has been directly proportionate to the

increase in R&D budgets.



Pharma outsourcing: evolution in India

Between 1990 and 2005, a large number of global fine and specialty chemical

companies restructured and downsized their operations. The traditionally integratedplayers in the western world saw merit in focusing on specific aspects of business

and outsourcing all non-core areas, manufacturing in particular. This opened up new

avenues for many traditional Indian pharma companies with under-utilized

capacities and expertise. Consequently, in the late 1990s, contract manufacturing

activity jumped, though growth has slowed subsequently. More recently, India has

emerged as an alternative research base for global pharma companies.


3/8



The past few years have seen an increased momentum in drug discovery

outsourcing due to new technological developments and increased targets from

advancements in technologies like genomics and proteomics. The Indian industry is

today on a rapid learning curve and quickly moving up the value chain in the drug

pipeline business. Several leading pharma majors have outsourced various

elements of the pharma value chain to India.

Buyers of CRAMS services from India

Multinational Outsourcer Multinational base country

Contract Research and Manufacturing Merck, Eli Lilly, GlaxoSmithKline

Clinical Trials Merck

Contract Manufacturing AstraZeneca, Solvay, Pfizer, AMO, Allergan, Degussa,

Altana, DSM, Mayne, Boots, Roche

Contract Research Wyeth, Rheosciences, Novo Nordisk, Teijin Pharma, Bayer,

Forest Labs, Novartis, Schwarz



Along with the evolution of individual services, business models around outsourcinghave evolved as well. Companies are seeking novel ways to lower R&D costs -

through licensing, collaborative and outsourcing agreements.

Business models for contract research organizations

Parameters In-house Models (Captive Center) Collaborative Models

Outsourcing Models


4/8

Captive Licensing/ Technology Transfer FTE Model (Preferred for data

management services) Joint VentureThird Party (Single Vendor)

Fee for Service Model Third Party (Multiple Vendors)

Description R&D centers exclusively work for the sponsor.

Licensing the rights of developing or manufacturing a drug by using the

partners technology for drug development. R&D centers which work full-time and

exclusively for the sponsor. R&D centers exclusively work for the sponsor who

usually retains management control. The sponsor pays fixed fees for the services

outsourced to a single vendor. Vendor outsources a part of the outsourcing

contract to a third party or consortium of vendors.

Strategic Intent In-house operations of captive center ensures data security and

confidentiality of proprietary technology Licensing the rights for manufacturing

or marketing a drug by using the partner's technology for drug development. The

local service provider develops the facility, human resource and offices while the

sponsor provides the hardware and the software and also the training on it. It is a

project-based model lasting for a few years. Deriving synergies and competitive

advantage from partners R&D competence, manpower and financial muscle.

Vendors can match buyers needs with specific vendor capabilities

Deriving synergies of multiple vendors for a particular contract on a risk-profit

shared basi



Indian pharma research outsourcing opportunity

The introduction of product patents in India in 2005 has renewed the interest of

global pharmaceutical giants in India, and has given a momentum to outsourcing in

the pharma sector. The pharma outsourcing market in India is estimated to be $4.8

billion (2006).



Contract manufacturing forms the largest chunk of services outsourced to India.

Going forward, the growing confidence of global companies in the Indian patent

system will encourage an increase in outsourcing of contract research services as

well.


5/8

Key trends

Given the focus of service providers on new discovery techniques and the

advantages of cost arbitrage and greater speed, it is no longer a question of

whether or not to outsource, but a question of finding the right partners.

Buyers of pharmaceutical R&D services will increasingly value contract research

organizations with capabilities of a 'one-stop-shop', with multi-service offerings

across the R&D spectrum. A virtual company, an organization that collaborates with

multi-disciplinary partners as per the project requirement to generate more

resources than it currently possesses on its own, is gaining traction in India. Virtual

companies will emerge as key players in outsourcing a large variety of services

(while focusing on the beginning and end of the value chain, i.e. discovery and

marketing) in the next 2-3 years. Pharmaceutical companies can move seamlessly

through the value chain by partnering with the virtual outsourcing company.

Emergence of new tools and techniques such as biotechnology, combinatorial

chemistry, bio informatics, genomics to name a few, complemented by wider

acceptance of IT and biotechnology has brought about a complete transformation in

the way molecules are being researched, developed, manufactured and marketed.

This will be the driving force for the shift to research driven outsourcing to India.

Strengths and weaknesses of Indias pharmaceutical industry

Strengths Weaknesses

* Cost advantages

* Large pool of highly trained manpower.

* 2nd largest number of U.S. FDA

approved facilities.

* TRIPS (Trade Related Intellectual Property

Rights) compliance.

* Lower operating costs.

* Growing biotechnology industry.

* Reverse engineering skills.

* Largest number of Drug Master Files.

* Bio-diversity.

* Industry concentrated at lower end of

value chain.

Low level of investment in R&D.

* Highly fragmented industry.

* Government price controls.

* Low margins.

* High tariffs and taxes.

* Substandard drugs and counterfeiting.

* Most Indian companies are small by world

standards.

* Lack of experience in drug discovery.


6/8

* FDI growing at 100 percent.

* Strong IT skills for research data

management.

* Strong marketing and distributionnetwork.

* Well established network of laboratories.

* It has an excellent record of development

of improved, cost-beneficial chemical

synthesis for various drug molecules.

* Corruption.

* Weak domestic market.

* Low levels of per capita medical

expenditure.

Contract research and manufacturing, outsourcing, and other services

CRAMS (Contract Research and Manufacturing Services) can be divided into 3 basic

segments: the production of intermediates, active pharmaceutical ingredients for

new chemical entities and the manufacture of generic drugs. India has emerged as

one of the worlds leading CRAMS providers for MNC innovator companies and now

accounts for 6 to 7 % of the

global market. Many expect India will command at least 15 percent of the market.

The passage of the Patents (Amendment) Act 2005 has significant implications for

both Indian and multinational companies competing in the Indian market.

Leading Indian companies are now gradually moving away from the generic

production to the development of new drugs, exports to regulated markets and

cooperative agreements with global MNC's.

Confronting lagging sales of patented drugs by MNC's in their home markets,

declining R&D revenues and rising costs, many MNC's have turned to contractmanufacturing, research services (CRAMS), co-marketing alliances, outsourcing of

research and clinical trials to reduce costs, increase development capacity and trim

the time to market for new drugs.

These strategies permit MNC's to focus on their core profit making activities, such

as drug discoveries and marketing, rather than on manufacturing. India has


7/8

emerged as the principal destination for global pharmaceutical companies across

the pharmaceutical value chain.

Although CRAMS is still in its nascent stages in India, it represents a significant

opportunity for medium-sized Indian pharmaceutical companies.

Contract outsourcing

International pharmaceutical companies are now outsourcing a wide range of

activities including: the manufacture of Active Pharmaceutical Ingredients (API),

chemical intermediates, formulations, clinical research, clinical testing, packaging

and labeling.

The Indian market for contract outsourcing has been driven by the need of leading

MNC pharmaceutical companies to reduce production costs and increase revenues.These companies have shifted portions of the production, research & development,

clinical trials, packaging, labeling, stability testing, other types of drug development

and discovery activities to India.

Future Trends

Innovation, not original research alone, is the order of the day.

MNC's will make an aggressive bid for the Indian market, as India moves

towards TRIPS, and international companies register their new drugs for

patenting after 10 years.

Smaller companies, which had so far beneted from the protective regime,

may be forced to become contracting units, or close shop.

Generics will have a huge demand.

Increasing R&D costs will lead to more consolidation for international

companies. Within 5 years, the top 10 pharma companies will control over

60% of the world market.

International companies could set up their own R&D labs in India and

develop drugs for tropical diseases.

Innovations in R&D process such as genomics and combinatorial chemistry.


8/8

Indian pharma companies are expected to move up the value chain from

merely being reverse engineers to developers of proprietary products in the

US market.

Implementing New Technologies to Address Key Issues.

Combating the growth of counterfeit drugs.

Handling "reverse logistics" where shipments are sent back to the

manufacturer either due to incorrect items being issued or simply being out

of date.

Improving the overall efficiency of receiving goods, ensuring that the right

products have been delivered.

Conclusion

The pharmaceutical business in the world trade environment will have to be

competitive. The major focus should be on research, drug design and development.

The industry, authorities and institutions must understand the challenges and

market needs to develop workforce with competent, managerial and

entrepreneurial talent.

Pharmaceutical industry players will need to take risk and fortify their organization

by focusing on to bring in talents and skills from outside the industry than withtraditional approaches focused on developing talent from internal departments to

focus more on to achieve industry goals.

Disclaimer:

This article is for information purposes only. Readers must take full responsibility of

use of information provided. The information compiled here is resourced from

various sources, which may change without prior notice and depend on market

dynamics. HarNeedi.com will not be responsible for any of the damages and claims

thereof. For more articles Click Here or Log on to www.HarNeedi.com.
http://www.harneedi.com/index.php/articles/3-pharma-articleshttp://www.harneedi.com/http://www.harneedi.com/http://www.harneedi.com/index.php/articles/3-pharma-articles

Documents

CR - Business Model