CR - Business Model

 

CONTRACT RESEARCH OUTSOURCING: OPPORTUNITY IN INDIA  Tuesday, 11 November November 2008 Soaring drug discovery development costs and timelines, prolonged regulationmandated testing, complex review processes, 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 outsourci ng 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. development.  

 The cost of developing developing a drug drug is high because the costs costs of failed efforts are added added to the costs of the successful 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. • Incr In crea easi sing ng time time-t -too-ma mark rket et fo forr new new dr drug ugs: s: For For mo most st phar pharma mace ceut utic ical al companies speed is the key to success, 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. • Redu Reduci cing ng new new dru drug g app appro rova vals ls:: Rap Rapid idly ly dryi drying ng R&D R&D p pip ipel elin ines es and and wid wides espr prea ead d commercialization commercializa tion 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 rose 147% 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

 

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 contract research research market in 2006 2006 was estimated around $7.9 billion with with an annual growth rate of 16.8%. (Drug discovery is estimated to be $4 to 5 billion).  The increase increase in contract contract research outsourcing outsourcing has been directly proportionate proportionate to the increase in R&D budgets.

  Source: ValueNotes Research Report: Pharmaceutical Outsourcing in Drug Discovery & Development

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 integrated players 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 1990’s, contract manufacturing manufacturing activity jumped, though growth has slowed subsequently. More recently, India has emerged as an alternative research base for global pharma companies.

 

  Source: ValueNotes Research Report: Pharmaceutical Outsourcing in Drug Discovery & Development

 The past few years have seen an increased increased momentum in drug drug discovery outsourcing outsourci ng 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. business. Several leading pharma pharma majors have outsourced outsourced various elements of the pharma value chain to India.

Buyers of CRAMS services from India

Multinat Mult inationa ionall Outsourcer Outsourcer Multinat Multinationa ionall base country country Contract Research and Manufacturing Manufacturing Merck, Eli Lilly, Lilly, GlaxoSmithKline GlaxoSmithKline Clinical Trials

Merck

Contract Manufact Contract Manufacturin uring g AstraZene AstraZeneca, ca, Solva Solvay, y, Pfizer, Pfizer, AMO, Allergan, Allergan, Degussa Degussa,, Altana, DSM, Mayne, Boots, Roche Contract Research Research Wyeth, Rheosciences, Rheosciences, Novo Nordisk, Nordisk, Teijin Pharma, Pharma, Bayer, Bayer, Forest Labs, Novartis, Schwarz

Source: ValueNotes Research Report: Pharmaceutical Outsourcing in Drug Discovery & Development

Along with the evolution of individual services, business models around outsourcing have 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 Par ara amete meterrs In In-h -hou ous se Mo Models dels (Capt Captiv ive e Cen Cente terr) Outsourcing Models

Coll Colla abor borati tive ve Mod Model els s

 

Captiv Capt ive e Lice Licens nsin ing/ g/ Tec echn hnol olog ogy y Tran Transf sfer er FTE FTE Mode Modell (Pre (Prefe ferr rred ed for for data data manag man ageme ement nt serv service ices) s) Joint Joint V Vent entureT ureThir hird d Part Party y (Sing (Single le Vend Vendor or)) Fee Fe e for for Serv Servic ice e Mode Modell

Thir Third d Part Party y (Mul (Multi tipl ple e Vend Vendor ors) s)

Descript Desc ription ion R&D center centers s exclusi exclusively vely work work for for the spons sponsor. or. Licensing the rights of developing or manufacturing a drug by using the partner’ part ner’s s technolog technology y for drug develo development pment.. R&D centers centers which which work work full-time full-time and excl ex clus usiv ivel ely y for for tthe he spo spons nsor or.. R&D R&D cen cente ters rs excl exclus usiv ivel ely y work work for for th the e spon sponso sorr who who usually usua lly retains retains management management contr control. ol. The spons sponsor or pays pays fixed fixed ‘fees’ ‘fees’ for for the servic services es outsourc outs ourced ed to a singl single e vendor. vendor. Vendor Vendor outsour outsources ces a part part of the the outsourc outsourcing ing contract to a third party or consortium consortium of vendors. Strategic Strate gic Intent Intent In-hou In-house se oper operati ations ons of capt captive ive center center ensure ensures s data data secu securit rity y and and conf confid iden enti tial alit ity y of pro propr prie ieta tary ry tec techn hnol olog ogy y Lice Licens nsin ing g the the righ rights ts for for man manuf ufac actu turi ring ng or marketing a drug by usi using ng the partner's partner's technology for drug development. development. The local service provider develops the facility, human resource and offices while the sponsor provides the hardware hardware and the software and also the training on it. It is a project-b proj ect-based ased model model lasting lasting for a few years. years. Deriving Deriving synergi synergies es and competiti competitive ve advantage from partner’s 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 Source: ValueNotes Research Report: Pharmaceutical Outsourcing in Drug Discovery & Development Indian pharma research outsourcing opportunity  The introduction introduction of product product patents in India in 2005 has renewed the interest of  of  global pharmaceutical 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).

  Source: ValueNotes Research Report: Pharmaceutical Outsourcing in Drug Discovery & Development

Contract manufacturing forms the largest chunk of services outsourc outsourced ed 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.

 

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 organizatio ns with capabilities of a 'one-stop-shop 'one-stop-shop', ', with multi-service offerings across the R&D spectrum. A virtual company, an organization that collaborates with multi-disciplinary multi-discip linary 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 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, informatics, genomics to name a few, complemented by wider acceptance of IT and biotechnology has brought about a complete transformation transformation in the way molecules are being researched, developed, manufactured and marketed.  This will be be the driving force for the the shift to research driven driven outsourcing outsourcing to India. Strengths and weaknesses of India’s pharmaceutical industry Strengths

Weaknesses

* Cost advantages

* Industry concentrated at lower end of 

* Large pool of highly trained manpower.

value chain.

* 2nd largest number of U.S. FDA

Low level of investment in R&D.

approved facilities.

* Highly fragmented industry.

* TRIPS (Trade Related Intellectual Property

* Government price controls.

Rights) compliance.

* Low margins.

* Lower operating costs.

* High tariffs and taxes.

* Growing biotechnology industry.

* Substandard drugs and counterfeiting.

* Reverse engineering skills.

* Most Indian companies are small by world

* Largest number of Drug Master Files.

standards.

* Bio-diversity.

* Lack of experience in drug discovery.

 

* FDI growing at 100 percent.

* Corruption.

* Strong IT skills for research rese arch data

* Weak domestic market.

management.

* Low levels of per capita medical

* Strong marketing and distribution

expenditure.

network. * Well established network of laboratories. * It has an excellent record of development of improved, cost-beneficial chemical synthesis for various drug molecules.

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 world’s leading le ading 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 contract manufacturing, 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

 

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.

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MNC's will make an aggressive bid for the Indian market, as India moves towards TRIPS, and international companies register their new n ew drugs for patenting after 10 years.

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Smaller companies, which had so far beneted from the protective regime, may be forced to become contracting units, or close shop.

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Generics will have a huge demand.

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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.

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International companies could set up their own R&D labs in India and develop drugs for tropical diseases.

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

 

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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.

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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.

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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 with traditional 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 “Click Here Here”” or Log on to www.HarNeedi.com www.HarNeedi.com..