R & D Outsourcing

R & D Outsourcing

Sayan Bandyopadhyay Vishal Saxena

What is outsourcing? • Outsourcing is nothing new. • From the 1600’s and earlier, the British have had work done for them abroad, even if it was simply the processing of sugar in Antigua.… • Outsourcing is essentially an elaborate description for an arrangement whereby a company carves out certain services that it has been providing internally and retains a third party to provide these services. • Offshoring is sometimes described as outsourcing to service providers in another country.

R&D outsourcing market has grown at an average annual rate of 14.6% between 1997 and 2001.

R & D Outsourcing

Sayan Bandyopadhyay Vishal Saxena

Benefits of outsourcing? The typical benefits from outsourcing include: – Allows focus on “core” competence of the company – Cost-savings from reduced overheads and consequent reduction in training needs – Cost-savings through economies of scale gained by the outsourcing service provider – Higher levels of service and performance due to specialization of the service provider – Reduction of capital expenditure – Improvement in processes and their documentation – something that tends to get ignored internally – and in Offshoring – labour arbitrage…

5 Macro trends…. 1. Global population from 6.5 Bi in 2005 to 7.6 Bi in 2020 and aging rapidly and they consume more; Demand to Grow 2. Pharma cannot rely on the US market alone. Nor will it be able to charge more for its products in some markets than in others: Price parity will emerge 3. The leading 8 pharma companies will lose between 14% Novartis (7 Bi) and 41% Pfizer (18 Bi) by 2012 of existing revenues due to patent expiries. Need to fill pipe line 4. Only 5 of the top 15 Pharma global companies generate more than 10% of their revenues from products launched in last 5 years. Pipe line not filling and generic players aggressive 5. Diseases profile of developing world increasingly resemble those of the developed world, and greater affluence is making them more attractive markets. New markets new opportunities Large growth with global price parity and generics aggressive even in new markets

Economic Indicators  Largest democracy: 1.1 billion population  1991: Wide-ranging reforms to open and deregulate the economy  GDP growth over 8% in 2005-6 – fastest growing economies in the world, with compounded growth at 5.7%  Gross GDP - $3 trillion – fourth largest economy in the world – after USA, Japan and China  Annual per capital income is $2,880 – one of the lowest in the world  Total market capitalization is 22 –25 % of GDP

Facts & Figures - INDIA •

Highest number of FDA approved plants outside USA

•

Large English speaking workforce

•

One of the IT leaders

•

Democracy of 1 billion

•

UK based legal system

•

Structured and reasonably transparent financial markets & banking system

•

Well entrenched entrepreneurial culture & developed private sector

•

Superior education level

• Infra-structure in need of development • Largest market-share in generic API production • Export & Western oriented • Economic growth in terms of GDP just slightly behind China

Seven myths of outsourcing

Seven myths of outsourcing • Myth 1: We can have it all • Typical reasons to outsource – Cost effectiveness or efficiency – Effectiveness or improvement in service – Flexibility or ability to increase and decrease production rapidly

• Don’t expect all three in the same outsourcing project!!! • Answer: Prioritize!!!

Seven myths of outsourcing • Myth 2: Outsourcing services is like buying commodities – Most managers believe that outsourcing is a frictionless market: with no or little transaction costs – Finding a vendor, negotiating a contract, expenses from moving the operation and keeping it in sync with the rest of the company – Costs for ongoing management and oversight

Seven myths of outsourcing • Myth 3: We need an ironclad contract – Outsourcing is not a one time transaction – It is an exchange that evolves over time – A protracted contracting process can sour the relationship

Seven myths of outsourcing • Myth 4: Contracts don’t matter – Sometimes companies rush into an outsourcing deal – A MOU or letter of intent is not a good substitute for a contract – They are often as elaborate as contracts – They are usually replaced with contracts in the short term

Seven myths of outsourcing • Myth 5: Vendors are insurance companies – Common perception is that vendors should bear greater liability for failure than regular, inhouse employees – Unreasonable for the vendor to take on unlimited liability or unlimited indemnities – Outsourcing does not relieve you of your obligation to deliver a quality product

Seven myths of outsourcing • Myth 6: Its not our headache anymore – Sometimes the client company thinks they can abdicate control to their vendor – Outsourcing does not mean that the process is not your headache – If you lose all knowledge of the process you are outsourcing, you cant investigate new vendors and you cant evaluate the vendors you already have

Seven myths of outsourcing • Myth 7: Our first failure should be our last attempt – Very few companies achieve or report great success in their first outsourcing project – There is significant learning in both directions: client and vendor – Over time, the communication and management processes become established

Rising R&D costs is compelling organizations in the U.S. and EU to look for new low cost R&D destinations such as India and China

R&D expenditure off shored USUSD 2.5 Billion Amount of off shored R&D moving to China USUSD 0.375 Billion

R&D expenditure off shored USUSD 8 Billion

Amount of off shored R&D moving to India USUSD 0.125 Billion

Countries offshoring Pharma R&D

Countries Providing Services Note: 1. Chinese offshored R & D Market Size estimated as a part of Chinese Offshored Pre-Clinical Market Size Note 2: The drug discovery outsourcing market (preclinical and clinical) in China was worth USD 5.9bn in 2006, the preclinical development market was worth USD 2.5bn., the clinical development market was worth USD 3.4bn in 2006

Global Pharmaceutical Outsourcing Opportunity Estimated Potential Market: Discovery Research

Preclinical Development

Clinical Development

Process Development

Drug Substance Production

Dosage Form Development

Dosage Form Production

Packaging/ Assembly

Pharmaceutical R&D

Drug Substance Supply

Formulated Drug Supply

30-35

~50

60-80 (in $ bn)

Source: Dow Report, AD Little, Cardinal Health

Choosing the Right Partner in India; a Selection Model

 Global Interests  Ownership pattern  Regulatory Compliance  Financial Stability  Understanding IP  Reporting compliant  Capability & Infrastructure

DIFFERENTIATORS  Speed  Costs  Communication  Project Management  Track Record  Understanding the West  Staff Quality

Final Partner

QUALIFIERS

Outsourcing cost savings, operational advantage Reasons to outsource • Obtain expertise, skills, and technologies • Increase flexibility • Improve operating performance • Reduce costs and investments in assets • Improve credibility and image • Expand capacity • Acquire innovative ideas • Accelerate expansion • Increase product and service value, customer satisfaction, and shareholder value

One of the key enablers of the phenomenal offshoring/ outsourcing success to India is the availability of large talent pool at a fraction of the cost

India – A Potential Pharmaceutical Hub India

Czech Ireland Russia Republic

China

Philippines

Infrastructure

• Besides IT and engineering services, India has a large talent pool to cater to the demands of pharmaceutical outsourcing services

Educational System

• The cost of conducting research in India is about

Cost Advantage (relative to high cost countries)

20–30 percent of the costs in the developed world

• Over the next five years, India is likely to mature further as a provider of services across the drug development spectrum:

Language Compatibility

- Discovery, research, pre-clinical, clinical,

Overall

process formulations, and IT among other areas

Unattractive

Evolving

Attractive

Enactment of patent protection laws has reposed the confidence of global pharma MNCs in the Indian market Impact

• Implications on Global Pharma

Change in Patent Law

• Capitalize on growing market in India • Shift/Outsource manufacturing and R&D to India to capitalize on low cost, manpower advantage and existing experience

Patent Act 2005

• Product Patent Patent Act 1970

• Process Patent •

•

•

5 yrs. for Food, Drugs, Medicines, etc. & 14 yrs. for other inventions Focus on Generics and Neglect of New Drug Discovery Development of Expertise in Reverse Engineering

•

20 yrs. for all inventions

•

Reversal of Law in case of violation of Patent from Plaintiff to Defendant

•

•

MPCs to enjoy same IPR in India as they enjoyed elsewhere Shifting of focus from Generics to Innovative Drug Discovery

• Compete with Indian players in the domestic formulation market

• Penetrate the emerging market for lifestyle drugs

• Implications on Indian Pharma Industry • Reverse engineering no longer an option • • • • •

for Indian market Increased competition from global players in domestic formulations Need to penetrate further in generics market in regulated countries Increase investment in R&D Consolidate to compete Build / buy facilities abroad to augment market reach and reduce risk

The Indian Government is further proposing initiatives to enable growth of the pharma industry… Previous Drug Regulatory System • India had a bifurcated drug regulatory system. Regulatory functions were divided between the Centre and State authorities • The existing infrastructure at the Centre and the State was inadequate to perform the assigned functions of drug administration with efficiency and speed • Main Objectives of this policy were – Ensuring abundant availability at reasonable prices of good quality essential pharmaceuticals of mass consumption – Strengthening the indigenous capability for cost effective quality production and exports of drugs

New Regulatory System • The Central Cabinet approved the formation of Central Drug Authority (CDA) in January 2007 • Proposed organizational structure of the CDA would be analogous to the US FDA • Strong, well equipped, empowered, independent and professionally managed body • Expected to facilitate upgradation of the national drugs regulator, uniformity of licensing, and enforcement and improvement in drug regulations • Efficiency and efficacy of drug administration is expected to be much higher post this transition

•Responsibilities of Central Drug Regulatory -

Regulatory affairs and environment New drugs and clinical trails Medical Devices & Diagnostics Organizational services and Training & Empowerment Quality control affairs and Legal & Consumer affairs

…and Pharma Special Economic Zones (SEZs) are a key step in that direction Discussion

• Many big pharma companies and biotech players like Ranbaxy, Wockhardt, Dr Reddy's, Lupin, Jubilant, Biocon, Divi's Lab, Zydus and Nicholas Piramal already have their presence in SEZs

1* 1*

• Gujarat with its growth enablers and strong building blocks seems to have all the ingredients to become a global pharma hub

• Dr Reddy’s will be setting up a Special

2*

Economic Zone for Active Pharmaceutical Ingredients (APIs) in the Ranga Reddy district with USD 25 million

3*

• In Andhra Pradesh, investments in the

2*

3*

5*

1*

*Note: Number of Pharma SEZs

biopharma sector could cross USD 450 million during the next three years generating employment opportunity for about 50,000 people

Influx of outsourced work from global pharma companies has given the necessary impetus for creation of Special Economic Zones (SEZ) SEZ: Benefits to the pharmaceutical industry

I Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. II SEZs are defined as "specifically delineated duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs"

• SEZ setup will provide single window clearance for global pharma companies and initiate speedy approvals for business • SEZ setup will also encourage foreign direct investment in India • Sector-specific SEZs offer infrastructure required by the biotech and pharmaceutical companies such as dedicated large scale R&D facilities • SEZ units have been exempted from the requirement of import licence, import registration and import through notified ports with respect to drugs and cosmetics.

India has been witnessing offshoring/ outsourcing of processes under the entire spectrum of drug development value chain

Development Research

Discovery

Product launch Phase Phase Phase PreII I clinical III

Target/ Lead identification

Lead generation and optimization

Drug registration

Data Management, Site Management, etc.

Manufacture

Marketing/ Phase IV

Commonly outsourced

Complexity Level

Vendor Landscape in India

Low

Average

Good

High

Very High

30

Offshoring of clinical trials and exploration of opportunities in discovery research is the key trend in pharmaceutical R&D offshoring to India

Offshoring Trend

Process

Trend

Discovery Research

• Most Pharma companies have started work in discovery research with Indian vendors. A few others have already started exploring opportunities

Pre-Clinical Trials

• Yet to pick at mass level because Government of India regulations have restrictions on animal trials of new chemical entity discovered outside India • This process has been offshored to a large degree and has more or less gained maturity. • Almost all studied Pharma companies offshore either of the Phases of clinical trials to Indian CROs

Clinical Trials

• Phase 2 and Phase 3 clinical trials get offshored the most • The offshored clinical trials are part of the global clinical trials and are multi-centric in India • Typically 15-50 patients are studied per center depending on disease and trial phase • Deal size of these clinical trials can vary between USD 0.5 million to USD 1 million or even more

Clinical trials industry in India is set to grow at a CAGR of 31 percent to become a USD 608 million industry by 2012 Growth of Outsourced Clinical Trials Market in India (2005 – 2012)

Market Size (in USD million USD)

Discussion

G CA

R

~

31

%

• About 80 government and private hospitals in India are participating in international clinical trials • Drivers – Conducting clinical trials (such as Phase II & III) cost as much as 60 percent less than in the U.S. – A large pool of drug-naïve patients, from multiethnic and multiracial backgrounds – India has about 700,000 hospital beds which along with more than 200 medical colleges makes it an attractive location

Indian Pharmaceutical M&S* outsourcing market is currently a USD 100 million market and is expected to grow at a CAGR of 36 percent till 2012

Market Size (USD million)

Indian Pharmaceutical M&S* outsourcing market

6%

CA

3 GR

Year

* Marketing and Sales

Pharma Contract Manufacturing in India was a USD 590 million market in the year 2007 and is expected to grow at a CAGR of 15 percent

Market Size (in USD Million)

Growth of Indian Pharma Contract Manufacturing (2005 – 2010)

5%

-1 GR A C

Discussion • Global Contract manufacturing is estimated to be USD 30 billion by 2012, growing at 10-12 percent • Contract manufacturing market for global companies in India would touch USD 900 million by 2010 • Manufacturing costs in India are between 30 and 40 percent lower than those in the United States and Western Europe and labor costs are oneseventh of that in the United States

Basic production cost in India is up to 50 percent lower than that in the U.S. Discussion India’s Cost Arbitrage

• FDA approved plants can be constructed in India at 30 – 50 percent lower costs

100

• Higher utilization of equipment due to improved processes

Product Cost Per Unit

• 85-90 percent manpower cost savings • Labor costs in India is typically 10-15 percent of the cost in the USA 50

• Savings applicable across all hierarchal levels (e.g., operators, research scientists, etc) • Improved, more efficient processes contribute to lower labor costs per unit

Production costs in India are 40 to 50 percent less than that in developed markets, primarily due to lower personnel and capital costs

Comparison of Captive set up cost in New Jersey, the pharmaceutical hub in USA… Break up of Total Cost in New Jersey 1879 943

USD ‘000

5112

1526.5

0

2400 7000

Elements

Note: 1. The above costs are for an employee Size of 100 2. The per sq.ft assumption per employee is 150 3. The cost calculated is for the first year of operation

205

140

25.8

19230

…with the Captive set up cost in Mumbai…

Break up of Total Cost in Mumbai

2400

669

643

436

243

USD ‘000

7000

Elements

Note: 1. The above costs are for an employee Size of 100 2. The per sq.ft assumption per employee is 150 3. The cost calculated is for the first year of operation

202

186

140

157

12079

Just over 50% of the respondents believe the current economic downturn and credit crunch has increased interest in outsourcing.

India still leads by a long way in terms of organisations first choice for an offshoring destination. The top two drivers are the availability of skilled workforce and India’s existing track record.

• Another important reason to outsource is- the time to market. • The clinical trials consume the maximum time in a drug development process that lasts for anything from 10-15 years or more. • Since a patent lasts only for 20 years, saving a year in time could lead in a pharmaceutical company making billions of dollars.

Which is where India comes in. • It has a large patient population and • the population is across diverse gene pools (unlike China or any European country), something that regulators keep insisting on.

T op A sia Offshore Destinations

Conclusion India has advantage because of its low cost labor Skilled work force Good track record Diverse gene pool enabling better clinical trials Good command over english Govt. support (SEZ’s) CSIR and DST provide financial support thruogh TEPP programme

“Outsource everything except your soul….” Tom Peters

• German pharma firm Altana has built a new state-of-theart drug discovery lab in suburban Mumbai, joining the firm's research campuses in Boston and Constance, Germany. • It will focus on early drug discovery for gastrointestinal and respiratory diseases as well as oncology. • access to local scientific talent was one of the primary reasons AstraZeneca chose to open a full-service $10 million tuberculosis drug discovery outpost in Bangalore in 2001