CONTRACT RESEARCH OUTSOURCING: OPPORTUNITY IN INDIA Tuesday, 11 November 2008 Soaring drug discovery development costs and timelines,

prolonged regulationmandated 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 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 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.

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 1990s, contract 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 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

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 Parameters In-house Models (Captive Center) Outsourcing Models Collaborative Models

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

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

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.

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 * Cost advantages * Large pool of highly trained manpower. * 2nd largest number of U.S. FDA approved facilities. * TRIPS (Trade Related Intellectual Property
Rights) compliance.

Weaknesses * 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.

* Lower operating costs. * Growing biotechnology industry. * Reverse engineering skills. * Largest number of Drug Master Files. * Bio-diversity.

* FDI growing at 100 percent. * Strong IT skills for research data management. * Strong marketing and distribution network. * 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 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. 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.

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 with traditional approaches focused on developing talent from internal departments to focus more on to achieve industry goals.

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