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, in-
house 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

R&D expenditure off shored to China
USUSD 8 Billion USUSD 0.375 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:

Pre- Clinical Process Drug Dosage Dosage
Discovery clinical Develop- Substance Form Form Packaging/
Research Develop- Develop- Produc- Develop- Produc-
ment Assembly
ment ment tion ment tion

Pharmaceutical Drug Substance Formulated Drug

R&D Supply Supply

30-35 ~50 60-80

(in $ bn)

Source: Dow Report, AD Little, Cardinal Health

 Choosing the Right Partner in India;
a Selection Model

QUALIFIERS DIFFERENTIATORS

 Global Interests
 Speed
 Ownership pattern
 Costs

Final Partner
 Regulatory
 Communication
Compliance
 Project Management
 Financial Stability
 Track Record
 Understanding IP
 Understanding the
 Reporting compliant
West
 Capability &
 Staff Quality
Infrastructure
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

Czech
India Ireland Russia China Philippines
Republic

Infrastructure • Besides IT and engineering services, India has a

large talent pool to cater to the demands of
Educational
System pharmaceutical outsourcing services

Cost Advantage
• The cost of conducting research in India is about
(relative to high 20–30 percent of the costs in the developed world
cost countries)
• Over the next five years, India is likely to mature
Language further as a provider of services across the drug
Compatibility development spectrum:

Overall - Discovery, research, pre-clinical, clinical,

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
Change in Patent Law
• 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
Impact
• Implications on Global Pharma
• Capitalize on growing market in India
• Shift/Outsource manufacturing and R&D
to India to capitalize on low cost,
manpower advantage and existing
Patent Act 2005 experience
• Compete with Indian players in the
domestic formulation market
• 20 yrs. for all inventions
• Penetrate the emerging market for lifestyle
• Reversal of Law in drugs
case of violation of
Patent from Plaintiff to • Implications on Indian Pharma Industry
Defendant
• Reverse engineering no longer an option
• MPCs to enjoy same for Indian market
IPR in India as they • Increased competition from global players
enjoyed elsewhere in domestic formulations
• Need to penetrate further in generics
• Shifting of focus from market in regulated countries
Generics to Innovative • Increase investment in R&D
Drug Discovery • 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
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

and the State was inadequate to • Strong, well equipped, empowered,

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
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,
1* Zydus and Nicholas Piramal already have
their presence in SEZs

• Gujarat with its growth enablers and strong

1* building blocks seems to have all the
ingredients to become a global pharma hub

2* • Dr Reddy’s will be setting up a Special

Economic Zone for Active Pharmaceutical
Ingredients (APIs) in the Ranga Reddy
district with USD 25 million
3*
• In Andhra Pradesh, investments in the
biopharma sector could cross USD 450
5* million during the next three years
2* 3* generating employment opportunity for
about 50,000 people

1*

*Note: Number of Pharma SEZs

 Influx of outsourced work from global pharma
companies has given the necessary impetus for
creation of Special Economic Zones (SEZ)
SEZ: Benefits to the
I pharmaceutical industry
Special Economic Zone (SEZ) is
a geographical region that has • SEZ setup will provide single window
economic laws that are more clearance for global pharma companies and
liberal than a country's typical initiate speedy approvals for business
economic laws. • SEZ setup will also encourage foreign direct
investment in India
II
• Sector-specific SEZs offer infrastructure
required by the biotech and pharmaceutical
SEZs are defined as "specifically companies such as dedicated large scale
delineated duty-free enclave and R&D facilities
shall be deemed to be foreign • SEZ units have been exempted from the
territory for the purposes of trade requirement of import licence, import
operations and duties and tariffs" 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
Pre- Phase Phase Phase Drug
clinical I II III registration
Target/ Lead Lead generation Manu- Marketing/
identification and optimization Data Management, facture Phase IV
Site Management, etc.

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

Process Trend

• Most Pharma companies have started work in discovery

Discovery Research research with Indian vendors. A few others have already
started exploring opportunities

• Yet to pick at mass level because Government of India

Offshoring Trend

Pre-Clinical Trials 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)

Discussion
Market Size (in USD million USD)

% • About 80 government and private hospitals in

31 India are participating in international clinical
~
R trials
G
CA • 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

Indian Pharmaceutical M&S* outsourcing market

Market Size (USD million)

36%
GR
CA

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

Growth of Indian Pharma Contract Manufacturing

(2005 – 2010)
Discussion
• Global Contract manufacturing is estimated to be
USD 30 billion by 2012, growing at 10-12
5% percent
-1
GR
Market Size (in USD Million)

C A
• 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 one-
seventh 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

• 85-90 percent manpower cost savings

Product Cost Per Unit

• 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 140 25.8 19230

943 205
1526.5 0
5112

2400
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
 …with the Captive set up cost in Mumbai…

Break up of Total Cost in Mumbai

140 157 12079

202 186
436 243
643
669
2400

7000
USD ‘000

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
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-the-

art 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