On the Move: Pharmaceuticals R&D in Asia (Part Three)

India, China and Singapore are in direct competition with Europe, the US and Japan where many pharmaceutical Multi-National Corporations (MNCs) are already well established in the latter countries.

For a Western company, the question of where to settle or invest, or to collaborate is often difficult to answer and depends on many factors. However, the answer often means that the company needs to be active in all three Asian countries.

Compare & Contrast
An attempt has been made to compare pros and cons of China, India and Singapore in general (Figure 4).

Comparing only India and China, each country offers different advantages despite having general similarities. Both countries' capabilities are still not uniformly "world-class" across the R&D value chain. However, this may change in a few years.

(Figure 5)

Some of the best opportunities in both countries are chemistry-based activities and clinical trials. In terms of chemical activities, India has more complete services in CM&C (Chemistry, Manufacturing & Control), including formulation and analytical services, up to full development for international filings.

Typically, many Active Pharmaceutical Ingredients (API) companies in India do not have a significant understanding of biology and the management of microorganisms. Preclinical and biological capabilities are opportunities in both countries, with China outpacing India in innovative biology.

In general, China is stronger in biology and is rapidly improving its skills. It has been the only country in the developing world to participate in the International Human Genome Project. Through investments, Chinese companies can now produce hepatitis vaccines, recombinant insulin, interferon and other generic therapeutic biologics.

While India's biotechnology sector is growing rapidly, its emphasis is still on vaccine production and bio-services.

China is strong in fermentation technology. State investments have changed the landscape in China, thwarting Indian attempts to progress in bio-generics. India has lost out in the fermentation business, such as Pen G, 7-ACA etc, to China, also due to the latter's lower energy costs.

China has adopted large capacity expansion and has captured the global market with aggressive pricing. Power interruptions, which are common in India, are fatal for fermentation. Government support for pharmaceutical R&D in general is also comparatively stronger in China.

On the other hand, India has a broader vendor base (which is also directly accessible - often not the case in China), a workforce fluent in English and more effective IPR protection.

Indian companies have the strongest appetite for acquisitions and the least for divestments. About 48 percent of Indian companies are considering acquisitions compared to 31 percent in Singapore and just 17 percent of Chinese companies.

In contrast, 46 percent of Chinese companies and 44 percent of Singaporean companies are open to foreign investments in their companies compared to just 20 percent in India, according to PriceWaterhouseCoopers.

Protecting Intellectual Property
Firms in India and China are important suppliers of low-priced APIs and finished products to international markets. A concern is that the introduction of product patents will adversely affect these industries and lead to an increase in drug prices in the importing countries.

However, the impact of the current patent regime is much broader: besides access to new medicines in India and China, changing IPR is influencing the business strategies of Indian and Chinese firms. It is providing an incentive for them to invest in R&D to improve their products and rankings in the marketplace.

IPR also affects Western MNCs that are operating in these countries. The IPR situation in China is still perceived as "tricky". MNCs are establishing or expanding their presence in China to allow themselves to test the conditions of the market and to build relationships for the future.

Many of the local engagements remain focused on discovery research activities, with an avoidance for projects that are considered "sensitive" from an IPR standpoint.

India still has a reputation of relatively weak IPR protection. However, pharma companies are now bringing more "sensitive" projects to India, indicating that there is growing confidence in the country.

While being perceived as an issue, IPR protection is a decreasing barrier to offshoring R&D activity. R&D activities like chemical and pharmaceutical development, are generally less affected.

To illustrate, up scaling and optimizing an API manufacturing process for a New Molecular Entity (NME), formulation development, analytical method development and validation as well as running analytical stability studies are all activities which typically happen in the later stages of the R&D process. This is after the patent protection of a new molecule has been completed.

With proper contractual agreements in place and the careful selection of a reputable vendor, IPR risks may be effectively managed. For major pharmaceutical firms (especially in India) that are working towards establishing themselves as significant players in the international pharma market, infringing on the intellectual properties of the customer will not be in the best interest of the service provider.

India has a more mature legal system for IPR protection than China, but significant practical issues still exist in both countries. While the risk for legal aspects such as the patent registration process, patent law coverage/protection and information disclosure requirements by customs/government in India is considered low, it is at least moderate in China.

The risk for practical aspects such as law enforcement/legal system efficacy and support of overall environment (IPR track record, governmental policy, business environment and culture) ranks moderate in India but high in China.

The Boston Consulting Group has summarized its findings in a study (Figure 6).

Offshoring Clinical R&D
Globally, the clinical research outsourcing market was estimated by Merrill Lynch to be at US$12.3 billion in 2007. This market is expected to reach US$23.1 billion by 2011. The Indian clinical research market was estimated by Cygnus Industry Insight at US$200 million in 2007 against US$140 million in 2006, and a mere US$70-80 million in 2001-2002.

As of 2007, about 100,000 clinical trials were underway around the world, involving at least as many physician investigators and more than two million participants. This is a substantial increase from a decade ago, when the number of trials was less than two thirds of this figure.

The increase can be attributed to several factors. For example, the increasing data requirements from regulators; greater use of lifecycle management such as indication expansion (requiring clinical tests); and the ongoing development utilization of data collection and management technologies that enable larger scale testing.

As the number of trials increases, their sizes are also growing. According to the US Food and Drug Administration (FDA), patient volumes have risen by about 25 percent from the early 1990s to about 4,500 volunteers per New Drug Application (NDA) in 2006. This increased size and volume translates directly into a greater need for more patients.

At the same time however, rising levels of consumer medication consumption are making it more difficult to identify potential study subjects who are not taking medicines that could interfere with the action of the drug that is under investigation.

The result is that clinical trial recruitment in the West now consumes about 30 percent of overall clinical trial time and up to 40 percent of clinical trial costs - more than any other activity associated with clinical testing.

MNCs have concerns about the escalating new drug development costs. Clinical trials now cost as much as US$5,000, US$6,500 and US$7,600 per patient for phase I, II and III respectively, according to Datamonitor in 2008.

This situation has led to the expectation that within the next two to three years, up to 65 percent of the studies that are regulated by FDA and sponsored by MNCs will be conducted outside the US, with Asia being a key destination.

Many researchers and pharmaceutical companies are beginning to look at China's and India's massive populations as an asset for clinical trials. Emerging diseases such as Severe Acute Respiratory Syndrome (SARS), and medical conditions that are particularly prevalent in China - such as diabetes and hepatitis - present an opportunity to make rapid advances in clinical research.

Furthermore, still relatively few Chinese and Indians have access to medicines (drug naive patients), which makes it more straightforward to test drugs without having to worry about interactions with other compounds. Meanwhile, the widely introduced Good Clinical Practice (GCP)/Good Laboratory Practice (GLP) guidelines and other Western regulations in most Asian countries are another pull factor.

As to the cost of clinical studies, testing in China is reported to be only one third of the cost of trials in the Western world. However, the downside is that Chinese regulators typically take as long as a year to grant companies permission to conduct clinical trials (compared with just two months in Singapore).

In regard to clinical trial capacity, there were 205 institutions that were accredited in China to conduct clinical studies as of 2006. The number of State Food and Drug Administration (SFDA) approved multinational clinical studies in China has also gone up from zero in 2002 to 53 in 2007.

There are however, some factors to consider in any offshoring decision. Drugs which are not already commercialized in any other country have to pass clinical tests from phase I to phase III in China.

In addition, if a drug has not passed phase I in another country, approval will not be given for conducting its clinical trials in China. Drugs which have already been marketed in a different country can skip phase I/II in China - but only if phase I/II had been carried out in East Asia (eg, South Korea or Japan) - otherwise a retesting may be required in China.

What about India? McKinsey estimates that by 2010, global pharma majors would spend around US$1-1.5 billion just for drug trials in India. Big pharma companies like Novo Nordisk, Aventis, Novartis, GlaxoSmithKline, Eisai, Eli Lilly and Pfizer as well as international Contract Research Organizations (CROs) like Quintiles, Covance, PPD, Parexel, Icon, Omnicare, and Clintec have commenced clinical drug trials across various Indian cities.

CROs which compete with each other to provide clinical trial services for pharmaceutical companies, are mushrooming across India. US companies are acquiring Indian CROs and turning them into hubs for clinical research activities.

India currently participates in about one percent of worldwide biopharmaceutical clinical trials, involving 757 sites, according to an article in Nature Reviews Drug Discovery. However, its average relative annual growth rate is nearly 20 percent. There are hurdles that need to be overcome as well. At the federal level, the central ethics committee at the Indian Council of Medical Research issues guidelines but has limited policing power. There are plans underway to convert the current ethics guidelines into law.

In 2005, the government of India enacted a rule that allows foreign pharmaceutical companies to conduct trials of new drugs in India at the same time that trials of the same phase are being conducted in other countries.

This rule supersedes a directive of India's Drugs and Cosmetics Rules that required a "phase lag" between India and the rest of the world. According to the older rule, if a phase III study had been completed elsewhere, only a phase II study was permitted in India. Even under the newer laws, only those drugs that have already passed phase I safety trials in the country of their origin can be tested on Indians.

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Playing Rules in Competition

Ulf Nehrbass, CEO, Institut Pasteur Korea

When it comes to technological development, competition is a major driver of progress. In Asia's more centralistic approach, the general notion is that there is too little competition to start with.

There are however, two sides to the coin: In a well-funded system, competition is a source of motivation and helps in the testing of the validity and robustness of alternative approaches and ideas - it functions as a check point by scrutinizing actual results.

By contrast in a less well-funded system, competition can give rise to problems, with researchers competing for professional, financial and social survival - creating an environment that is toxic to innovation.

The size of the playing field is another important factor: In a country like the US, the duplication of efforts between laboratories and institutions is affordable and desirable, whilst in Asia, it easily amounts to a waste of resources. More importantly, competition requires a mature set of "rules of game," allowing a switch to cooperation where needed, particularly pertaining to national interests.

If it is taken out of context, competition can become a liability. To yield benefits, it has to be administered in careful doses. On the side of decision makers, there should be clear road maps of how cooperation can lead to win-win situations.

By sharing expensive R&D technologies while working on distinct disease areas, Asian pharma can afford the resources to remake itself into an innovative industry. Instead of competing within the region, it should aim to collectively compete in the international arena.

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Part four of this series will be featured in the January/February 2010 issue of PharmaAsia and will look at the various business models that are adopted by MNCs.