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

One of the key decisions that needs to be made by a company that is aiming to establish a presence in Asia, is to choose the optimal business model. Each model will perform differently under different conditions. Any given project or R&D area might lend itself to a certain model. So the model of choice will be determined mainly by the nature of the activity.

Mode of Operation

For example, clinical trials may be safely outsourced to a reliable vendor, whereas full scale Good Manufacturing Practice (GMP) chemical and formulation development requires an investment in equipment and staff and be operated to Western GMP standards. The decision on the model is likewise determined by:

• Country (China vs India vs Singapore);

• Nature of the company;

• The company’s objectives and long-term goals;

• The degree of flexibility needed;

• Intellectual Property Rights (IPR)

• Risk tolerance;

• Available budget;

• Existing engagement in the respective country

MNCs have tried a number of different approaches. The following business models have emerged as the main options:

1. Captive R&D Center

Key Features:

• MNC operates at a fully owned site

• Large investment and limited flexibility

• Full control over IPR, talent and know-how

This model represents the most serious and committed presence in any offshoring destination. It is however vulnerable to problems with planning and construction permissions, red tape issues in general and has limited flexibility.

One way of mitigating these challenges might be to start with a joint venture in order to obtain assistance from a local partner on how to operate in the country. After the joint venture contract and relationship expires, the MNC takes over or alternatively buys out the partner.

2. Partnership

Key Features:

• Partnering with a local provider who acts on behalf of the MNC and returns the project to the MNC after the respective work is done

• Moderate investment and greater flexibility

• Easy access to local talent

• Limited IPR control

This model can help to ease capacity constraints, and leverages on the partner’s experience in managing local red tape – however intellectual property could become compromised.

3. Build-Operate-Transfer (BOT) Model

Key Features:

• After forming an alliance with a local company, the latter hands over facilities and workforce at an appropriate time.

• Investment is spread out over time.

• Fast access to local talent and managing red tape via local ally.

There is good track record of this model in other industries. It allows the MNC to test local methods of getting work done before undertaking the risk of setting up its own full-fledged center.

4. Third-Party/Vendor–Based Outsourcing

Key Features:

• Outsourcing of selected activities to third party providers

• Almost zero investment

• High degree of flexibility

• Know-how transfer and IPR risk limited

This is the least risky and most careful approach to offshoring, particularly useful for well-defined, less complex activities (eg, stability testing). However it is also limited in insights regarding the respective country and is limited in terms creating a strategic presence.

In practice, there are also various kinds of hybrid models. An MNC might migrate in two stages, eg, from a vendor-based to a captive business model.

The alternative to these four options is the “waitand- see” approach. This is not considered a real model by definition and does not describe a concrete course of action with respect to offshoring. Waiting and holding off from any involvement or extension of involvement until conditions improve, bears the risk of lost opportunity.

The location and city selection is an important aspect as well. Key factors are eg, the ability to attract talent, cost aspects (land, workforce), clustering effect, proximity to MNC’s headquarters, proximity to authorities, etc.

In China, Shanghai is the city of choice for R&D centers, followed by Beijing (largest number of institutes and universities), Guangzhou, Tianjin and Hangzhou. In India, the focus is on the Mumbai / Pune area, Hyderabad and Bangalore.

Making a Choice

In terms of pharmaceutical offshoring, China and India generally require different business models. The characteristics of each country translate into certain preferences for the choice of the operating model.

In China, the preferred business model seems to be the captive center. The existence of a captive site indicates an MNC’s commitment. This is more than just symbolic as it encompasses visibility, establishing the brand name with patients, doctors and authorities, and eventually translating into sales.

Chinese officials like to see technological advancements in their country – which may be best achieved by a captive center. It is viewed as one of the ways to assist Chinese R&D institutions and vendors to move along their learning curve by demonstrating international best practices and inspiring local R&D providers. This model is favored by Chinese officials and may be instrumental in influencing regulatory and pricing policies as well as tighter IPR protection.

Pertaining to chemical and pharmaceutical R&D in India, which is currently more advanced and mature than China’s – the vendor-based, uncomplicated, “arm’s-length” outsourcing model is more suitable. For example, by offshoring some of its “excess” leads, an MNC can quickly and cheaply ease its capacity constraints and leverage India’s wide variety of vendors, ie, both the large integrated domestic players and the myriad of ambitious smaller vendors.

It might be useful to illustrate some of the activities of selected MNCs, in particular with regard to their R&D business, by clustering them according to the business models discussed.

A number of wholly owned R&D centers in China are operated by:

• GSK with a total more than 2,000 employees including an over-the-counter R&D center in Tianjin);

• AstraZeneca has a US$100 million center in Wuxi, Jiangsu province. The company is also investing US$14 million in Wuxi PharmaTech;

• Novartis has a US$100 million R&D center in Shanghai;

• Roche has one of its five R&D centers in Shanghai;

• Novo Nordisk has a US$10 million R&D center in Beijing;

• Eli Lilly is an example of an exclusive partnership (with ChemExplorer);

• Others are Schering-Plough, Merck and Johnson & Johnson (joint venture Xian- Janssen).

Some of the most reputable Chinese vendors for vendor-based outsourcing are WuXi PharmaTech, ChemPartner, Medicilon, Shanghai Genomics, Dragonfly, Frontage and BioDuro.

In India, wholly owned R&D centers are associated with Altana, growing out of a joint venture with Zydus Cadila, setup in 2000 for API and clinical research. Novartis owns its International Clinical Development Center in India.

AstraZeneca set up a world-class R&D centre in Bangalore 2001. Sanofi-Aventis is carrying out major R&D in several therapeutic areas in its own facilities. Johnson & Johnson’s Analytical & Pharmaceutical Development Center for its pharmaceutical franchise is located in Mumbai.

Most MNCs maintain partnerships at various levels with Indian domestic companies and Contract Research Organizations (CRO) as well as performing API and drug product manufacturing in the country at their own plants or within a partnership.

Merck is an example for maturing its partnerships with Advinus and Nicholas Piramal in India and WuXi in China from simple outsourcing in the beginning, into preferred strategic partnerships later on.

Cross-Cultural Considerations

In terms of working with Asian partners, what works in North America and Western Europe may not necessarily work in Asia. Likewise, what holds true in one Asian country may not necessarily be valid in another. This applies to both work-related subjects and to cross-cultural behaviour.

Asian partners generally have a bold “can do” mentality combined with ambition and an eagerness to learn. They are enthusiastic about “proving themselves” and have hard-working employees.

On the flip side, this attitude has sometimes resulted in the “no problem” problem, ie, underestimating the complexity and difficulty of problems or the time that it takes to complete projects.

In particular with partners who have not been exposed to collaboration with Western companies before, the occasional “wait-and-see” mentality can occur. This eventually often leads to – at least in the settling-in phase of a collaboration – reduced efficiency.

While most of the scientists in India are well-educated, many have a background in pharmaceutical generics only. This means that it will take time to get them used to the new standards that are related to New Molecular Entity (NME) development.

A golden rule is to hear ≠ to understand ≠ to agree ≠ to execute ≠ to make execution repeatable and sustainable.

There are a number of steps that can be taken:

• Training: not just to teach, but to demonstrate before and on the job;

• Helping Indian / Chinese management structure to adjust to employee turnover, which is generally much higher than in the West;

• Make provision for sufficient internal resources for control/ coordination/training;

• Try to predefine the format, structure and expected content of any report in detail;

• Seed Asian organization with expatriates, at least for the start-up phase;

• Work on personal relationships and build trust to reduce cultural and hierarchical barriers;

• Do not rely solely on trust – proactive checks are helpful to avoid surprises;

• Meticulous project planning/tracking;

• Clearly define Rest and Recreation (R&R);

• Be patient;

• Ensure that concrete answers are given.

• China

In China there is little experience in development of NMEs (even less than in India). A Western company would normally require a broker or local affiliate to facilitate interaction with local suppliers and to overcome language and political barriers.

Typically, Chinese suppliers/companies are not responsive to direct enquiries. The use of a local MNC affiliate can aid in working through local issues such as language, laws, politics, etc. Language in China is still a constant barrier, especially in partnerships that rely on trust. Chinese returnees who are employed by the potential partner can be useful in facilitating contact and collaboration.

It is sometimes necessary to have local interpretations of national laws. It is also good to know is that local leaders can influence the speed and extent of development in their respective province or city. Almost unavoidable is the need to work with Chinese government to facilitate any business processes.

It still seems that with the right connections – termed as “Guanxi”, one can get things done more easily in China. The entry into the World Trade Organization was supposed to make China more of a rule-based system – where guanxi would have far less influence – and also improve its legal system to make its rules easier for companies to understand. Yet guanxi so far remains important in China.

In China, formality is an issue. Local partners do not always like the accompanying paperwork that comes with manufacturing. Although government bureaucracy is familiar to Chinese companies, the production of internal documents, follow-up reports, and regulatory approval documentation often do not receive the same level of attention.

• India

Success in India (and China) may be achieved if extensive, coordinated, consistent and prolonged cross-functional resources are provided by the MNC and if the latter is truly partnering with the Indian company of choice. Cost savings may only be realized after start-up issues get resolved and only if the potential supplier or local affiliate becomes fully operational – a timeframe of typically more than a year.

In India, there is fierce competition between companies to hire, train, and retain skilled scientists/employees. Company loyalty is low and it is common for employees to “job hop”. Government labor regulations can make it difficult to downsize or close down plants or R&D units. Inefficiency remains an issue – managers are spending an average of 14 percent of their time in dealing with government regulations, compared to eight percent in China.

The Indian government is offering limited financial incentives to pharma companies for investments although there is an increasing number of tax free zones that are being established throughout the country that provide tax relief.

There are differences between different Indian states. There is growing development in the number of industrial parks, often located in tax free zones, resembling the Chinese model.

The infrastructure in India is still weak compared with that of the West and also with Chinese urban areas. This pertains to road, rail, traffic and airports. Outages in electricity and the water supply are also common. The majority of companies have their own generators. The Indian government has launched programs to invest in infrastructure.

Legal concerns with IPR and confidentiality are not as dominant compared to China’s. India is multilingual and multicultural (Hindus, Muslims, Sikhs, etc). The official languages are Hindi and English. The culture values education and traditional family values. Foreigners need to be sensitive to religious or social differences. The caste system still plays a significant role in politics and business. Local decisions are made by local state government.

Benefits and Constraints

The pharmaceutical industry entered into the offshoring business later than many other industries. Pharma stands to benefit from such the opportunities that this business activity presents, since the real value lies not just in cost savings but also in the faster development of new compounds and in penetrating new markets. Enquiry code: 101E05

The global pharmaceutical industry is embracing offshoring and its general expansion towards Asia, ie, to potential markets and low-wage powerhouses like India and China. The reality of shrinking profit margins, drying pipelines, patent expirations, intense generic proliferation and increased R&D costs have made offshoring an attractive strategy.

R&D activities in particular, are a focus of MNCs. Next to conducting clinical trials (which make up 60 to 80 percent of a NME’s development costs) and API related activities such as chemical process research, increasingly, full end-to-end R&D activities are being set-up by MNCs in Asia. The applied business models are many, mostly by strategic partnerships, acquiring local companies, and by setting up wholly-owned R&D subsidiaries.

MNCs are also wary of offshoring sensitive and vital operations. There is low tolerance for errors; simple mistakes can compromise results, or even harm patients, resulting in massive and expensive liability.

On top of this, the cost of an unsuccessful partnership is more than just a financial issue, since the company loses crucial time and the opportunity of investing elsewhere. In offshoring (by outsourcing to a third party) there is also a loss of partial control to the provider.

Poor communication can lead to problems with quality and can result in delays. There are also concerns about intellectual property. Working across multiple languages and time zones adds to the complexity.

Nevertheless, given the objective constraints in the pharmaceutical industry, globalization and the importance of emerging markets, offshoring and expansion towards Asia is unavoidable, regardless of the means and business model.

The delivery of offshoring benefits requires sustained investment and the development of management experience. In particular, it is necessary develop endurance and adaptability to cross-cultural differences – in line with the pace of capability development in individual geographic Asian environments.

The offshoring of both R&D and manufacturing and other types of core and non-core competencies is becoming an integral component of sustaining profit levels.

There are few major pharmaceutical companies that do not already have pilot programs in place or plans to offshore sizeable components of their operations. Offshoring is expected to increase by 16 percent annually, driven by robust increases in the augmentation and relocation of both back-office and core processes.