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

The focus of the global pharmaceutical industry is shifting, with Asia set to be the largest pharmaceutical market in the world. With the expansion of low cost manufacturing in the region, companies are seeking to site research, development, analytical services and clinical trial activities in Asian territories.

This reflects both increased capabilities in the region and a changing business model for pharmaceutical Multinational Companies (MNCs). The view that the center of the industry is moving away from North America and Europe and towards Asia is shared by MNCs and Asia-based companies alike. About 50 percent of MNCs agreed with that statement and less than a quarter voiced any disagreement with the prospect of such a shift, according to Price WaterhouseCoopers.

Relocation

Historically, the pharmaceutical industry has been slower to embrace offshoring. However, this trend has started to change with significant movement towards global sourcing over the last few years. Unlike many other industries, the pharmaceuticals sector is uniquely positioned to remotely execute one of its core competencies, ie, R&D, which represents 74 percent of offshore employment.

Part of that change is the recognition that one of the key challenges of the biopharmaceutical industry is to improve R&D productivity. Organizations are targeting the drivers of cost and value, aiming to increase R&D productivity through a series of lines of attack – offshoring is one such approach.

For reasons such as strategic importance and market size, the Asian countries of choice are particularly China and India.

India, China and Singapore are poised to become leading countries in the Asia pharmaceutical space – other territories, notably South Korea, Malaysia and Thailand are also building domestic pharmaceutical bases although the MNCs currently dominate these markets at this stage.

The Boston Consulting Group stated in 2005, that for the top ten MNCs, total sales in China during 1999-2004 registered a compound annual growth rate of 15 percent. By the year 2010, China will probably have leapfrogged major European markets to become the world’s fifth-largest national market for pharmaceuticals, with sales likely to reach US$25 billion – almost double the current total.

Many MNCs are intensifying their market efforts by investing in commercial operations. A main reason for investing in R&D activities in China and India is the cost factor. These companies face increasing developmental costs (more than US$1.0 billion) while being pressurized from health authorities to decrease prices. This has given rise to a cost-driven shift towards outsourcing to low-cost countries, in particular to Asia.

Pharmaceutical MNCs from a variety of industries expect that just relocating lab work and even more clinical trials from the West will reduce bills, rentals and overhead by half.

Trade-Off

There are however, other factors to consider. Offsetting costs arise from relocating the necessary existing staff, importing equipment and supplies, and maintaining equipment. This is in addition to the impact of possibly lower productivity and security, differences in technical practices, regulatory and legal requirements, culture and language.

However, cost savings alone are not the primary consideration for the pharmaceutical industry. Because of the expected rise in wages of highly-skilled employees, the increasing costs of support functions and compliance in Asia, focusing on cost advantage is a shortsighted view.

The true value of conducting R&D in India and China lies elsewhere – as a strategic lever for helping companies to achieve their Asian ambitions. When MNCs conduct such activities in India and China, they have the opportunity to increase their own visibility and reputations. This will help them to shape these domestic health-care markets and to consolidate their own market share.

Another aspect is the huge and expandable talent pool. In addition to having a huge output of high-quality locally trained scientists, India and China have an impressive and steadily increasing number of scientists. These skilled labor have returned in recent years with master and doctorate degrees that were earned overseas.

The fact that the Intellectual Property Rights (IPR) situation was adapted to international standards (India recognizing full product patents on pharmaceuticals in 2005; China’s entry into the World Trade Organization, WTO, in 2001) has further enhanced the dynamics in setting up a strategic R&D presence of pharmaceutical MNCs.

In summary, most of the pharmaceutical MNCs move East for the following reasons: strategic presence facilitating growth in emerging huge markets; cost savings; capacity constraints in the West; and developing products in close proximity to local markets.

About 80 percent of the Active Pharmaceutical Ingredients (APIs) for drugs that are made in Europe, are manufactured in India and China. In addition, 30 percent of bulk drug manufacturing – worth around US$31 billion, and US$25 – US$30 billion for pharma R&D are outsourced by major global players, according to the Economic Times, India in 2008.

“Big Pharma” Challenges – Reasons for Heading East

The challenges that are faced by current Big Pharma companies can be summarized as:

• Increasing cost of drug discovery & development due to:

- Tougher regulatory demands.

- Competition for patients.

- Larger clinical studies.

- High rate of failures.

- New technologies not yet paying out (eg: genomics).

- Longer development timelines.

• Increasing time-to-market. For instance, a delay in the launch of a drug can cost a company up to US$23 million per day in terms of lost sales in the US alone, and almost US$37,000 per day in terms of additional development costs, according to Datamonitor, 2008.

• Impending patent expirations of blockbuster molecules. For example, a large percentage of Big Pharma revenues are at risk as drugs that worth US$47 billion are expected to go off– patent in the US alone over the next 3 years.

• Pricing pressure in the US and Europe (by the government to reduce health care costs).

• Increased penetration of generics.

• Considerable reduction in the numbers of new product approvals. In 2007, the US Food and Drug Administration (FDA) approved just 19 new drugs, the lowest in 24 years.

• Low public opinion.

• Increasingly aggressive generics companies.

• Re-importation pressures.

In consideration of these issues, MNCs need to radically rethink their strategic options and business model, ie, ways to maintain revenue, increase productivity, and lower unit costs.

Offshoring R&D has already proven beneficial and even essential in comparable high-skill industries such as the software industry. Global resourcing of R&D can help pharma companies to unlock productivity gains.

R&D offshoring can serve a number of purposes. It can help to improve global cost structures and counterbalance reduced growth rates in the West via:

• Early access to emerging markets

• Supporting MNCs’ sustainable growth in big Asian economies

• Accelerating launches, eg, by tapping into large and naive patient populations

• Faster enrolment into clinical studies

• Building new growth platforms

• Capitalizing on Asian talent pools and innovation potential

• Utilizing “reverse brain drain” by hiring returnees in their respective Asian countries

• leveraging on highly developed IT and bioinformatics (India)

India as an Offshoring Destination

There are three area’s of concentration of Pharma R&D (service) activities in India: Mumbai, Hyderabad and Bangalore.

India has a highly developed and relatively mature domestic pharmaceutical industry, which is still mainly geared towards generics. Although most advanced Indian companies continue to strengthen their generics franchises and are on their way to become global players, they have set off to change business models and strategies towards New Molecular Entity (NME) development.

The strong interest of Indian pharmaceutical companies in collaborations and alliances with Western MNCs offers opportunities to create “win–win” situations for both parties. Substantial cost advantages for Western pharmaceutical companies by doing business in India are only one benefit for MNCs.

Indian companies are not just offering world-class manufacturing services, both in finished products and in particular in API sector, but also in R&D.

For medicinal chemistry work within the R&D sector, chemistry process research and clinical testing have been the strongest areas. However, chemical and pharmaceutical development including comprehensive analytical services is also emerging.

Up till now, Indian companies have focused on developing drugs “faster and cheaper” and on deploying their capabilities in chemistry research, clinical trials and manufacturing oral solids. The second phase, expected over the next five years will extend capabilities to include the complex manufacturing of injectables, clinical trials (including proof of concept trials), and more sophisticated biology-based research platforms.

The third lap will likely occur between 2013-2015, when Indian companies are expected to start manufacturing biologics and offer cutting-edge R&D platforms such as cheminformatics.

These activities (including achieving the respective cost advantages) can be accomplished by various operating models: Collaboration with Contract Research Organizations (CROs) / Contract Manufacturing Organizations (CMOs), joint ventures between Indian pharma companies and Western MNCs and MNCs that are setting up their own facilities.

Better Intellectual Property Rights (IPR) protection, an English speaking workforce, a relatively small time difference with Europe and political stability are additional supportive factors for MNCs to set up their own offshoring R&D capabilities in India, or to collaborate with Indian companies.

For chemical and pharmaceutical development activities in full Good Manufacturing Practice (GMP) up to pilot scale, India is by far the preferred Asian destination.

There are however certain disadvantages in investing in India:

- Lack of attractiveness for expatriates.

- Less developed infrastructure.

- Generics mindset.

- A lack of certain skill sets (quality assurance, maintenance).

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Part two of this series will be featured in the October issue of PharmaAsia and will focus on the Chinese market.

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