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What drives CRAMS outsourcing of research in the chemical and pharmaceutical industry ?

In part I. of the article series we have discussed the political and macro-economical implications of outsourcing. In part II. we have covered market size of outsourcing in pharmaceutical research and manufacturing.

 The pressures on global pharma companies to outsource are growing for several reasons. An ageing population in the developed countries is straining healthcare budgets. To manage cost inflation in healthcare, most Western governments are looking for cheaper generics and lower cost drugs. The poor efficiency of the pharma R&D pipeline, “the epic problem –low productivity of the R&D pipelines”, despite R&D spending of 18% of revenues, as well as expiring patents for blockbuster drugs, put pressure on profit margins.  With new drugs becoming more difficult to develop, pharma companies cannot sustain large R&D spending unless new blockbusters are developed cheaper.

In 2011 Swiss market leader Roche has spent 9.1 bio USD for R&D which is 25% of total revenue of 27.1 bio USD[i], just to give a numbers what the global leaders in biopharmaceutical are spending in R&D.

What drives decision makers in pharma companies to outsource R&D and manufacturing activities ?  43% say the main reason was to focus on their core competences.

As Anthony DeStefano of Procter &Gamble Pharmaceuticals put it[ii], “In a general sense, the decision to outsource comes down to the organization’s capacity, capability and, given limited resources, its concept of core competency. Are there more projects in the pipeline than the company can handle, or do individual projects have more work than can be handled? Before deciding to outsource, it’s necessary to decide if the lack of capacity can be handled internally by increasing staff permanently or temporarily, or by automation of repetitive tasks. If the company doesn’t have the necessary skills and technologies to develop the drug, does it have the time and resources to hire or train new people? If not, then outsourcing can make sense.”

According to Rhonda Griscti, senior R&D director at Johnson & Johnson, “Cost will always be an important consideration, but quality, sustainability, growth potential, and consistent performance will also be critical factors.”[iii]

The types of partnerships that CROs make are also changing. While pharmaceutical companies used to contract work on single projects, there has been a shift to more strategic outsourcing.

According to a the 2012 annual outsourcing survey by ContractPharma journal[iv], the top reasons for chosing a contract lab are confidentiality, consistency of performance, CMP compliance, quality and timeliness of the services provided.

CMC (chemistry, manufacturing and controls) are less outsourced than pre-clinical research and clinical trials, according to Paul Stuart, VP at Pfizer “first is the lack of robustness of the capabilities of the external market in these areas. External providers for clinical research in general are far more sophisticated compared to their CMC development counterparts. Second is the perceived risk of missing the opportunity for knowledge capture gained from internal formulation and process development.”^[iii]

To judge how far the outsourcing trend has already progressed, 52% of the people interviewed (28% big pharma, 61% small/medium and 56% emerging biotech) say that they have outsources more than 50% of API production.

The same survey interestingly found that for next year a slightly declining trend for outsourcing is expected for top pharma companies.

Management of outsourcing is a much more complex process than that of internal R&D. While the selling of R&D is a well-advanced process, the buying of R&D is not. Many companies incorrectly regard this as a normal extension of their in-house efforts with little training being given to the R&D people who manage it. Alternatively, they consider outsourcing as part of the purchasing function.

Process in vendor selection in CRO outsourcing

The process of ‘buying’ R&D can be divided into the following segments²⁰ :

• The identification of potential partners
• Selection of a preferred partner
• Negotiation of a contract
• Management of the work
• Reporting of results

Identification of potential partners for contract research and manufacturing services is itself a complex process, with thousands of companies in the business of offering services.
Reflecting the complexity involved, some of the larger CROs are increasingly offering a wider menu of services (“one-stop-shop” outsourcing). However, the risk for the buyer in choosing such supermarket offerings is that the quality and value for money is not always equally high across all the relevant areas. The discerning buyer is better served by selecting different companies with expertise particular to the service sought.
Selecting, planning and budgeting for the use of a CRO are crucial for project success. CRO use continues to increase in the U.S. and Europe and yet customers continue to encounter difficulties in these areas.

Typical problems in CRO outsourcing

Typical potential problems include^[viv]:

• Insufficient knowledge of specialist providers of the service required
• Finding the time and resources for evaluating and selecting a high-quality, experienced CRO
• Unrealistic bid expectations
• Poor bid specification leading to poor CRO performance
• Difficulty comparing competing bids
• An inability to specify add-on work at rates and terms comparable to the initial   contract.

One of the potential disadvantages of using CROs is that short term R&D costs would increase. CROs set prices to not only cover their costs plus a healthy profit margin; they also include provisions for unforeseen occurrences such as early termination of a project, delays, change requests, etc. This results in relatively high fees for CRO services.

CRO Offshore Outsourcing  to China and India

Over the past years the global pharmaceutical industry has been shifting its focus towards the emerging markets. Asia-Pacific is the fastest growing region for CRAMS services with China and India as the major hubs. Especially India is expected to be one of the biggest beneficiaries of this wave[v] .

China  and India combined make up a market of 2 bio USD for outsourced clinical trials by 2014, which is still comparably small in a total market of more than 20 bio USD.

In China, there CRO market is expected to grow from 320 mio USD in 2009  to 1.1 bio USD by 2014. It is even further developed than India due to a better infrastructure, especially in pre-clinical trials[vi] .

Already in 2005, Financial analyst Pakhi Jain of Mumbai based Edelweiss Capital predicted[vii]  “India has the potential to garner 35-40 per cent global market share in this segment” which would have massive implications on the global pharma business. With foreign companies increasingly leaning towards India, the chances of big growth in future looks bright indeed” for the Indian CRAMS service providers. Leading providers for CRO and CRAM in India are Nicholas Piramal, Divi’s Laboratories, Jubilant Organosys, Dishman Pharmaceuticals  or Syngene.

Mr Jain further explains “Pharmaceutical outsourcing ranges from a one-time supply to a partnering agreement. Today, it is on a high growth path with large global pharma companies facing the vagaries of pipeline surges and slowdowns, internal consolidation, and global expansion” ^[vii].

According to S.K.Gupta, general director of the Institute of Clinical research, New Delhi/India, “the who-is-who of BigPharma are already taking clinical trials in India, with 139 ongoing studies in 2008” [viii]. In 2010, the pharma industry would spend more than 400 mio USD on clinical trials in India, rising to 1 bio USD by 2014[vi] , conducted by more than 150 CRO companies, a main driver being cost savings – 50-60% savings in phase I to phase III clinical trials can be achieved in India compared to US ^[viii] .

Besides highly attractive cost, India has more advantages: There is long experience in R&D and technical outsourcing projects in India, which has become a huge markets in IT, accounting, and also in pharmaceutical custom manufacturing and contract research organizations (“CRO”). A huge English speaking population, high education levels in science & technology which ranks among the best all over Asia, and closer ethnic similarity with EU/Europe Caucasian roots, compared to East Asian countries allowing a better predictability of clinical trial data.

Summary :

In this article we discuss contract research and manufacturing services (CRAMS / CRO) offshore outsourcing in thepharmaceutical, bio-technological and chemical industry. We have outlined in this article how big is the business, what drives the business, what are the implications for enterprises and for the society, what drives outsourcing, the process for vendor selection, typical problems in CRO outsouring, and CRO offshore outsourcing  to China and India.

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