Increasing cost and time of bringing drug to the market, declining R&D productivity levels and decreasing returns on existing drug portfolio have put the global pharmaceutical industry reeling under crisis making them rethink the way it does the business
Development costs are increasing by almost 50% for every 5 years and total capitalized cost per new drug is currently estimated at approximately $834 millon across 10 major disease areas. While the time for synthesis-to-first in humans to NDA approval increased from 11.6 years during 1970-1979 to 14.2 years during 1990-1999, the average post-launch US patent exclusivity period for new products has fallen from 12 years in 2001 to just 8 years in 2005.
NCE approvals are falling steeply, economics and efficacy together constitute almost 70% of the reasons that are responsible for terminating clinical development by IND filing period; FDA gets tougher and the number of approvals for NMEs and biologics have plummeted, from 38% in 2003 to 8% in 2005.
Regulatory and managed care efforts on cost containment puts pressure on prices; only 3 of 10 marketed drugs ever generate revenues to match or exceed R&D costs. Accelerating genericization shortens the life cycle of patented products (~$50 bn. of "patented" revenue to lose protection in 3-5 years)
Aggressive M&A activity has been the first response to this crisis. However that had misplaced faith in economies of scale. "Ever-greening" of existing blockbusters by patenting incremental innovations also has been used to overcome the crisis that had moderate impact. The easy solution was to cut costs through reduction in sales force, rationalization across geographies and outsourcing.
Pharmaceutical industry was a late entrant to reap the benefits of outsourcing, partly due to fear of poor intellectual property protection outside USA and Europe. Outsourcing in pharma industry started in non-core functions such as finance, accounting & IT. The emerging focus is on outsourcing "core" & "semi-core" functions for cost control and productivity enhancement such as drug discovery, clinical development, contract manufacturing and other functions like detailing & retailing and business analytics.
The strategic value of outsourcing lies in not just cost savings but also in the faster development of new compounds. It is estimated that one day of speed advantage typically saves $37,000 in out-of-pocket development costs and nets an additional $1.1 million in daily prescription revenue for an average performing drug.
Outsourcing to offshore locations from US and EU pharma industry was estimated at ~$50 bn. in 2006 and is projected to reach ~$171 bn. by 2015, a growth of 15% CAGR. Outsourcing to offshore locations in CMO pharma sector is largely driven by the objective of concentrating on core functions by large pharma companies in the US and EU, while CMO biopharma is driven by increasing biotech pipeline and prohibitive costs of manufacturing, which small biotech companies can not afford to invest. The capital expenditure to set up a biotech manufacturing facility is in the range of $20-500 mn and it is estimated that 300 biotech drugs are undergoing clinical trials and another 600-700 in preclinical or early clinical development. Clinical research is expected to be the most potential opportunity for countries like India, China and Brazil due to the availability large treatment naïve patients and increasing patient recruitment time in the west, which resulted in extended development time lines.
India is one of the most attractive destinations for outsourcing in pharmaceutical industry. In 2006, India could garner about 15% of outsourcing market from US and EU that was estimated to be ~7.6 bn. of which CMO pharma alone constituted 86% of total supply from India. The opportunity for India is reportedly huge, which is pegged at ~39 bn. by 2015, a CAGR of 20% (2006-15).
CMO pharma continues to be the biggest outsourcing opportunity for India through 2015. India recorded 44% of total US DMF filings that justifies the India's credentials as a significant global supplier of APIs. According to IDMA 40% of world's API requirement is met by India and the country continues to sustain growth in CMO sector due to well established infrastructure and capabilities.
The other key sectors are in infancy stage and hold a great promise to the future of Indian saga in pharmaceutical outsourcing space.
The projected growth across the sectors like CMO biopharma, preclinical & clinical research and contract research is an early indicator of India's increasing skills along the drug development value chain. The growth is these sectors would be more than 30% CAGR (2006-15).
Contract research is projected to achieve 15% of total outsource supply potential in 2015. India has more than 20 companies that offer contract research to global pharma industry across major therapeutic areas. Aurigene, Advinus and GVK Bio are the few names to reckon with in contract research space. CMO biopharma is poised to become one of the most potential sectors in the future followed by preclinical & clinical research.
Outsourcing by pharmaceutical industry of US and EU to India would change the landscape of Indian industry. The opportunity could put India on a higher pedestal. The authors foresee few important areas of immense benefit to India that outsourcing can offer.
Most US FDA approved manufacturing plants out side the US, increasing ANDAs submission in US and absolute majority share of US DMF filings leaves India untouched by competition in global generics market.
Discovery research was never on the cards for Indian companies until India adopted international patent standards in 2005. Government initiatives to promote discovery research and industry's grit would develop good Indian IP that can be leveraged with global industry. Growth in foreign R&D sites is increasing noticeably over the last five to ten years and 75% of new R&D sites and 30% of R&D staff globally will be in India/China.
While we believe biotech as the future of pharma and healthcare India's biotech capabilities have attracted global biotech majors like Amgen and Genentech to set up shop in India. The alliance with global biotech companies is expected to increase.
India is expected to play an important role in the global clinical research services with a projected global share of ~10%. Considering that this is a highly human intensive, the employment is going to open up in a big way not just in the clinical research space but also in allied services like data management, biostatistics, pharmacovigilance, etc.
The Indian pharma industry is going through a transition from just manufacturing hub to a knowledge intensive, services oriented industry. This transition could be credited to the outsourcing play, whose potential the Indian companies recognized well in advance to reap the benefits. Outsourcing is expected to help in not just employment, foreign exchange, but it will also help Indian companies to go beyond reverse engineering and generate IP, technology experience.
(Authors are industry consultants at PharmARC, Bangalore.)