From Outsourcing to Offshoring into Emerging Markets: A Sponsor-Contract Research Organization (CRO) Relationship in Pharmaceutical Drug Development

Overview

Today, more and more pharmaceutical companies are outsourcing and offshoring projects which require complexity and demands strict timelines. The role of CROs is to serve the healthcare industry by assisting pharmaceutical and biotechnology companies to bring new products to market; their primary objective is to carry out on behalf of sponsor companies’ studies on a contract basis. From the perspective of the CRO, outsourcing is good business, whereby it expands capacity and adds resources. It also allows for the acquisition of new technology and brings expertise/experience to the project. The niche for CROs is to deepen the knowledge within a particular area of their business and identify significantly higher skill sets from people and instrument resources that would set them apart from sponsor companies with respect to the handling of the volume of work and by delivering within aggressive timelines, providing competitive cost and without compromising quality.

On the other hand, pharmaceutical companies, when deciding to outsource or offshore, will have to clearly define their objectives such as their internal resources (people and instrument), how best to utilize their internal resources to maximize added value, type of work that should be outsourced to protect sponsor’s intellectual property, or identify internal technological or scientific gaps that could be served well by the CRO. After defining their internal objectives, sponsor companies should identify CROs with appropriate resources, equipment, science, timelines, quality, etc….to support their needs. Pharmaceutical companies' role is to put drug in the market and therefore to achieve this, various factors will have to be clearly defined where the target timeline for review and submissions are not missed. Consequently, expectations must be clearly and realistically defined under mutual agreements to avoid any unmet expectations.

Introduction

Outsourcing was a trend in the late twentieth century to reduce costs, expand capabilities and increase flexibility on a smaller scale. The positive results of outsourcing as experienced by some pharmaceutical companies has transformed into a more magnified arena of offshoring of the twenty-first century for the same reasons as described above. The terms 'outsourcing' and 'offshoring' have similar meaning but in a different context. Therefore, outsourcing is a general term for a business function done by non-employees while offshoring is also, and in most cases, outsourcing but the function is done outside the country or area of the client. Outsourcing is an option often selected by big companies to get rid of particular routine work which could be performed by third parties for money. On the contrary, offshoring is often opted because the overhead for business process costs less in other places such as emerging markets with low labor costs and a potential for huge market with competition on a larger scale. Outsourcing in local premises poses no real communication drawbacks while offshoring can have, at times, significant communication and language barriers.

Emerging markets can be identified as any place on this globe that are in the process of rapid growth and industrialization with India and China considered being by far the two largest from a pool of approximately 20-30 countries. Consequently, these markets are highly competitive in providing costs of services which are significantly lower than costs offered within the United States or Western Europe and which can be ultimately measured when taking into account the overall drug development cost. From sponsors’ perspective, the expectation is that contract companies in these markets should also be able to deliver quality science combined with meeting aggressive timelines for the deliverables in enabling a successful long-lasting partnership.

In the recent past, western pharmaceutical companies have typically utilized CROs in China and India to perform tasks such as clinical development, data management and preclinical toxicology studies. Now, Chinese and Indian CROs are moving up in the R&D chain by offering more challenging services in chemistry, assay development, and even in target identification. Thanks to higher government investments in basic research and good collaboration leading to improved technology transfer between university and industry. In addition, and more recently, due to regulatory needs and country-specific registration, requirements for generic or New Chemical Entity (NCE), Brazil, Argentina, Russia, Thailand, Korea, Mexico, South Africa, and other Eastern European countries have also been in the forefront not only from the aspect of keeping current with regulatory standards, but at the same time, expanding and easing on marketing efforts by other pharmaceutical companies for marketing their branded or generic drugs into these emerging markets. This effort in turn has enabled the masses from these countries to have access to medicines supporting diverse therapeutic areas, whereby providing additional choices of drugs that are either first in class or best in class. Consequently, efforts are continuously being made by both the industry and regulatory bodies looking for ways to harmonize processes and/or documents thus leading eventually to globalization.

In this article, I will discuss some of the key elements (Communication, Collaboration, Compliance, Capacity, Capability, and Cost) for successfully partnering with contractors in the offshore market ensuring that high scientific quality and aggressive timelines are not only met but maintained. However, before outlining these above points, I will briefly identify the defining points of emerging markets, specifically China and India.

China and India: The Emerging Powers within the Emerging Market

According to the latest communication by International Monetary Fund (IMF), India and China will witness steady high growth rates of approximately 8.8% and 10%, respectively in 2010, and Asia will continue to lead global recovery. As such, the pharmaceutical industry is growing at ~15-20% in India and the similar industry growth is observed in China.

China, with approximately 20% of world’s population is an emerging market in the pharmaceutical arena. According to a recent report on pharmaceutical industry by PriceWaterhousCooper, ‘China arguably ranks as the best pharmaceutical outsourcing destination among all Asian territories.' Significant savings in labor and laboratory set-up costs, as well as strong government incentive programs such as various tax exemptions, are attractive incentives for western-based sponsor companies. It is estimated that the clinical trial costs in China are roughly 30% to 50% of costs in western countries. Demand for drugs due to surge of diseases in various therapeutic areas and other health related problems, combined with a rising level of income, is enlarging China’s pharmaceutical market by more than 20% a year and creating attractive opportunities for global pharmaceutical companies at a time when rates of growth in European and US markets are declining. While almost all major global companies have a presence in China’s largest and wealthiest cities, few have completely penetrated them. The impact of multinationals is especially patchy in rural areas and smaller cities. Only a few products have achieved critical scale. To serve China effectively, multinational pharmaceutical companies should put more resources into tailoring and expanding their product portfolios to meet China’s growing needs and develop a distribution strategy that deepens and broadens their reach and at the same time sponsor companies realize significant savings as part of their drug development.

India, on the other hand, the second most populous country in the world has seen its economy advance rapidly. It is one of the fastest growing markets in the world. Its present expansion is being fuelled by a number of factors such as increased healthcare expenditure, a strong economy and rising wealth in the middle classes of society. The country’s pharmaceutical market has many parallels with that of China; it, too, has a large and generally poor rural population that is badly served by healthcare services. As transportation and infrastructures and central government expenditures on healthcare rise, significant increases in drug consumption are expected in the rural sector of the population. With the fourth-largest economy in the world, the total medical spending in India is growing quickly, driven by better-off Indians willing to pay privately for modern care from private hospitals. This increased spending creates many opportunities for pharmaceutical companies. In addition, the country’s low labor costs, large existing pharmaceutical manufacturing base, and sizable patient population make it an excellent location of Western companies to do contract manufacturing, clinical research, and various R&D activities. Even despite the traditional focus on generics, original R&D is becoming a more practical option in India. This is partly due to the abundance of trained scientists in the country. Large Indian firms are also players in R&D and big pharma companies from the west have a wide-ranging drug discovery and development alliance with the Indian firms. Additionally, India’s low costs, availability of talent, and large population have made it a major site for international clinical trials.

Successful Partnership Between Asian CROs and Sponsor

China and India are both developing countries with emerging but rapidly growing economies. For many years, western companies believed that developing countries were good at manufacturing products at low costs but the knowledge-intensive activities such as chemistry, biology or toxicology should be performed at industrialized countries with a better educated workforce, and hence, at a higher cost. However, recent developments (booming economy in China and India as well as frequent migration of people across the globe for knowledge transfer) are changing this viewpoint and pharmaceutical companies are increasingly considering both of these countries to be capable of performing knowledge-intensive pharmaceutical R&D.

Additionally, with recent “reverse brain drain,” several talented scientists have been lured back to their countries with attractive offers. Many of these scientists are now working at CROs, and they have the advantage of understanding the cultures, languages, and requirements/expectations of customers in Western countries. Many of the returnees are within management teams that include Western-educated PhDs and MBAs who are experienced in Western business practices. In return, this has also been advantageous for the Western companies to work with CROs with a strong understanding of their culture and operating models. This in turn has significantly reduced the time and effort of training some of the CROs in Asia as per the need of regulations and compliance of sponsor companies, as well as the requirement of Regulatory Agencies. However, there still exist gaps that further need to be sealed to lay a solid foundation for successfully partnering with CROs in Asia.

As more and more Western companies are looking for outsourcing clinical trials to the Asian giants, they are also in an advantageous position to penetrate into the Asian market in identifying a large gap within various therapeutic areas that are still in high need with large diverse populations. Additionally, from Discovery to loss of exclusivity, management within companies around the world is looking for two key elements in the overall drug development. They are: 1) to cut down on drug development costs, i.e., to realize best savings for sponsor and patients and 2) reducing time for bringing the drug quickly to market; i.e., to enjoy longer years of marketing prior to patent expiration. Both must be achieved without compromising the scientific quality and integrity of any outsourced work. As a result, big pharmaceutical companies under highly competitive environment are looking for opportunities within various sectors of the world that would enable them to meet such goals. With the high quality of skilled workers and low labor cost within Asia or other emerging markets, more pharmaceutical companies are looking to offshore their projects in a highly evolving market.

The below identified elements are critical as part of contracting into the offshore market. These elements must be clearly evaluated by both the sponsor and CRO, and in some cases, one by CRO and the other by sponsor companies. Regardless, each of these below mentioned points provides a path of informed decision making by undertaking calculated risk(s) and understanding its impact when outsourcing decisions are made either by the Sponsor Company or the acquisition of Sponsor business by the Contract Research Organizations.

Communication: As the relationship is in the very infancy stage with CROs in Asia, no given expectations should be assumed from both the sponsor and CRO. In other words, due to difference in communication style, interpretation of words and interpretation of their meaning in the context of subject, expectations should be clearly communicated and at the same time acknowledged from the other end to ensure everyone has the same understanding. Ensure that the Standard Operating Procedure (SOP) for executing the expectations within this SOP has the same meaning from both ends. Setting up weekly teleconference during the early stages of relationship helps to gain clarity on various points such as scientific, operational and regulatory requirements. Additionally, items such as timelines and its impact on projects; scientific quality especially on the integrity of data; regulatory requirements from the aspect of compliance; resolutions of discrepancies and how documented; delays and how delays are communicated and its impact are some of the few defining points in building up bases for clear understanding and expectations. Frequent exchange of e-mails as a follow-up to re-define the points discussed as part of teleconference not only further confirms from a documentation perspective but additionally ensures the successful completion of outstanding items. Communication is important as it eventually leads to building a long-term relationship with clear expectations and minimal ambiguity, if any.

Collaboration: Partnering with Asian CROs requires the collective collaboration between sponsor and the CRO. Below are some of the key strategies for successfully partnering with CROs within the Asian labs:

• Sharing of operational ideas as part of process improvements to benefit each other.
• haring of scientific skill sets in developing and further strengthening the current knowledge and transforming these into future needs and/or expectations.
• Sharing of potential upcoming projects with CRO for the next several months to ensure appropriate resource allocation is in place at the CRO for timely delivery of deliverables.
• Sharing future plans of the CRO (if known) with the sponsor company from the aspect of potential changes in key personnel, changes in instrument resources, expansion/reduction plans, and changes in scientific capabilities.
• Sharing of information from the aspect of import/export requirements.
• Sharing of regulatory requirements as driven by country-specific needs.
• Sharing openly on issues arising as part of projects to ensure complete resolution.
• Frequent visits between the two groups for face-to-face meetings to understand and further strengthen each others operating model as well as each others needs.

Compliance: Does the CRO demonstrate an understanding of and compliance with the appropriate regulations wherever in the world they operate? Some of the key questions include: Are their instruments and/or equipment validated and documented? Do they follow the appropriate PARTNERSHIPScompliance GxP program such as Good Laboratory Practices (GLP), Good Clinical Practices (GCP) and/or Good Manufacturing Practices (GMP)? Do they have a good archiving system? How are out of specification issues identified and documented? How are deviations documented? Is there an appropriate training system in place? Are Sponsor / CRO Standard Operating Procedures (SOPs) being followed? Is there suitable quality management group (quality control and quality assurance) in place to ensure certain requirements of global regulatory bodies such as FDA, EMA, MHRA, AFSAAPS, ANVISA, etc…. are met? What have been the outcomes from the audits of these regulatory agencies and how have they been addressed. The sponsor would need to understand the audit findings from the aspect of impact not only on the current findings but how these findings may shape future study placements at that particular CRO. The sponsor would also need to determine the risk-benefit analysis from the aspect of these findings in taking future decision and/or directions.

Capacity: Do the CROs in Emerging markets have the capacity to expand and contract with changing needs. Determine whether the CRO being considered has the resources available to deal with each project and its uncertainties. For example, if a study would suddenly require a complete re-examination of the data, is there evidence that they can respond appropriately and quickly? The sponsor would need to evaluate not only their current portfolio but upcoming portfolio for the next six to twelve months to understand the CROs resource model and map with CRO’s current available resource. It is also important for the sponsor companies to understand the changing environment of labs in emerging markets and the events that cascade down to the point of contact and project levels. Are there successors being groomed to step-up in the absence of the current point of contact or project manager at the CRO? Sponsor should not only understand the role of business development within the CRO but also the type of interactions they have with their Research and Development group from the aspect of taking on Sponsor’s business. This is important as it ensures that undertaking additional business is not solely from the aspect of developing business on the CRO side but also confirms that their R&D can certainly undertake specific types of sponsor projects and is capable of meeting timelines for the required deliverables.

Capability: Are the CROs capable of taking on a specific project? Examine their existing workload and personnel to determine if they have the right resources and people to effectively support the project. The sponsor would also need to understand the personnel’s previous experience for the current task. What is vendor turnover rate? What plan does the CRO have to add specific types of instruments? How many personnel are in the Quality management group and what ratio of this group supports the number of personnel in the laboratory? What type of training programs and/or refresher programs are provided to employees to ensure individual skill sets are constantly being evaluated based on new technologies and/or methodologies within the lab? The CRO should also understand why the potential work for outsourcing cannot be done within the Sponsor Company. What is the expertise or lack thereof of the sponsor companies? Based on this, should the CRO expand their capabilities beyond their existing skill sets with the understanding of business demand now and in the future? Some short surveys are always helpful to the CROs in understanding in which direction the pharmaceutical industry is headed.

Cost: Though cost is not a key component in ensuring successful partnering with contractors in Asia, it is certainly an element of great importance as part of drug development especially when more and more pharmaceutical companies are looking for ways of reducing cost in bringing drugs to the market. Several pharmaceutical companies have not only outsourced their manufacturing businesses to Asia but more recently as part of cost savings strategy, different aspects of R&D activities have also been outsourced for the same reasons. Effective costing without compromising on the scientific and operational quality as well as personnel talent is significant, especially when qualifying vendors from a large pool in the Asian region. From the CRO’s perspective, providing competitive pricing alone is not sufficient in vying for sponsor business, but rather a comprehensive package that includes all elements of quality and aggressive timelines are what most sponsors are looking for.

Summary

The world’s largest companies have engaged in offshoring for a variety of reasons: to reduce costs, expand capabilities, and increase flexibility. As the competition is rising among big and small pharmaceutical companies in terms of cost and speed from bringing a New Chemical Entity (NCE) to market, the outsourcing divisions within pharmaceutical companies are looking for ways to collaborate with various vendors in the offshore market, academic institutions and consulting groups. If not managed appropriately, the intent to reap success from outsourcing and further offshoring into the emerging market can immediately transform into frustration and loss. This is not only true from the sponsor’s perspective but same for Contract Research Organizations.

The key elements as described above (Communication, Collaboration, Compliance, Capacity, Capability, and Cost) are critical in successfully partnering with the offshore markets as they are useful tools not only in evaluating new vendors but also evaluating the sponsor’s existing vendors in today’s constantly changing environment.

This article was printed in the May/June 2011 issue of Pharmaceutical Outsourcing, Volume 12, Issue 3. Copyright rests with the publisher. For more information about Pharmaceutical Outsourcing and to read similar articles, visit www.pharmoutsourcing.com and subscribe for free.