Synergies between Singapore & Philippines in Pharmaceutical Outsourcing

LT B8 Nishant Gambani Ashwani (Rohit) Rathore Seshadri Vyas Muthusubramanian Akriti Mehta Chelsea Rillo Mars Montilla

Synergies between Singapore & Philippines in Pharmaceutical Outsourcing

Contents

• Executive Summary

• Outsourcing in Pharmaceutical drug development

• Economics of Drug Development

• Pharmaceutical Industry in India & China

• Pharmaceutical Industry in Singapore

• Pharmaceutical Industry & Outsourcing in Philippines

• Strategic Options Available

• An Example – INC Research

• Conclusion and Possible Extension of Research

(This report was prepared by the members of LT B8 – Nishant Gambani, Ashwani (Rohit) Rathore, Seshadri Vyas Muthusubramanian, Akriti Mehta, Chelsea Rillo & Mars Montilla)

EXECUTIVE SUMMARY: In the field of new pharmaceutical drug development, the ability to modularize and outsource work is crucial to success. Over the years outsourcing service providers, located mostly in the developing parts of the world, have delivered turnkey results to their clients and built up trust. It is an extension of this trust and advancements in communication technologies that has led to the evolution of a new area in pharmaceutical outsourcing called ‘Functional Outsourcing’ – which covers Human Resource Management (HRM), Finance & Accounting (F&A), Procurement and most recently Real Estate & Facilities Management (REFM) 1. This changed landscape in the pharma outsourcing industry has led outsourcing companies to position themselves as providers of both technical and functional outsourcing. This trend works favorably for countries like India & China. These two countries have labor which is skilled (in technical and functional areas) and is available at costs which are lower than in western countries. But this trend works against Singapore, where the human capital required for executing functional outsourcing isn’t available. This is partly because of high wages and partly because of the strategic focus of the government towards positioning Singapore as a provider of high value-adding pharmaceutical research services2. This paper makes an argument that will allow the Singaporean pharmaceutical outsourcing industry to continue their focus on high value-add research, while remaining competitive in a newly emerging industry landscape. The argument in this paper is based on the coopetition model, which encourages firms to think of cooperative and competitive ways resulting in win-win opportunities. One such win-win opportunity between the Philippine and Singaporean pharma outsourcing industry is explored in this paper. By virtue of having complementary skills (Philippines – functional outsourcing & Singaporean – research outsourcing), both nations will benefit by cooperating. Cooperation will also make both nations more competitive. The argument presented in the paper then moves on to talk about how this coopetition strategy can be operationalized at a firm level. In this context, the example of pharmaceutical outsourcing company – INC Research, is presented. OUTSOURCING IN PHARMACEUTICAL DRUG DEVELOPMENT The development of new drugs is a complex process involving large investments and multiple stakeholders. The expertise needed to successfully formulate, assay, test, manufacture and distribute a new drug spans across multiple domains. In such a complex environment, pharmaceutical companies resort to several innovative ways of modularizing the drug development process. Till the end of 1970’s it was possible for pharma companies to remain as FIPCOs - Fully Integrated Pharmaceutical Companies. This meant that one company would take on the responsibility of formulation, assays, pre-clinical trials and clinical trials. In addition, some of them also ventured into manufacturing and distribution of the drugs they designed. However,

over the years, as the search of potent and innovative drugs heightened, pharma companies found economic logic in moving from the FIPCO model to modularized drug development model. This change was accelerated by the burgeoning trend of outsourcing in the mid-1980s. Parts of the drug development process could be transferred to another company, which was often located in developing countries. The value chain of the drug development process is shown in Exhibit - 1. The number of compounds at each stage declines steadily as the drug development process reaches commercialization stage. This means that the fixed costs of high tech equipment cannot be afforded by one Pharma Company alone, especially if the number of compounds being tested is a very low number. The problem for pharma companies is aggravated by the long gestation of each stage of the process. On the other hand, companies providing research outsourcing have the advantage of using the same costly equipment for multiple clients and recovering their investments in shorter time. Over the years, this model has proved to be successful and by 2008 had resulted in a $24 billion market that is primarily focussed in the developing countries of the world - India, China and the ASEAN countries. A key aspect in the development of this industry is that over the years the nature of outsourcing work has also changed. In earlier stages, pharma companies outsourced work centred on the clinical trials. This then moved to research work in other parts of the value chain. However, aided by the rapid advancements in Internet & Communications technology (ICT), pharma companies also started outsourcing non-research work like Documentation, Certification & Quality Control, Payroll processing, Human Resource Management (HRM), Finance & Accounting (F&A), Procurement, Real Estate & Facilities Management (REFM) and even the complex task coordination among partners in drug development. These developments created three segments in the pharma outsourcing industry - Clinical Research Outsourcing, Contract Research Outsourcing (CRO) and Functional Service Providers (FSP). The reasons highlighted above are a select few among other important reasons for the spawning of this industry and its segments. Pharmaceutical Outsourcing is prevalent in parts of Asia, Eastern Europe and Latin America. For the purpose of this analysis, we restrict the scope to Asian countries. In Asia, India and China are popular destinations. Singapore has also caught up because of its focus on developing a strong research base in the country. So, there are 3 popular destinations within Asia and each provides a different combination of the required skills. India offers a well skilled resource pool which has the necessary technical skills at labor rates far lower than developed countries. China has similar the advantage of skilled labor and low wage rates. Singapore however, has a different proposition. Their skills in research work are considered to be superior to that India and China. However, the wage rate in Singapore is high and is comparable to Western countries. ECONOMICS OF DRUG DEVELOPMENT

The previous section mentioned briefly about the logic behind moving from the FIPCO model to the Outsourcing Model. This section focuses on some more aspects that make outsourcing more compelling for pharma companies. The first issue is that of patent cliffs. Every time a drug is developed, the company responsible for it gets a patent that prevents cheaper alternatives of the drug from cropping up. However, this patent lasts only for a few years. So pharma companies often find themselves dropping off cliff when a patent expires - meaning cheaper alternatives suddenly crop up and their sales will plummet. The pharmaceutical industry faces an anticipated loss of approximately $78 billion in 2009 - 2014 resulting from patent cliffs3. This de-incentivises innovation in the industry, yet is needed to prevent monopolies from forming. This is a catch-22 situation makes it less desirable to invest in complex lab equipment, but the quest for gaining market share makes innovation necessary. Outsourcing companies provide the best solution to this situation. Second, pharma companies have moved from a blockbuster strategy to ‘nichebuster’ strategy. R&D efforts of major pharma companies has moved away from identifying major diseases and then working backwards to arrive at compounds to fight the disease. The strategy for a majority of the companies now is to identify chemical compounds that are innovative and then test the combinations, leverage manufacturing and distribution network to sell these drugs in niche markets4. The direction of R&D has moved from right to left, and not from to left to right as was earlier the case (as seen in Exhibit – 1). This creates a space in the market for outsourcing companies to exist. Finally, over the years, the study of business management has evolved and the dominant thinking of this field has shaped the way firms tend to channel their resources. The thinking over the years has been towards making firms focus their resources on their core competencies. And so, over the years, the vertical boundaries of firms has shrunk manifold. In most cases pharma companies have held on to the area of the value chain that has the highest margins – drug discovery. PHARMACEUTICAL INDUSTRY IN INDIA & CHINA5 This part of the paper focuses on the industries of important countries in this market. China: China has a total of 128 universities and colleges for medicine and pharmaceutics. This is complemented by 53 tertiary vocational technical colleges and 666 institutes dedicated to science and technology. Given that most of these institutes are of standards comparable to the rest of the world, one can conclude that China has a pool of talent which is sufficiently skilled in executing clinical trials more sophisticated research work as well. The CRO market has been impressive with growth rates of 52% and 38% as early as 2006 and 2007 respectively. In more recent years, this has continued but at lower rates. The market is fuelled by global R&D outsourcing and not domestic outsourcing. In 2007 the contract research market in China was estimated at US$186 million and reach US$791 million in 2012. These estimates were turned out to be accurate predictions. Around the time of 2007 it was estimated

that, Chinese CROs will account for an estimated 2.3% of the global CRO market – a very large proportion for one country. India: Similar to China, India also has a vast pool of talent. According to a Confederation of Indian Industries (CII) study in 2007, the number of fresh scientists and engineers available every year is 700,000. Over the years this number has only increased. However the problem in India is that despite these impressive numbers, recruiting clinical research professionals has been tough for multinationals. An Indian Planning Commission report highlights a “looming shortage of clinical research personnel, estimated at 30,000-50,000”. Yet, many companies are still willing to plunge into India because labour costs are significantly lower and the talent pool's proficiency in English. India offers capabilities for pre-clinical trials in rodents but limited for dogs. The capabilities of the companies have mostly been through the dint of the private sector industry, which has had very little support from government organisations. In clinical trial phases, India has several experienced CROs offering services. The CROs have largely adhered to quality standards and the output is like that of developed markets. India has very strong data management capabilities and IT skills. In 2007 the total CRO market was about US$323 million and was expected to grow at around 49% CAGR up to 2010. These estimates turned out to be optimistic in accuracy, but largely true in direction. Funding through private equity and venture capitalists improved the credibility of Indian pharmaceutical research. PHARMACEUTICAL INDUSTRY IN SINGAPORE5 In Singapore, the availability of a skilled talent pool has a density of 93 per 10,000. This is on par with mature markets such as the US and Japan. English is an official language in Singapore and therefore not a barrier. Labour costs are comparable to those in developed territories in the West and significantly higher than in India or China, resulting in the outsourcing of mainly high-end complex tasks to Singapore. In pre-clinical development Singapore offers good capabilities for trials using rodents and primates. However, the cost of subjects, especially genetically modified ones is sometimes high. Despite having a multiracial population, the small population base of 4.5 million limits the recruitment of patients for clinical trials. There are also fewer opportunities for ‘treatment naïve’ trials. Clinical trials capabilities exist with government and private institutions. This is markedly different from India and China. The National University of Singapore conducts trials jointly with Eli Lilly for candidate drugs in various therapeutic areas. Singapore hosts the secretariat for the Asia Pacific Economic Cooperation (APEC) Coordinating Centre for Good Clinical Practice (GCP). Singapore has also been steering many initiatives

such as the training of clinical research personnel and the creation of a conducive environment for multi-site clinical trials in the region. The intent behind presenting the state of each country’s pharma outsourcing industry is for the reader to get an appreciation of the various contours that shape this industry. Low cost advantage is the first thing to catch the eye. But beyond it, there are several other factors like – depth of knowledge, government support, IPR laws, maturity of private sector, etc. A short summary of this is shown in Exhibit – 3. PHARMACEUTICAL INDUSTRY & OUTSOURCING IN PHILIPPINES Pharmaceutical Industry The Philippine pharmaceutical market is dependent on import of raw materials to manufacture drugs. The size of the market was projected to reach US$1.4 billion in 2008 and have very little R&D capability. Only basic research services and clinical trials are offered. The healthcare system suffers from funding shortages. The migration of experienced medical workers to other countries has been a major problem. The language proficiency is good. Most Filipinos in urban areas are bilingual with English as a dominant language. Functional Outsourcing Industry in Philippines6 Philippines has surpassed India, according to the 2010 IBM Global Location Trend Annual Report, in outsourcing support functions and shared services. It is a leader in the voice and non-voice sectors such as financial services, healthcare and knowledge processing. The outsourcing industry was estimated to have a size of only $1.5 billion in 2004, but has grown since. With impressive growth rates of 30-50% for several years continuously, the industry reached the $9 billion mark in 2009 and still growing at the same rate. Across the globe, Philippines is acknowledged as an emerging leader in functional outsourcing and shared services. STRATEGIC OPTIONS AVAILABLE The analysis thus far in this paper talks about the state of the industry in the important countries. But to proceed further it is important to shift our perspective from an industry level to a firm level. This change in perspective is important for two main reasons. First, the objective of the paper is to identify ways through which the pharma outsourcing industry in Philippines and Singapore can collaborate for the benefit of the companies in their respective industries. So, the end goal is for the firms in the respective industries to be successful and so a firm level perspective is needed. Second, pharma outsourcing companies have spread to most of the outsourcing destinations. So the same company is present in China, India, Singapore, Philippines and other Asian & South American countries. So, an analysis like – ‘Philippines has a competitive edge in functional outsourcing capabilities’, may hold true for the industry as a whole but not true for an individual firm. To avoid this fallacy of composition, it is moot that the analysis proceeds at a firm level henceforth.

INC Research is a pharmaceutical outsourcing company present globally. Over the years, the company has evolved from providing clinical trials outsourcing. In 2011, it acquired Kendle International with the objective of developing capabilities for functional service projects7. This background makes INC Research an ideal company to demonstrate arguments in this paper. Having described the current state of the industries and their respective internal strengths and weaknesses in the previous sections, we now place these alongside the opportunities and threats as identified in the IMD Competitiveness Roadmap for 2012:20503. The corresponding SWOT analysis and strategic options generated through this analysis are given in Exhibit – 4. From Exhibit – 4, a bunch of options emerge. These are the strategic options that are available for INC Research as it continues to expand its presence in functional and research outsourcing. Of particular interest is the option that is a labelled as (S4-O1, O6). It says, ‘Use regional knowledge capital to provide integrated services that combine technical & Functional areas’. This talks about the possibility of using regional strengths to develop complementary competencies. In other words, for a company like INC Research it would be better if they use their Philippines office to nurture talent for functional outsourcing capabilities rather than using the Philippines office as an extension of the research outsourcing work that mainly happens in Singapore. Currently, INC Research Philippines only conducts Clinical Research Trials. From the analysis of Adam Brandenburger and Barry Nalebuff, this move is akin to the ‘Players (P)’ component of the P.A.R.T.S classification of the coopetition model8. To elaborate further, by the addition of a new player (Philippines) and leveraging the unique competitiveness of it (function outsourcing), INC Research will be able to cooperate across industries in different countries and then remain more competitive than competitor companies. AN EXAMPLE – INC RESEARCH The above section elaborated briefly about how the coopetition strategy would be operationalized. In this section the example is presented with greater detail. INC Research is headquartered in North Carolina and operates an office in both Philippines and Singapore. However, in the year 2011 the changed landscape mentioned earlier in the paper meant that INC Research had to acquire expertise in functional outsourcing as well. To develop this capability it acquired Kendle International9. However, based on the reports of analysts covering this private company, this acquisition hasn’t generated the necessary expertise. The strategy proposed in this paper could be implemented for INC Research as follows. First, INC Research’s Philippines office should be expanded and experts in the country’s booming outsourcing industry should be hired along with a team that has expertise in the pharmaceutical business. This team can be formed with members from Philippines or from Singapore or both. Then, the second step should be to bid for projects to major pharma and biotech companies as a ‘one-stop’ shop. Since this is the expectation of the market, INC Research should raise the bar and position itself accordingly. Now, the company can boast of providing world-class R&D services through its Singapore office and also provide functional services by the cheap source

of labour available in Philippines. The low labor rates in Philippines will also allow the company to subsidize costs at its more expensive Singaporean R&D facility. The key to making this strategy work is for INC Research to see Philippines as not just a place for doing clinical-trials, but as a market with expertise in executing functional projects. The argument presented in this paper hinges on this premise. Exhibit – 5 depicts the working of this strategy through a transactions based diagram. CONCLUSION AND POSSIBLE EXTENSION OF RESEARCH This paper highlighted the role of adding a new player to an existing market that results in a win-win proposition for both the Philippines and Singaporean pharma outsourcing industries. This was the central idea in the paper. When this is put in the perspective of a changing industry landscape and two individual countries coming to terms with it, what emerges is a very clear case of coopetition. We end this paper on this note – while the analysis going into the paper took place after due analysis and study of the industry. So the arguments made in this paper are true for the industry as a whole. When the implementation steps were suggested, care was taken to ensure that INC Research had the capability to execute the coopetition strategy. However, this can’t be taken as an extension that could be held true for all firms. The authors feel that possible extensions of this research work can include implementation frameworks and steps that can applicable to a broader set of pharmaceutical outsourcing companies. Exhibit – 1

Note –

Source: Case writers. Adapted from Burrill Report Biotech 2006 & Baden-Württemberg

• The attrition rate mentioned in the figure refers to the reducing number of compounds from left to right.

• The FDA approval stage is the stage wherein regulatory authorities in other countries approve or reject a drug.

• The long gestation periods and declining expertise of companies from left to right are key points to note in the exhibit.

Exhibit - 2 Pharmaceutical Outsourcing Industry Segments

Exhibit – 3

Process

China India Singapore

Preclinical Development

Capabilities in pre-clinical trials in a wide variety of species. Approximately 20 labs with good laboratory practice (GLP) certification; new regulations should boost that number

• Good capabilities for pre-clinical trials in rodents, limited for dogs, almost none for primates. • Capabilities residing mostly with Indian pharmaceutical companies, not government owned. • Approximately 12 GLP certified labs, expected increase in the number • Government increasingly supportive and relaxing hurdles, though restrictions persist (for example, on exporting blood samples)

•Extremely supportive government • Good capabilities for pre-clinical trials in rodents and primates • Sufficient number of GLP certified labs to carry out development studies

Clinical Trials

• Experienced contract research organizations and growing vendor pool

• Experienced contract research organizations with full service range and output of similar quality to that of developed markets • Strong data management

• Well experienced CROs capable of delivering as per international standards

Pharmaceu

)cal+Outsourcing+

Clinical+Research+Outsourcing+5+to+do+with+outsourcing+of+only+clinical+

trials+

Skills+Required+5+preliminary+set+of+skills+required+to+run+a+lab+

effec)vely.++

Contract+Research+Outsourcing+5+to+do+with+research+outsourcing+in+

parts+of+value+chain+

Skills+Required+5+More+sophis)cated+research+skills+needed+for+the+labs+to+give+scien)fically+accurate+results+

Func)on+Research+Outsourcing+5+to+do+with+allied+&+non5research+

ac))vi)es+

Skills+Required+5+A+combina)on+of+basic+research+knowledge,+process+management+and+customer+focus+

•Several multinationals conducting global trials at Chinese sites • Low-cost and efficient enrolment compared with the United States and Europe • Trial approval times may stretch long

capabilities and track record • Many multinationals conducting global trial activities • Greater advantage in cost and patient enrolment • Uneven infrastructure and shortage of clinical research assistants might hamper future growth

• Low patient pool due to low population base • Skilled labour needs to be sourced externally • CROs also work more in collaboration with other Asian CROs

Exhibit – 4

SWOT Analysis for INC Research SWOT Analysis for INC Research-

Opportunities – O 1. From cheap manpower

to cheap brainpower 2. The technological

divide disappears 3. Life sciences and

environment attract massive investments

4. Growth in the early-stage research segment

5. Expansion in Asia-Pacific

6. Increasing expectation among customers to deliver functional services

Threats – T 1. Lack of managerial

talent 2. Inflation rises costs 3. High volatility of

currencies 4. Concerns over

accuracy and ethics in offices in emerging countries

5. Highly competitive market environment

Strengths – S 1. Strong presence in

phase I–IV clinical services

2. Steady Growth in operating profit

3. Broader therapeutic exposure

4. Acquired another top CRO company- Kendle

S-O Option S1-O1: Seek more projects in Clinical Trials Stage S1-O2: Expand into pre-clinical research services to diversify risks S1,S2-O5: Build a strong R&D base in the Asia-Pacific region S4-O1,O6: Use regional knowledge capital to provide integrated services that combine technical & Functional areas

S-T Option S1,S2-T1: Actively hire more managers with local experience S2-T2: Create funds for investments to avoid inflation related risks S4-T6: Seek partnerships to avoid excess competition

Weakness – W 1. Shortage of local

talent in remote offices

W-O Option W1-O3: Invest in training and skill development

W-T Option W1-T1: Bring in Technical Managers from Europe & America to lead Asian teams

In the above SWOT, the Opportunities & Threats sections contain relevant industry-level issues which are mentioned in the IMD Roadmap for 2012-50. These are shown in Italics font. Strengths & Weakness sections pertain to the company INC Research. Exhibit – 5 Transactions diagram of the Coopetition Strategy

Before Market Expectations: Individual Outsourcing providers for each outsourcing activity

After the execution of strategy

Market Expectations: ‘One-Stop’ Shop provider of Clinical Trials + Contract Research Outsourcing + Functional Outsourcing (Note the alignment that exists between the company’s core competency and market expectation)

INC Research Singapore (Singaporean CRO/Clinical

Research Outsourcing Company)

Money ($)

Functional Outsourcing Expertise ($)

Research Outsourcing (from Singapore) +

Functional Outsourcing (from Philippines)

Money ($)

INC Research Philippines (Philippine CRO/Clinical Research Outsourcing

Company)

Abbott Labs (Pharmaceutical

Company)

INC Research Singapore (Singaporean CRO/Clinical

Research Outsourcing Company)

Money ($)

Research Outsourcing (Clinical Trials & Contract Research Outsourcing)

Abbott Labs (Pharmaceutical

Company)

Bibliography: 1 – KPMG Articles & Publications, Outsourcing in the Pharmaceutical Industry: 2011 and beyond, http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/Outsourcing-pharmaceutical-industry.pdf , accessed on 24th June 2013. 2 – California Management Review – Winter 2005, Vol. 47, No. 2 3 -http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/Outsourcing-pharmaceutical-industry.pdf 3 – The IMD Competitiveness Roadmap: 2012-2050, by Professor Stéphane Garelli in the IMD World Competitiveness Yearbook 2012. 4 – http://www.bio-pro.de/magazin/thema/00166/index.html?lang=en 5 – PWC Report - The changing dynamics of pharma outsourcing in Asia: Are you readjusting your sights? The data for this section is taken from this report. 6.http://www.kpmg.com/PH/en/IssuesAndInsights/ArticlesAndPublications/Documents/The%20Philippines-%20Outsourcing's%20new%20destination--%20Guide%20for%20Businessmen%20and%20Investors%202011-2012%20Digital%20Edition.pdf) 7 – INC Research website, http://www.incresearch.com/Company/INC-Research-CRO.aspx 8 – Adam Brandenburger and Barry Nalebuff, The Right Game: Use Game Theory to Shape Strategy, Harvard Business Review - July-August 1995 9 – http://www.incresearch.com/news/detail.aspx?nid=290 10 – http://www.incresearch.com/AVOS/AVOS-Consulting.aspx