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Industry’s R&D Restructuring Can be Facilitated by India

  • The global generics market is facing an impending “patent cliff” whereby over 300 drugs that generated over US$ 400bn in 2010 sales 1 are expected to go off-patent between 2011 and 2016.
  • Generics companies continue to focus heavily on developing a strong pipeline of ANDA filings with the aim to gain “First to File” (FTF) status for drugs in an intensely competitive environment
  • India has a track record as the premier destination for service outsourcing in a wide range of business process and information technology sectors. Given the precedent of IT, the country’s strong domestic pharmaceutical industry has built the core pharma skills needed for India to emerge as an ally of the industry and a leading global hub for CRO services through a range of new structures.

The Big Question

Prior to the “Millenium bug” galvanizing corporations and government institutions worldwide to reprogramme their technology systems for a total investment of over US$300bn, internal IT departments served their organisations’ front line delivery and back office support teams with self-developed or highly-tailored suites of software. The Millenium bug and corporate responses to it were a a fundamental catalyst for corporations worldwide to rethink their IT strategies, creating massive opportunities for the first generation of Indian IT services companies like Infosys, TCS and Wipro and giving birth to a new industry segment, that of Indian low cost technology outsourcers. Just as the Millenium bug drove major corporations to question the need for in-house technology development, systems integration and hosting in the 1990s, is the pharmaceutical industry today waiting for a potential mission critical issue to rethink its most critical function, R&D?

The global generics pharma industry is poised for continued significant growth, driven by an impending “patent cliff” whereby over 300 currently patented drugs that generated over US$400bn in 2010 sales2 are expected to go off-patent between 2011 and 2016, opening these products up to the generic industry. Generic pharmaceutical companies looking to take advantage of this market opportunity file Abbreviated New Drug Applications (“ANDA”), with the US FDA, to receive approval to market generic versions of these drugs in the US, the world’s largest pharmaceutical market. Similar filings exist for other jurisdictions that enable the generic companies to access, for example, markets in Europe or Asia.

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Unlike large global branded pharmaceuticals companies, generic companies do not generally focus on developing in-house R&D or clinical research capabilities but rather focus on developing a strong pipeline of ANDA filings with the aim to gain “First to File” (FTF) status for drugs. The outsourcing rate from generic pharmaceutical companies thus is considerably higher than the level of outsourcing seen in the branded market.

Changing Global CRO Market

CRO companies typically provide pre-clinical and Phase I-IV clinical trials and lab services to branded pharmaceuticals companies and bioavailability (BA) and bioequivalence (BE) services to generic pharmaceutical companies. The market dynamics of the CRO industry are significantly impacted by the trends in the global branded pharmaceutical market and the global generics market. The global CRO market is expected to grow from US$ 16 billion in 2007 to US$ 35 billion by 2013, representing a CAGR of 14%. Growth in the CRO market is driven by the rising pharmaceutical and biotech R&D investments and an increasing shift towards using of outsourced services. Currently, about 35% of R&D spending is outsourced to CROs and it is estimated that 44% of the development spend, up from 29% in 2007, will be outsourced by 2015, fuelled by rising research and development investments, generic competition, pricing pressures and increased regulatory scrutiny.

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Positive market dynamics coupled with the ability to extract significant synergies through consolidation has driven increased M&A activity in the global CRO market, with over 25 deals announced over the last three years. Large, globally positioned players are continuing to broaden and enhance their existing services offerings through strategic mergers or bolt-on acquisitions. Premium valuations are being ascribed to either niche service offerings and/or competitive advantages that enable a CRO to provide a greater value proposition to its client. Examples include Parexel’s acquisition of Apex International (Taiwan) in 2007, Wuxi’s Pharmatech’s acquisition of AppTec Laboratory Services in 2008, the acquisition of United BioSource by MedcoHealth in 2010, and the recent purchase of RPS by Warburg Pincus (announced in January 2011).

The Transforming Nature of the Indian CRO Market

However as cost pressures at Big Pharma and generic companies continue to increase, a scaled low cost alternative to traditional outsourcing destinations is clearly required. India, with a strong domestic pharmaceutical industry has already emerged as the premier destination for service outsourcing in a wide range of business process and information technology sectors. Given its competitive advantages it is well placed to emerge as a leading global hub for CRO services as well. India provides a favorable environment for the establishment, maintenance and growth of CROs, with core advantages clearly outweighing the perceived challenges:

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These favourable dynamics enable an established Indian CRO with strong regulatory relationships to pass on the economic benefits derived from cost efficiencies and rapid project initiation turnaround to provide a significantly higher value proposition to its target customer base than any Western competitor. The following chart highlights the significant advantage in cost that an Indian CRO has as compared to its US counterparts.

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Structural Changes to CRO in India

The Indian CRO market today is highly fragmented, comprising an estimated 150+ players including captive units, global CROs and domestic CROs. The Indian CRO market was estimated to be US$485m in 2010 and is expected to grow at a CAGR of 15% from 2008 to 2013. Growth in the Indian CRO market is driven by favourable industry dynamics and significant cost advantages that make India one of the world’s most attractive clinical research outsourcing destinations.

In recent years, the more established Indian CROs have transitioned from being mere providers of one-off chemistry or biology-based services to offering a broader, more partnership-oriented, innovation-driven service offerings. This has been backed by a multi-billion dollar initiative by the Indian Government to build infrastructure for discovery and clinical research, offer financial incentives to encourage and incubate innovation and shape a favourable regulatory environment. Figure 12 highlights how India has played a growing role in R&D outsourcing since 2006, a trend that is expected to continue in the years to come.

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The strong value proposition and industry dynamics of the Indian CRO market have attracted investments from several US and EU based CROs, global pharmaceutical firms, and private equity sponsors, although the barriers to entry for setting up a green field CRO in India, are significant and include among other aspects, access to talent base of qualified doctors, regulatory approvals and a longer gestation period.

The competitive advantages offered by the Indian market make it a highly attractive CRO destination. Several large players entered this market early and have established a strong presence based on a track record of performance and reliability. As more international players continue to explore the means to enter this highly profitable market, identifying the right target/partner in the local market to leverage existing clients and local infrastructure is the key. Independent and internationally accredited CROs offer a profitable path to entry in to this market for global players looking to (i) establish a strong foothold in the country and (ii) diversify and augment their current platform to benefit from the strong growth aspects offered by the Indian CRO market.

Structuring Relationships for Value Creation

There are a number of constructs for industry players to consider when structuring relationships, all of which are relevant for investors:

Early signs suggest that these are being actively explored in what is set to be an exciting time for the Indian players who are also pursuing their own international growth strategies to scale themselves, gain enhanced global delivery experience and build capacity.

Greater Pacific Capital’s pharma investing and research team are active participants in the industry through their investment in one of the leading companies in the sector and their pursuit of a strategy to create an international delivery platform.

For further information contact Gautier de Limelette at contact@greaterpacificcapital.com.

Gautier is a senior member of the firm’s management team and Indian office. Previously, he was at Goldman Sachs. His sector experience includes high technology, telecommunications, media, mobile, and industrials. Other work experience includes Analyst in the Investment Banking Division of UBS Warburg in London, working on M&A transactions in the capital goods sector as well as Leveraged Finance. Gautier holds a Master of Business Administration from the University of Louvain in Belgium.)

1 : Evaluate Pharma, March 2011

2 : Evaluate Pharma, March 2011

3 : Per current list of colleges from Medical Council of India, March 2011

4 : The Glorious Metamorphosis, Ernst & Young, 2009

 

©2013 Greater Pacific Capital