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Low R&D productivity driving CRAMS growth
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Vinay Kumar Singh
December 12 , 2014
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Contract Research and Manufacturing Services (CRAMS) is one of the fastest growing sub-sectors in pharmaceutical, biotechnology and cosmetics industries.
The pharmaceutical market uses outsourcing services from low-cost providers in the form of Contract Research Organisations (CROs) and Contract Manufacturing Organisations (CMOs). Huge investments followed by low productivity in R&D are driving companies to cut the manufacturing costs by outsourcing their research and manufacturing activities to low-cost countries like India.
Outsourcing to India offers significant benefits over the other matured pharmaceutical hubs in North America and Europe. India emerged as one of the leading economical, quality manufacturers of pharmaceuticals for number of global players along with multinational companies. Moreover, present economic crisis along with the shootup in prices and generic agenda are forcing global pharmaceutical companies to leverage the strengths of Indian pharmaceutical manufacturers. The present article explains the role of CRAMS, benefits, risks, challenges and recommendations for Indian CRAMS industry.
Global CRAMS market is around US$60-70 billion (estimated to reach US$90 billion by 2015) of which contract manufacturing constitutes around 65% and contract research about 35%. Indian CRAMS business is around US$3.8 billion (estimated to reach US$8 billion by 2015). Global CRAMS market has grown (2005 - 2010) at the rate of 16% CAGR, while Indian CRAMS market has grown at 45% CAGR during the same period.
One-stop shop
The leading CRAMS players are closely looking at full-service providers operating on a global scale. They act as 'one-stop shop' for all services, from preclinical through contract manufacturing and marketing.
CRAMS field in India has undergone a tremendous change since 1990. In the early days of CRAMS, focus was only on manufacturing but from the last 10 years, the focus is towards chemistry services, finished dosage forms and drug delivery systems. Trends have changed from drugs manufacturer and marketing to R&D solution providers. Indian CRAMS has noticed a considerable growth rate in the last decade. Many Indian CRAM companies have collaborated with global players. Indian pharmaceutical companies focus their maximum research on the development of generic drugs which have wide range of complexity from simple to complex dosage forms. Pharmaceutical outsourcing varies from a one-time supply to a partnership agreement. Nowadays CRAMS is on a verge of high growth rate with multinational pharmaceutical companies facing the changes in R&D pipeline surges and slowdowns, internal issues, and global expansion. Globally, India is the only country with more than 175 US FDA approved manufacturing units which makes it a preferred location for multinational companies to outsource their manufacturing services. Overall India has enough number of advantages to grab the CRAMS market over the other competitive countries like China, Korea and eastern Europe.
Drivers of the Indian CMO market
a) Higher number of FDA-approved manu facturing facilities
b) Large and growing talent pool and
c) Continuing cost advantages
Resistors of the Indian CMO
a) Intellectual property concerns
b) Competition from China and safety concerns
Scenario in India: Regulations, competition
Nearly 40% lower operational costs are being offered in India when compared to western CROs. Government policies in India have also noticed drastic changes over a period of time. In 2005, patent regime in India was introduced by Indian Biotechnology Policy simplified procedures for regulatory clearance and exempted import duties and service taxes on the raw material being imported which encouraged multinational pharmaceutical companies to outsource in India. This support led to the growth of CRAMS in India. IPR protection is less superior in Asian countries whereas eastern Europe countries offer superior protection. So, there may be chances of IPR violation. China, Russia, Brazil and Taiwan are the major competitors for India. There must be strict matured regulatory aspects in India to carry out the processes in a systematic manner without which causes delay in timeliness relative to other competitive countries.
These are basically a model of outsourcing that enables business to increase production capacity, acquire new products that they cannot manufacture, and reduce their production cost or concentrate on sales & marketing of products without bothering about other activities that go to bring out the product in the market. It is production of product by one firm, under the label or brand of another.
I always feel that this is the best model of mutual symbiotic business relation where both the parties, the manufacturer and marketing organisation are in a win-win situation.
Reason why one approaches CMOs is to reduce their burden and concentrate on market building exercise and its expansion, as manufacturing organisation takes care of all the need from start to finish i.e., procurement of quality materials, efficient processing to manufacturing of stable, effective & efficient product that builds reputation of the product and also customer acceptability.
CMOs produce complete product and components that are subsequently marketed to customers. The marketing organisation may design and engineer the product or may generate concept of the product, providing the manufacturer with a specification. There are organisations like Mikasa Cosmetics in Ahmedabad, who indulge in CROs for product and develop formulation of the product as per the concept/idea as provided by marketing organisation/brand-owner.
The concept/idea is converted into a product form that is stable, efficient and effective, satisfying the need of the consumer and the whole process is well documented for future reference. Even the technology transfer is facilitated by CRO for hassle-free production, thereby serving as one-stop solution for all product needs.
In this model, there are many benefits for the organisation, making it quite a popular proposition. Following are the direct benefits apart from many indirect ones.
a. Cost Saving: Companies save on their cost of capital because they do not have to pay for a facility (research, quality assurance, production & logistics) and equipment needed for it. They can also save on labour costs such as wages, training and benefits. Some companies may look to contract manufacturers in areas where government offers various benefits. e.g. Uttarakhand / Himachal.
b. Mutual Benefits to Contract Site: A contract between the manufacturer and the company its producing for, may last several years. The manufacturer will know that it will have a steady flow of business
until then.
c. Advanced Skills: Companies can take advantage of skills that they may not possess, but the contract manufacturers/research organisations do have. The contract manufacturer is likely to have relationship formed with raw material suppliers or methods of efficiency within their production.
d. Quality: Contract manufacturers are likely to have their own methods of quality control in place that helps them to detect counterfeit or damaged materials early.
e. Focus: Companies can focus on their core competencies better; means, a manufacturer can concentrate on manufacturing, research organisation can develop best formula and marketing can do better in their area.
f. Economy of Scale: Contract manufacturers have multiple customers that they produce for. Because they are servicing multiple customers, they can offer reduced costs in acquiring raw materials by benefiting from economies of scale. The more units there are in one shipment, the less expensive the price per unit will be.
g. Sharing of Risks and Returns: With activities outsourced to various other firms, the risks and returns are also shared, thus, minimising the same at one particular point.
h. Big Pharma Maximises Revenue Potential: It can obtain the services at low-cost since the other players have expertise in those areas. Eventually the cost of final product is reduced greatly.
i. Big Pharma Controls System sans Owning: The company at the central hub does not own any process but ultimately has the control over the final product.
j. Profit for All: All the firms involved in the collaborations get profits for the services and expertise provided by them in return.
RISKS
a) Lack of control - As soon as a company signs the contract allowing another company to produce their product, they lose a significant amount of control over that product. They can only suggest strategies to the contract manufacturer; they cannot force them to implement them.
b) Relationships - It is imperative that the company forms a good relationship with its contract manufacture. The company must keep in mind that it is not the only customer to the manufacturer. They cannot force them to produce their product before a competitor's. Most companies mitigate this risk by working cohesively with the manufacturer and awarding good performance with more of their business.
c) Quality concerns - When entering into a contract, companies must make sure that the manufacturer's standards are in line with their own. They should also evaluate the methods in which they test product to make sure the products being produced are of good quality. The company has to rely on the contract manufacturer for having good suppliers that also meet these standards.
d) Intellectual property loss - When entering into a contract, a company is letting someone else in on their formulas or technologies. That is why it is very important that a company does not give out any of its core competencies to contract manufacturers. It is very easy for an employee to download such information from a computer and steal it. The recent uptake in intellectual property loss has companies and government officials struggling to find the best method of security. Usually, it comes down to the integrity of the employees.
e) Outsourcing risks - Although outsourcing to low-cost countries has become very popular, it does bring along risks such as language barriers, cultural differences and long lead times. This could make the management of contract manufacturers more difficult, expensive and time-consuming.
f) Capacity constraints - If a company does not make up a large portion of the contract manufacturer's business, they may find that they are de-prioritised over other companies during high production periods. Thus, they may not be able to get the product they need when they need it.
g) Loss of flexibility and responsiveness - Without direct control over the manufacturing facility, the company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to respond to demand fluctuations, risking their customer service levels.
Services provided by CMOs
1. Development of cost-effective formulation with functional aspects built in as an USP; 2. Infrastructure like pilot plants, state-of-art manufacturing equipments; 3. Process development; 4. Identification & sourcing of appropriate equipments; 5. Technology transfer; 6. Documentation of process manual; 7. Sourcing of input materials-Imports as well as local equivalents; 8. Technical information on functional ingredients; 9. Stability studies; 10. Compatibility studies; 11. Preservative efficacy; and 12. Quality control and GMP.
As this model of business is based on mutual understanding between two parties, the manufacturer and marketing company, a contract between the two plays a very important role. A contract should be drawn up between the contract giver and the contract acceptor i.e., between manufacturer and the marketing company, which specifies their respective responsibilities relating to the manufacture and control of the product. Technical aspects of the contract should be drawn up by competent persons suitably knowledgeable in technology, analysis, quality control and good manufacturing practice.
All arrangements for manufacture and analysis must be in accordance with the marketing authorisation and agreed by both parties.
The contract should specify the way in which the qualified person releasing the batch for sale ensures that each batch has been manufactured and checked for compliance with the requirements of marketing authorisation.
The contract should describe clearly who is responsible for purchasing materials, testing and releasing materials. Undertaking production and quality controls, including in-process controls and who has responsibility for sampling and analysis. The contract should state whether or not the contract acceptor should take samples at the premises of the manufacturer.
Manufacturing, analytical and distribution records and reference samples should be kept by, or be available to, the contract giver. Any records relevant to assessing the quality of a product in the event of complaints or a suspected defect must be accessible and specified in the defect / recall procedures of the contract giver.
The contract should permit the contract giver to visit the facilities of the contract acceptor.
In case of contract analysis, the contract acceptor should understand that he is subject to inspection by the competent authorities.
Following must be looked into while making a contract
a. The conditions of contract manufacturing and analysis should be clearly defined, agreed and controlled so as to avoid misunderstanding which could result in a product or work of unsatisfactory quality.
b. There should be a contract between the contract giver and acceptor to clearly establish the duties and responsibilities of each party.
c. The contract manufacturing acceptor must comply with all the conditions laid down in contract.
d. The contract acceptor must be duly accredited by the relevant appointed accreditation agencies.
The written contract must include following
n Duly authorised representatives from the contract acceptor and giver
n Scope of work must be identified between the contract acceptor and giver taking into consideration the following:
For Contract Manufacturing: Formula development, prototype and acceptance evaluation, safety and efficacy tests; if any, packaging development, raw and packaging materials supply and testing and so on.
For Contract Analysis: Sampling (sampling plan, quality of sample, sampling containers), test protocol, test format and so on.
n List of products for contract manufacturing
n Finished product specifications including directions for use
n Packing sizes, container specifications and labelling requirements
n Shipping labels and instructions
n Storage condition and so on.
Both the parties are jointly responsible for the quality of products or the test subject of the contract.
The contract giver shall have the right to audit the manufacturing site and/or supervise the process of testing the contracted products during the period covered by the contract.
The contract acceptor shall not deviate or make any changes to the formulation and/or process/es agreed upon by the parties for the manufacturer or analysis of the product without the prior consent of the contract giver.
If contract is clear on all aspects, then there will be no ambiguity in operation and both the parties will benefit from this mutual symbiotic relation.
The Indian advantage for CROs
a) 50% lower costs in clinical trials compared to global market.
b) Nearly 7 lakh hospital beds in multi-speciality hospitals with state-of-the-art facilities and 221 medical colleges are present in India.
c) Language-India is one of the largest English speaking countries which offers modern science education in English making it easy for the investigators. All the documentation of clinical trials including laboratory reports, clinical notes are written in English with no need of translation required for Western auditors.
d) Rich talent pool- Many clinical investigators with experience in world-class trials and rich exposure to ICH GCP compliance and international audits for protocol.
e) Diversity in population.
f) India with a wide pool of patient population which includes chronic diseases, disease characteristics of both developed and developing countries.
g) Indian pharmaceutical companies, with their reversible engineering skills have evolved superior chemistry, manufacturing and regulatory skills at low-cost.
h) Skilled labour is available at low cost (Labour costs in India are around 1/7th the levels in developed countries).
i) Cut-capital cost: with locally fabricated equipment and high quality local engineering /technical skills 25-50% of set up cost for a project is reduced. This benefit can be shared with customers.
j) Regulatory expertise: Outside USA, highest numbers of US FDA approved plants - about 175 - are present in India.
Emerging opportunities in CRAMS
Annually $850 million were generated by CRAMS. Eight per cent of total Indian pharmaceutical business was made by CRAMS over the last five years [13] with the help of co-marketing alliances to increase the product life cycle.
Indian companies are looking for market expansion by stretching their footprint to major geographies. Increase in competition and saturation of Indian pharmaceutical market space leads the companies to enter into less regulated and developed markets rather than domestic market. In the past two decades, investment on CRAMS is expanded at a double digit pace, which reached US$31.9 in 2011. In the coming five years, on an average 12.0% revenue rise per year in CMO industry will be recorded. By 2016, Indian CRAMS market is expected to increase 30-50% with drugs of market worth US$430 billion losing patent protection.
Challenges for India
a) Increasing cost structure (manufacturing costs and labour costs): India is no longer the lowest cost destination for outsourcing companies.
b) Increasing the competition from other geographies like China and Taiwan.
c) Big pharmaceutical MNCs setting up their facilities in India (off-shoring).
d) Though India has enforced patent laws, there is still lingering discomfort among few multinational companies, particularly small biotech, with working in India.
e) Relative to Western countries, there is still a lot of government control (via licences) that leads to additional timelines, than that of those countries.
f) Focus on safety, health, environment (SHE) is a relatively recent advance, and although it is growing, it needs a much greater focus.
Recommendations for Indian CRAMS industry
Develop capacity and expertise in following areas, which are showing huge growth potential:
a) Biologics: Increased biologics in the discovery pipeline.
b) Cytotoxic drugs: Increasing oncology discovery pipeline.
c) Pre-clinical studies: In vitro and in vivo studies.
d) Biocatalysis: Increasing emphasis on optically pure drugs and stereo-specific and environment-friendly processes.
CRAMS - an attractive business proposition - the reason
Despite few challenges, India continues to offer competitive advantages mentioned earlier and has great potential to become a global leader in CRAMS, because of the following drivers:
f) Global CRAMS is around US$60-70 billion (estimated to reach US$90 billion by 2015) of which contract manufacturing constitutes around 65% and contract research 35% [17].
g) Indian CRAMS business is around US$3.8 billion (estimated to reach US$8 billion by 2015), with almost the same proportion of contract manufacturing and contract research [18].
h) Drugs worth US$90 billion are expected to go off patent from 2011-2015 while the sales from new approvals are now here near enough to replace the blockbusters [19].
i) Increasing emphasis on generic alternatives by healthcare policies of developed countries.
j) Global pharmaceutical companies are focussing on marketing and discover, while outsourcing drug development, clinical trials and manufacturing.
k) Indian companies can also serve as contract marketing partners of multinational companies who want to setup their presence in India. Multinational companies leverage the marketing & distribution infrastructure of Indian pharmaceutical companies to sell their products in the domestic market.
Future needs
Globalisation of standards and skills development and transfer will lead to greater acceptance of India and China as first options for outsourcing contract manufacturing. Even though, India has excess capacity, talented pool of scientists, technology transfer skills, and regulatory compliance facility, India must ensure that it can deliver consistent high quality to capitalise on this potential. In spite of higher FDA-approved facilities in India, many CMOs are still failing to demonstrate the levels of regulatory compliance in entire facility operations involved in manufacturing/testing of drug product expected by sponsors.
CMOs must closely work with pharma companies on a long-term basis with mutual trust and openness so that they complement each other rather than focus on short-term to develop true strategic partnerships. Openness and trust on both CMOs and pharma companies and an honest willingness to cooperate is the key to overcome cost pressure, increasing GMP and quality standards. It is very essential to manage life cycle projects in this present scenario. CMO business model is presently not designed to absorb high levels of risk. Therefore it is critical for the companies to implement a wide array of risk-mitigation tactics.
(The author is general manager-technical, Mikasa Cosmetics Limited)
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