oppi ernts n young_ pharma sector 2009

Taking wingsComing of age of the Indian pharmaceutical outsourcing industry

Ranga Iyer President OPPI

The engineering industry has discovered India’s talent and potential for what an automobile maker called “frugal engineering”. Global automakers are now tapping India’s engineering resources to improve their competitiveness. A similar revolution is under way in the pharmaceutical sector. As this OPPI-Ernst & Young study reveals, India has emerged as a growing customs manufacturing and outsourcing destination with a growth rate of 43% that is thrice the global market rate. I am sure that this study will be an eye-opener for everyone on the growing potential of India’s vibrant pharmaceutical sector.

Organisation of Pharmaceutical Producers of India

Taking wings Coming of age of the Indian Pharmaceutical outsourcing industry

Taking wings2

Table of contents

Foreword Introduction Executive summary Insight into pharma outsourcing to India

Acknowledgement Glossary of terms

Coming of age of the Indian pharmaceutical outsourcing industry 3

Section 1 : Trends in the global pharmaceutical industry and resultant shift to outsourcing

Section 2 : Custom manufacturing services

Section 3 : Drug discovery and development services

Foreword Introduction Executive summary Insight into pharma outsourcing to India

Acknowledgement Glossary of terms

Taking wings4

Foreword


Tapan Ray Director General OPPI

Dear reader,

By 2020 India is expected to be one of the top 5 pharma innovation hubs with one out of every 5 to 10 drugs discovered worldwide coming from India, as reported by The Economic Times dated 14 March 2009 quoting Mr. Ashok Kumar, Secretary, Department of Pharmaceuticals, Ministry of Chemicals and Fertilisers, Government of India.

Focused actions aimed at building world class infrastructure, creation of a large talent pool through public-private partnerships, offering financial incentives to encourage innovation and shaping a favorable regulatory environment will help propelling the country in this direction faster.

Towards this effort, the Organisation of Pharmaceutical Producers of India (OPPI) has been undertaking, over a period of time, a series of research studies to meet the unmet information needs of the stakeholders to help improving the healthcare environment of the nation. We are pleased to share that to encourage innovation in the country; OPPI has recently collaborated with two premier R&D focused institutions, National Institute of Pharmaceutical Education & Research (NIPER) and Council of Scientific & Industrial Research (CSIR) through a Public-Private Partnership (PPP) initiative.

Decreasing R&D productivity and increasing cost containment pressures are driving the global pharmaceutical companies to contract out some research related and manufacturing activities from North America and Europe to low cost destinations of the world like, India and China. A global survey done by the Economist Intelligence Unit (EIU) about two years ago on the preferred centers for overseas contract research indicates 39% preference for China and 28% preference for India. The Indian Pharmaceutical industry is poised to grab this opportunity with its world class facilities and large pool of English speaking skilled manpower.

By 2010 global Contract Research and Manufacturing Market (CRAMS) is expected to reach around USD66b (excluding clinical trials), when Indian CRAMS market will be around USD3.8b (excluding clinical trials) with CAGR of 51%. The global market for contract manufacturing is highly fragmented. The market share of top 10 companies in this field is just around 30%.

Realising the importance of the CRAMS sector, Global Sourcing Committee of OPPI spearheaded by Mr. Alok Sonig, Managing Director, Bristol-Myers Squibb took the initiative to partner with Ernst and Young for a study on the Indian Contract Research And Manufacturing Services (CRAMS) sector.

This report captures the opinions of the key stakeholders like, the customers, the suppliers, the regulatory authorities, various experts group to highlight India’s potential in the CRAMS space. I compliment the members of the Global Sourcing Committee of OPPI and the Ernst & Young team for preparing this important research report aimed at offering significant value to the stakeholders in pursuit of excellence.

Taking wings6

Alok Sonig (MD, BMS India) Chairman OPPI Global Sourcing Committee

Dear reader,

On behalf of OPPI’s Global Sourcing Committee, I am pleased to share this comprehensive, yet succinctly summarized, body of work put together by the OPPI and Ernst & Young.

India and outsourcing are invariably used in the same sentence. We all know that India has become an established player across industries such as I.T. and other G&A functions such as Human Resources and Finance. While this has happened due to cost advantages, skilled workforce, and a favorable political and economic environment, the OPPI and Ernst & Young teams undertook this initiative to better and more specifically understand the current and future drivers of growth for outsourcing pharmaceutical R&D and manufacturing to India.

The team reached out to several pharmaceutical leaders and professionals worldwide, both suppliers and customers of services, to develop a balanced perspective on India’s capabilities in these areas and the outlook ahead.

The worldwide pharmaceutical industry is keenly looking at driving effectiveness and efficiencies in R&D and Manufacturing and is looking at India with renewed interest. I am confident that this report will provide a renewed and rich perspective as global players gear up to make significant bets on the Indian R&D and manufacturing capabilities.

I’d like to thank members of the OPPI sourcing committee Ms. Mukta Arora, Eli Lilly (Vice Chairperson), Dr. Ashoke Banerjee, GSK Pharmaceuticals, Mr. Jayant Dwivedy, Piramal Healthcare, Mr. Nilesh Wadhwa, Sanofi-Aventis, Mr. Chittur Devaraj, Wyeth and the Ernst & Young team who have made this comprehensive report possible.


Dear reader,

For many decades, the pharmaceutical and biotechnology industry has been considered an “evergreen” industry. It has weathered recessions, downturns and upturns and has provided investors with certain risk/reward that was well understood and documented. The rate of change in this industry, compared with most of the others, has always been sedate – with a group of few pharmaceutical companies driving its future.

This decade has seen perhaps the most significant changes in the fortunes of the pharma industry:

Development of new products, the real driver of growth and • profitability, has seen a serious drop in approvals, against a backdrop of ever increasing R&D costs.

There has been an emergence of biologics as a significant • driver of new R&D. Many of the established pharmaceutical companies have had to make changes/acquisitions to align their portfolios to include a larger biologic presence.

On the other end of the product life-cycle, the ever • strengthening generic competition has meant rapid declines in sales of products going off patent.

The global financial crisis of the past two years has added the • final challenge in that the key markets, US & Europe, have had low/no growth.

Big Pharma in particular have had to take a look at their business models and refocus energies towards new growth opportunities (biologics, cytotoxics and emerging markets) as well as evaluate more cost efficient operating models. The result has been that the innovative pharmaceutical industry has moved into a faster trajectory of outsourcing and offshoring of R&D and manufacturing across APIs and dosage forms. The global outsourcing industry is USD51b and growing at 14%; faster than the global pharmaceutical industry growth.

India is perfectly positioned to be a preferred destination for global pharmaceutical companies to outsource R&D as well as manufacturing. Some of the key drivers being:

Track record of supplying pharmaceutical API and • formulations globally (with all the requisite quality and regulatory approvals in place) – particularly small molecule

Strong cost/quality proposition. Lower costs and strong • supply of skilled manpower (scientists, QA/QC professionals etc) and capital efficiency

Diverse and wide group of companies who have acquired • this capability

India as a outsourcing market is USD1.1b and growing at ~51%. The opportunity for growth for Indian as well as global companies looking at setting up in India is very strong and sustainable for the foreseeable future.

The Indian outsourcing industry has overcome many hurdles along the way and is now poised to assume the mantle of leadership as a strategic partner of choice for global pharmaceutical companies across the areas of R&D and manufacturing.

This publication, collaboration between OPPI and Ernst & Young, attempts to characterize the Indian outsourcing landscape, its capabilities, challenges and opportunities, all of which could make it the preferred destination for partnering, especially when outsourcing decisions are increasingly becoming strategic in nature.

The times we are going through encourage you to explore, engage and partner with the Indian outsourcing industry, which is truly at an inflexion point.

Ajit Mahadevan Partner Ernst & Young

Hitesh Sharma Partner Ernst & Young

Taking wings8

Introduction


IntroductionThis report is a collaboration between Organisation of Pharmaceutical Producers of India (OPPI) and Ernst & Young and aims to present to you:

Trends in the global pharmaceutical industry that are leading to an increase in outsourcing •

An assessment of the capabilities and potential for growth of the Indian custom manufacturing and • drug discovery and development outsourcing industry in light of the customer expectations from their outsourcing service providers

While this report covers clinical trials supplies, it does not cover clinical trials services market.

Lead molecule identified

Launch

Discovery

On-patent growing

On-patent maturePre-launch Off patent Discovery

research

Expiry

Development Full scale manufacturing

Research biology

& chemistry

Pre-clinc.

Ph I

Ph IIb

Ph III

Ph IIa

Contract research Contract manufacturing

The viewpoints and conclusions presented in this report are an outcome of discussions with various stakeholders, i.e., customers, suppliers, regulators, key opinion leaders and data available in public domain and our industry understanding. As part of this initiative, we have interviewed/interacted with more than 50 respondents across 30 organizations including large and medium pharmaceutical companies across US, Europe and India; Indian suppliers and regulatory authorities. Further, as part of this report, a benchmarking survey has been conducted, to assess relative attractiveness in custom manufacturing outsourcing of six countries/geographies – India, China, Eastern Europe, Puerto Rico, Singapore and Ireland. The findings of this survey are presented as part of this report.

This report is intended to serve as a reference document for the global pharmaceutical community to explore, assess and partner with India in the pharmaceutical outsourcing segment. It does not consider the investment objectives, financial situation and impact of specific business decisions associated with outsourcing in general and India in particular.

Pharmaceutical value chain

Taking wings10

Executive summary

The global pharmaceutical and biotechnology industry is in the midst of challenging times.In 2008, the global pharmaceutical market has grown at the slowest rate in this decade and is expected to slow down further. The market reached USD773 billion at a growth rate of 4.8% in 2008, which is the slowest growth rate of the decade. The two largest markets, the US and Europe which contributed almost 73% of the global market in 2008, achieved growth rates of 1.4% and 5.8% respectively. Going forward, the US market is expected to stagnate or decline further over the next five years while the European market is expected to grow at a sluggish pace with a CAGR of 2 - 5% for 2008 - 2013. There are primarily four reasons for this slowdown:

Decreased R&D productivity: during the eight year • period between 2000 and 2008, while the total R&D spend of pharmaceutical companies has increased from USD53 billion to USD129 billion, the number of drugs approved has declined. This decreased R&D productivity is due to the increased failure rate in trials and higher cost of developing new drugs due to stricter regulatory requirements.

Current global financial crisis: the crisis has severely • affected the liquidity of small biotech companies; with 44% of the US biotech companies having less than a year’s operating cash and 26% having less than six months of operating cash. Further, the consumer spend on healthcare has declined, reflected by a drop in the number of prescriptions in the US by 2% for the first time in a decade in 2008-09.

Increasing penetration of generics: penetration of generics • in US, in terms of their share in total prescriptions, has increased from 47% in 1999 to 63% in 2007 .Going forward, this is expected to increase further driven by impending patent expiries and measures by governments to reduce healthcare costs.

Fewer and smaller blockbusters: decreased number of • blockbuster approvals to replace the existing ones going off patent and reduced sales potential of recently launched drugs will further decelerate the market growth. The sales of blockbuster drugs have grown only 9% in 2007 compared to 24% in 2004. Further, projected sales of top 10 NMEs launched in 2008 show no potential of achieving a blockbuster status in the next 5 years.


Executive summary

These challenges have forced the industry to look at three key imperatives for creating and sustaining profitable growth – new technology, emerging markets and efficiency enhancementPharmaceutical companies are tackling the slowdown by focusing on new technologies, participating in emerging markets and enhancing efficiency.

The companies are focusing on biologics, which is making • rapid in-roads in the global pharma industry and is projected to have a share of 23% of total market and 50% of top 100 molecules in 2014. Other new technologies which are increasingly becoming areas of interest are the ones required for complex chemistries, such as lower-temperature technology that can suppress side reactions and increase reaction selectivity, chemical decontamination technology for cytotoxics and research in nanotechnology.

Emerging markets are expected to be the key engines • of growth for the global pharmaceutical market. While there has been a slowdown in the western pharmaceutical market, emerging markets which form 18% of the global pharmaceutical market, continue to drive growth contributing 49% of the total growth in 2009. Emerging markets outperformed developed markets in terms of growth with a CAGR (2003-2008) of 12-13% whereas CAGR for developed economies stayed around 6-8% for the same period.

Pharmaceutical companies are focusing on restructuring • and implementing cost containment initiatives. Almost all of them have announced cost reduction programs over the past few years. They are increasingly using acquisitions as a key strategy for sustained growth and adopting a ‘‘networked’’ operating model to boost efficiencies, gain access to technologies and to emerging markets. Through “networked” model, pharmaceutical companies have been increasingly becoming reliant on using third parties to improve efficiencies through in-licensing, out-licensing, collaborations and outsourcing.

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Outsourcing is no more an option but a strategic imperative for pharmaceutical companies across the globeOver the past two decades, there has been a shift in the pattern of outsourcing. Companies have moved from outsourcing non-core functions to routinely outsourcing a number of core functions such as manufacturing and drug discovery and development. Between 2006 and 2009, percentage of big pharma companies considering outsourcing for strategic advantage has increased from 42% to 57%.

The global R&D and manufacturing outsourcing market • (excluding clinical trials) is USD51 billion in size and represents 19% of total global pharmaceutical R&D and manufacturing spend in 2008.

Across the value chain, the penetration of outsourcing varies • significantly with approximately 55% penetration in API manufacturing and 15% penetration in dosage (formulation) manufacturing.

The R&D and manufacturing outsourcing market has two • major segments – custom manufacturing services and drug discovery and development services.

Custom manufacturing, spans from clinical trial phase • II b to the off-patent stage and includes manufacturing of intermediates, APIs and formulations. Global custom manufacturing services market is valued at ~ USD33 billion and is projected to grow at a CAGR of 13% between 2007 – 2010. The growth of this industry is driven by:

Rationalization of plants due to low capacity utilization: • Big Pharma companies have built huge capacities over the years and with products moving to the late lifecycle, these companies are operating plants at only 20–30% capacity. As a result, more companies are looking at divesting such plants and outsourcing while retaining marketing rights for the products thereby reducing their fixed costs.

New operating models for companies: Many of the virtual/• emerging biopharma/biotech companies do not have an internal capacity for manufacturing and outsource it while retaining only the marketing rights.

Emergence of biologics: As a high percentage (~75%) • of the current pipeline is from biologics and cost of investing in a new manufacturing facility is high, companies prefer to outsource manufacturing rather than to invest in a facility.

Drug discovery and development, spans from target • identification though lead optimisation till clinical trial IIa. Global drug discovery and development services market is valued at ~ USD18 billion and is projected to grow with an estimated CAGR of 17% over 2007 – 2010.

Globally, pharmaceutical companies are shifting their outsourcing activities to Asian markets with India emerging as one of the most attractive destinations.

India is a fast growing custom manufacturing outsourcing destination with a growth rate of 43% that is thrice the global market rate. This is driven by its ability to create a differentiating cost value proposition powered by its lower manufacturing costs, skilled manpower and strong technical capabilitiesAssurance, quality and service are the ticket to play in the custom manufacturing space while cost and innovation serve as differentiating criteria for selection. The India story is driven by its offering of a ‘cost value proposition’ comprising cost efficiency along with skilled manpower and technical capabilities.

As per our survey conducted as part of this study, India is rated • highest in terms of its cost efficiency attractiveness among six countries – India, China, Eastern Europe, Puerto Rico, Singapore and Ireland. Approximately 67% of the respondents have rated India as “excellent” and rest 33% have rated it “above average”.

India’s cost efficiency is driven by its low manufacturing • costs which is only 35-40% of the cost of manufacturing in the US supported by its low installation and manpower cost.

Around 90% of the respondents have rated India either • “excellent” or “above average” for its technical capability attractiveness. This is demonstrated by the following:


It has manufacturing prowess in both APIs, where India is • the 3rd largest player in the world with 500 different APIs and in formulations where it manufactures 60,000 packs across 60 therapy areas.

India currently accounts for 8% of the global • pharmaceutical production making it the world’s 4th largest pharmaceutical producer.

Vertically integrated model of Indian players to offer end-• to-end services across development and manufacturing in both formulations and API’s.

It has around 119 USFDA and 84 UK MHRA approved • plants and accounts for one third of DMFs and highest number of ANDAs in the US.

Approximately 90% of the respondents have rated India • either “excellent” or “above average” for its skilled manpower attractiveness.

India offers a large pool of English speaking skilled • manpower. Every year, around 1.6 million graduates and 0.4 million post graduates qualify in science courses.

While the growth in the North American and European • markets is expected to slow down to -1 to 2% and 2 - 5% respectively over 2008-2013, the growth of emerging markets would be 11-14%.This increasing influence of the emerging markets will position India in the proximity of the markets driving growth of the pharmaceutical industry.

Share of emerging markets in clinical trials has been • increasing and India is emerging as a hot spot as compared to most emerging markets, with a robust growth of 31% p.a. over the last four years. This trend will increase India’s proximity to the clinical trial supplies market.

67% of respondents have rated India “above average” both • on project management attractiveness and response time attractiveness indicating that India has developed strong project management capabilities with reduced turnaround time

While India needs to improve its IP perception Indian • companies are adopting various business models to ensure partnering with global companies and have been successful in doing so.

In order to further strengthen India’s position in the • pharmaceutical manufacturing outsourcing market, government has taken or planning to take several initiatives such as

Streamlining and reducing time frame for approvals • involving NOC manufacturer and NOC export licenses from 8 – 12 weeks to 2 weeks.

Providing infrastructure support such as building • “Pharmazones”, a separate dedicated temperature and atmosphere controlled area to maintain the safety, efficacy, and quality of imported and export drugs/pharmaceutical products at international airports at Delhi, Hyderabad and Mumbai.

Building capabilities through collaboration with western • countries such as MoU with US FDA, WHO, Health Canada, South Africa and EMEA.

All the above factors have been instrumental in the Big • Pharma conducting their sourcing operations from India and attracting global CMOs like Lonza, Patheon, DSM and Albany Molecular Research Institute to set up base or collaborate in India.

India is thus well poised to become the strategic partner of • choice in the arena of contract manufacturing

Taking wings14

In drug discovery and development services, India is emerging as a hot spot, growing at ~ 65%, i.e. more than three and half times the global growth rate driven by strong chemistry capabilities, skilled manpower and cost value propositionEach stage of the discovery and development cycle has different requirements, but certain attributes are required across the value chain. While speed of delivery is more important in case of development, innovation is more important in case of drug discovery. Flexibility, integrated capabilities and cost value proposition are the attributes applicable across both drug discovery and development. India’s story is driven by cost competitive strong chemistry capabilities supported by talent pool of skilled professionals and R&D infrastructure.

India has developed strong capabilities in process chemistry, • medicinal chemistry and analytical chemistry. Further, process development and scale up capabilities for clinical APIs and formulation manufacturing across various dosage forms such as solids, semi-solids, liquids, powders (lyophilisation) and parenterals have also been undertaken.

India has developed pre-clinical services capabilities with • a number of animal testing facilities (existing and under development) using dogs and primates.

India offers significant cost arbitrage in end-to-end research • and development with potential savings of 61% as compared to US. Further, India offers an abundant pool of professionals in the area of drug development and research chemistry with ~ 50,000 pharmacists and 150,000 chemistry post graduates qualifying every year.

India has more than 200 DSIR (Department of Scientific and • Industrial Research) approved in-house pharmaceutical R&D units and 48 GLP compliant R&D facilities.

Big pharma companies and global outsourcing service • providers have started focusing on India for drug development and research chemistry. Big pharma companies have adopted different operating models such as captive off shoring, dedicated R&D unit in partnership, fee for services and collaboration/JV.

However, India lacks a culture of innovation due to legacy issues such as low levels of funding, collaboration between industry, academia and educational infrastructure

India spends only 0.8% of its total GDP on research and • innovation which is much lower as compared to developed countries such as US (2.8%), Japan (3.1%), Germany (2.5%) and France (2.2%).

A two-way traffic of knowledge and experience between • industry and academia is quintessential for innovation .Unlike in the west, the transfer of knowledge between industry and the academia is comparatively lower in India due to minimal movement of people from the industry to the academia and vice versa. While recently there has been some movement from academia to industry, this needs to increase significantly and the movement from industry to academia most certainly needs to gain traction, to ensure cross fertilisation of ideas.

To innovate, scientists need to draw from different disciplines • like mathematics, biology & chemistry; however the education system in India creates scientists who have little exposure across disciplines due to the excessive focus on specialization and minimal opportunity to change disciplines. Lack of interdisciplinary processes is one of the factors that has hampered innovation in drug discovery in India.

Indian educational institutes do not have the relevant • exposure to the industry and follow a curriculum which does not include courses like programs in regulatory affairs, IPR, legal issues and scientific development. Further, less attractive career options in the area of research result in students either not opting for research as profession or migration from India in search of better options. For instance, 39% of the pharmacists working in the US are of Indian origin.


The Indian government has recognized the need to build an environment conducive for research and innovation and has planned/implemented a number of initiatives to provide the much needed impetus to research and innovation in pharma & biotech

The Government of India is embarking on a major multi-billion • dollar initiative with 50% public funding through a public-private-partnership model to harness India’s innovation capability. The vision is to catapult India into one of the top five pharma Innovation hubs by 2020 with one out of every five to ten drugs discovered worldwide by 2020 coming from India.

The Government of India is promoting collaboration among • industry, academia and government through various programs such as New Millennium Indian Technology Leadership (NMITLI) and Drugs and Pharmaceuticals Research Program (DPRP).

Government has set up 7 NIPERs as institutes of “national • importance” to achieve excellence in pharmaceutical sciences and technologies, education and training.

These initiatives have motivated Indian pharmaceutical • companies to pursue drug discovery programs. Indian companies are pursuing new drug discovery research and have more than 50 candidates across different stages of drug pipeline.

However, India needs to rapidly build its research biology and further enhance its development capabilities to emerge as a partner of choice for early stage discovery and patented product launches.

Despite India’s inherent advantages, it accounts for only ~3% share of global outsourcing market, indicating significant opportunity for growth in this segment.The global pharmaceutical and biotech industry is yet to harvest the full potential of India’s skilled talent pool, strong technical capabilities and cost value proposition. This can be attributed to the perception arising from its legacy of IP regime and its branded generic market image, which have in the past hampered global pharmaceutical companies from taking advantage of the value proposition offered. This mindset has been undergoing a sweeping change and India has set its sights on becoming the strategic partner of choice to the global pharmaceutical industry. This can be achieved in both arenas by;

Custom manufacturing:• Building infrastructure, instilling a culture of quality & acquiring newer technology capabilities such as biologics, cytotoxics and lyophilization for custom manufacturing and

Drug discovery and development services:• Creating global reach, developing end to end service offerings, building a culture of process safety and quality, creating a project management mindset, investing and building biologics, research biology, lyophilization and cytotoxics capabilities to capitalize on future high growth opportunities.

The Indian pharmaceutical outsourcing service provider community is committed to demonstrate the capability required to enhance its credibility further in global pharmaceutical industry.

Taking wings16

Section 1: Trends in the global pharmaceutical industry and resultant shift to outsourcing


Section 1

1.1 The global pharmaceutical market has grown at the slowest rate in this decade and is expected to slow down further. This is being shaped by:

Declining R&D productivity ►

The current global financial crisis ►

Increasing genericization ►

Fewer and smaller blockbuster ►

1.2 The industry is focusing on three key imperatives to sustain growth:

Investing in new technology platforms ►

Building a presence in emerging markets ►

Enhancing efficiency in operations ►

1.3 Acquisitions and the networked model have emerged as the key levers being deployed by the industry to meet these strategic imperatives.

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1.1 The global pharmaceutical market has grown at the slowest rate in this decade and is expected to slow down further. This is being shaped by:

► Declining R&D productivity► The current global financial crisis► Increasing genericization► Fewer and smaller blockbuster

Section 1


Global pharmaceutical market growth the slowest in this decade and expected to slow down further

The growth rate of the global pharma market has less than halved in the last decade

The global pharmaceutical market reached USD773b, at a growth rate of 4.8%, in 2008, which is the slowest growth rate of the • decade. The two largest markets, the US and Europe, which contributed almost 73% to the global market in 2008, achieved growth rates of 1.4% and 5.8%, respectively1.

Going forward, it is estimated that global market growth rates will decline further. The US market is expected to stagnate or • further decline over the next five years. The European market is also expected to grow at a sluggish pace with a CAGR of 2 to 5% for 2008–20131

The only silver lining in the global pharma market is expected to come from emerging markets, which, according to IMS forecasts, • will collectively grow at 13–16%1.

Global Pharma market size trend

Source: IMS Health Market Prognosis , March 2009

393

715773

648605

6.6%

11.8%

7.2% 6.8%

4.8%

0

200

400

600

800

2001 2005 2006 2007 20080%

2%

4%

6%

8%

10%

12%

Market size inUSDb

% Growth overprevious year

Source: 1.IMS Health Market Prognosis, March 2009

Taking wings20

Four key structural trends affecting pharma market de-growth

Global pharmaceutical

market de - growth

Decreasing

R&D

productivity

Increasing

penetration of

generics

Fewer and smaller blockbustersCurrent global financial crisis Global pharmaceutical

market de - growth

Global pharmaceutical market de-growth

Decreasing R&D

productivity

Increasing penetration of

generics

Fewer and smaller

blockbusters

Current global

financial crisis

1

2 4

3


Despite increasing R&D spend and number of active compounds in development, no significant change in the number of approved NMEs

Decreasing R&D productivity1

53 5967

7685 92

103114

129

2000 2001 2002 2003 2004 2005 2006 2007 2008***

Note: *** CMR international 2008 pharmaceutical R&D factbook

Growth in R&D expenditure in USDb from 2000-2008

Source: Evaluate Pharma Alpha – World Preview 2012, CenterWatch Analysis, CDER, PhRMA Industry Profile

Although the R&D spend has more than doubled from • USD53b in 2000 to USD129b in 2008, the number of NCE approvals have shown a largely declining trend with a historic low of only 18 in 2007 before correcting to 25 in 2008.

Further, while there has been an increase in the number of • approved NMEs in 2008, the percentage of new products, which offered a significant improvement* over currently marketed products, fell from 44% in 2007 to 36% in 2008.1

Over the last five years, the average number of active • substances in the development for the first launch has increased steadily across companies. However, this has yet to be reflected in new product approvals.


Decreasing R&D

productivity


generics

Fewer and smaller

blockbusters

Current global

financial crisis



Decreasing R&D

productivity


generics

Fewer and smaller

blockbusters

Current global

financial crisis

1

2 4

3

27 2418 19

36

20 2218

25

2000 2001 2002 2003 2004 2005 2006 2007 2008

Number of NME approvals (2000 - 2008)

Source: CDER NME, BLA Approval 2008

Trend in mean number of active substances** developed for first launch (2003-2007)

36 3946 48 52

2003 2004 2005 2006 2007

Note: **Active substance (AS): The active ingredient that is intended to furnish pharmacological activity or other direct effect to a pharmaceutical product — this may be a chemical, biological, biotech or radiopharmaceutical substance that is or is destined to be made available as a “prescription only medicine,” to be used for the cure, alleviation, treatment, prevention or in vivo diagnosis of diseases in humans

Source: CDER NME, BLA Approval 2008

Note * As defined by the CDER; significant Improvement compared to marketed products in the treatment, diagnosis or prevention of the disease and are under a priority review

Source: 1.CDER NME, BLA Approval 2008

Taking wings22

Declining R&D productivity due to increasing failure rate of NMEs and high costs incurred in developing molecules for complex therapies

The decrease in R&D productivity has been due to:

Increasing failure rate in trialsAn increasing number of projects are being terminated at the • Phase III stage. This has increased by 25% between 2002–2004 and 2005–2007, resulting in fewer NME approvals.

Increasing cost of developing a new drugThe average cost of developing a new drug has increased • from USD1.1b in 2004 to USD1.3b in 2008.

Source: Tufts Center for drug development

Annual drug withdrawal, based on NME, and the withdrawal • data for preceding periods indicates a sharp rise ranging from 4–10% and an average of 7%1. Thus, stricter FDA regulations have increased the need for more extensive data submissions.

Number of projects terminated in Phase III

31

36 35

39

2002 - 04 2003 - 05 2004 - 06 2005 - 07

Source: 2008 © CMR International, a Thomson Reuters businessBased on data provided for all years by 19 companies

In addition, the FDA requires companies to monitor drugs after their launch for safety, and can at times require specific additional • data. Such data is known as post-marketing commitment (PMC). Over the last decade, the number of PMCs has increased by 50%, resulting in a significant cost increase2.

Source: 1. Analysis Group Inc, 2. Datamonitor

Increase in time taken for trial completion and drug approval

Longer trials with higher complexity result in increased costs.•

Six therapy areas, oncology, CNS, respiratory, • endocrinology, cardiovascular and infectious diseases, account for 68% of all clinical trial protocols.

These therapies require a larger number of patients • per trial, e.g., the mean patient enrolment rates in the therapies mentioned above for Phase III trials is nearly twice as much as compared to other therapies.

Source: Karlberg, 2008, EY FICCI Report

Parameters 1999-2002 2003-2006

Average duration of Phase 1-3

5.8 years 7 years

Protocol design to database lock time

460 days 780 days

Patient recruitment rates

75% 59%

Volunteer retention 69% 48%


Reduced funding to mid-tier and small pharma/biotech companies and decreased consumer spending due to financial crisis


Decreasing R&D

productivity


generics

Fewer and smaller

blockbusters

Current global

financial crisis



Decreasing R&D

productivity


generics

Fewer and smaller

blockbusters

Current global

financial crisis

1

2 4

3

Financial crisis2

Small and biotech pharma companies, which contribute almost 75% of the total R&D pipeline, are most impacted by the financial crisis.

Although the financial crisis has had a lower impact on the pharma industry in comparison to other sectors, small biotech • companies have been adversely affected by it. Based on a market study conducted by Ernst &Young’s global biotechnology center, it is estimated that 44% of US biotech companies have less than a year’s operating cash, while 26% have less than six months of operating cash. This is due to decreasing funding from venture capitalists and the inability of small pharma and biotech companies to launch an IPO in current market conditions. The financial crisis will have a negative impact on the already drying product pipeline for the pharma industry.

Source: Ernst & Young, Beyond borders, Global Biotechnology report, 2008

The financial crisis: impacted the consumer spend on healthcareAccording to IMS, contrary to the 5.6% CAGR increase in prescriptions from 1997 to 2007, the number of prescriptions filled in the • US dropped by 2% for the first time in a decade in 2008–09.

Growth in number of prescriptions filled in US

Source: Ernst & Young, Beyond borders, Global Biotechnology report, 2008

1997 2007 2008-09

5.6% CAGR -2%

Taking wings24

Increasing genericization driven by the impending patent cliff due to expiry of key blockbusters and government pressures to reduce cost of healthcare


Decreasing R&D

productivity


generics

Fewer and smaller

blockbusters

Current global

financial crisis



Decreasing R&D

productivity


generics

Fewer and smaller

blockbusters

Current global

financial crisis

1

2 4

3

Generic penetration has increased by 16% in the last decade…3

Source: IMS Health, National Prescription Audit Plus

53 53 49 43 37

47 47 51 57 63

0%

20%

40%

60%

80%

100%

1999 2001 2003 2005 2007

Brands Generics

% of total prescriptions dispensed (in US)The global generics industry was valued at USD78b in 2008.•

The top eight global markets — US, Germany, France, UK., • Canada, Italy, Spain and Japan — today account for 84% of total generics sales.

Sales of more than USD235b are at risk in six years as many • blockbuster drugs go off patent.

Of this, USD~40b worth of drugs are biologics, which are • difficult to copy, and as a result, have low price erosion post genericization. Thus, it is an attractive market for players with biologic capability.

Governments are taking various steps to promote generics to • reduce healthcare costs:

Centralized procurement, e.g., 68% of generic sales in • Germany

Generic substitution, e.g., Japan•

Waiving co-payments for patients using generics, e.g., US•

Promoting and monitoring physician prescription habits•

…and is expected to further increase driven by impending patent expiries and measures by governments to reduce healthcare costs.

Source: EvaluatePharma World Preview 2014, Datamonitor

Sales at risk due to the patent cliff (in USDb)

26 27

5848

39 37

2009 2010 2011 2012 2013 2014

Source: IMS Health, National Prescription Audit Plus

High healthcare costs as % of GDP

15.3%

11.3%

11.1%

10.6%

10.0%

8.2%

US

Switzerland

France

Germany

Canada

Japan


Fewer blockbuster approvals to replace existing ones going off-patent to further decelerate market growth


Decreasing R&D

productivity


generics

Fewer and smaller

blockbusters

Current global

financial crisis



Decreasing R&D

productivity


generics

Fewer and smaller

blockbusters

Current global

financial crisis

1

2 4

3

Fewer blockbuster drugs launched4

One of the other key reasons for the slowdown of the pharmaceutical industry has been the lack of replacements for blockbuster drugs that have gone off-patent in the past.

Decreasing sales growth of blockbuster drugs

Year 2003 2004 2005 2006 2007

Blockbuster sales growth n/a 24% 14% 10% 9%

Market share 33.1% 36.5% 38.7% 39.7% 39.7%

Pharma market growth% n/a 12% 8% 7% 9%Source: IMS Health, Business Insight Analysis

It is evident that although the market share of blockbuster drugs is increasing, this increase has slowed down in recent years. Blockbuster drugs only grew by 9% in 2007 as compared to 24% in 2004.

Reduced sales potential of recently launched drugsThe impact of the industry’s dearth of blockbuster approvals in recent years can be seen in the modest sales potential of all the new drugs approved in 2007 and 2008.

Top 10 NMEs in 2008: ranked on USA Consensus Sales in 2013

Product Company Therapy 2008 2013

1 Treanda Cephalon Oncology 75 544

2 Nucynta J & J Analgesic 0 424

3 Promacta/Revolade GSK Hematology 2 409

4 Pristiq Wyeth CNS 67 372

5 Relistor Wyeth CNS 6 371

6 Lexiscan Astellas CVD 50 296

7 Mozobil Genzyme Oncology 0 275

8 Cimzia UCB I&I 12 249

9 Vimpat UCB CNS 0 237

10 Intelence J & J Anti-infectives 42 215Note: CVD: cardiovascular diseases, CNS: central nervous system, I&I: immunology and inflammation

Source: EvaluatePharma, World Preview 2014; Datamonitor, Company comparator 2009

The projected sales of the top 10 NMEs launched in 2008 show no potential of achieving blockbuster status in the next five years.•

Four of these 10 NMEs have been developed by emerging/biotech pharma (Cephalon, Genzyme, UCB)•

Taking wings26

1.2 The industry is focusing on three key imperatives to sustain growth:

► Investing in new technology platforms► Building a presence in emerging markets► Enhancing efficiency in operations

Section 1


Industry facing three key imperatives for creating and sustaining profitable growth — new technology, emerging markets and enhanced efficiency

Imperatives for pharmaPharmaceutical companies are tackling this slowdown by focusing on new technologies, participating in emerging markets and increasing their efficiency.

Growth

1

2 3

Key imperatives for growth

Focus on new technologies

Expansion in

emerging marketsEnhanced efficiency

Taking wings28

Key imperatives for growth — focus on new technologies

A presence in biologics, which is making rapid inroads in the global pharma industry, accounting for an estimated market share of 23% and 50% of the top 100 molecules in 2014

1

Biologics accounted for 17% of the world pharma market in 2008. It also accounted for 42% of preclinical candidates and 26% of submissions the same year. As a result, the share of biologics is expected to grow to 23% of the world pharma market in 2014. The fastest growing therapies (oncology and diabetes) are being driven by biologics. Within biologics, mAbs, therapeutic proteins and DNA therapeutics are fast-growing segments.

New technologies required for complex chemistries:

Lower-temperature technology that can suppress side • reactions and increase reaction selectivity

Chemical decontamination technology for cytotoxics•

Research in nanotechnology•

Source : EvaluatePharma, World Preview 2014

Share of biologics in top 100 molecules

89%72%

11%28%

50%

50%

2000 2008 2014

Conventional Biologics

10%

14%

AbsentEmergingVery High

5%-5%-6%

2%1%

4%3%

5%-5%-6%

2%1%

4%3%1

Oncology

Immunology

Diabetes

Muscoskeletal

Hematology

Infectious Dis.

Urology

Respiratory

Cardiovascular

Gastrointestinal

AbsentEmergingVery high

Ther

apy

area

s

Monoclonal Antibodies

Therapeutic Proteins

Exposure to generics2

Small Molecules

Me too

targets Interm

ediateN

ovel target

Source : Datamonitor, Future Pharma Trends, 2009 Note : 1.Represents a CAGR 2008-20132.Indicates probability of entry of generics in the segment

Growth

1

2 3


Expansion in



Key imperatives for growth – expansion in emerging markets

Emerging markets are expected to be the key engines of growth for the global pharmaceutical marketWhile there has been a slowdown in western pharmaceutical markets, emerging markets, which form 18% of the global pharmaceutical market, continue to drive its growth, contributing 49% of its total growth in 2009.

2

Source: IMS Health, 2009

Pharma market size (USDb)

311.8

247.5

76.6 90.846.5

North America

Europe Japan Asia/Africa/Australia

Latin America

% share in overall absolute growth of global pharmaceutical market over previous year

57%

12%13%

49%

0%

20%

40%

60%

2003 2009

North America Emerging Markets*

Source: IMS Health, 2009Note: * include India , China , South Korea, Brazil, Mexico, Russia and Turkey.

Source: IMS Health 2009

Pharma market growth CAGR % 2003-2008

5.7% 6.4%

2.7%

13.7% 12.7%

North America

Europe Japan Asia/Africa/Australia

Latin America

According to IMS Health, emerging markets outperformed • developed ones in terms of their growth with a CAGR (2003-2008) of 12-13%, whereas the CAGR of developed economies remained at around 6-8% for the same period.

Big Pharma is increasing its emerging market focus, as indicated by recent deals being made:GSK expanded its emerging market footprint by buying Bristol-Myers Squibb’s branded generics drugs business in the Middle East • and striking a deal with Indian generic drug-maker Dr Reddy’s Laboratories, thereby gaining access to a portfolio of 100+ drugs

Sanofi-Aventis extended its reach into Eastern Europe and Turkey with its purchase of Zentiva in Czech Republic, and has since • expanded into Latin America with the purchase of Medley in Brazil and Krendrick in Mexico.

Pfizer, the world’s largest drugmaker, signed two licensing deals with India-based companies, adding 128 new off-patent products • to its portfolio

Sources: Company websites, press releases

Growth

1

2 3


Expansion in


Taking wings30

Key imperatives for growth — enhanced efficiency

Increasing operational efficiency is essential for sustaining profitability in the long runRising pricing pressure, increasing generic competition, ongoing fallout of product safety concerns, thinning pipelines and looming patent losses have captured the headlines throughout 2007 and 2008.

The industry is responding to some of these issues by restructuring and implementing cost- containment initiatives. Nearly all the major pharmaceutical firms have announced cost-reduction programs over the past year.

The key initiatives of the top pharmaceutical companies include the following:

3

Company Revenue1 2008 (USD million)

Est. annual savings (USD million)

Program term Key initiatives2

Merck USD23,850 USD3,500–4,000 2006–2010 Headcount reduction (7,200, 12%) Plant rationalization (5 of 31 facilities)

Novartis USD41,459 USD1,600 2008–2010 Headcount reduction (2,500, 3%) Global procurement and sourcing Plant rationalization and LEAN initiatives

Bristol-Myers Squibb

USD20,597 USD1,600 2008–2010 Headcount reduction (4,300, 10%) Plant rationalization (27 facilities)

GlaxoSmithKline USD39,694 USD1,400 2007–2010 Improving the selling model Streamlining global manufacturing Enhancing R&D efficiency

AstraZeneca USD31,601 USD1,400 2007–2010 Headcount reduction (7,600, 12%) Strategic procurement Simplifying business support functions

Pfizer USD48,296 USD4,500–5,000 2005–2008 Headcount reduction (10,000, 10%) Plant rationalization (48 of the 93 facilities) Simplifying research and development (R&D)

Johnson &Johnson

USD63,747 USD1,300–1,600 2007–2008 Headcount reduction (4,800, 4%) Consolidation of pharma operations Integration of business model for Cordis franchise

Sanofi Aventis USD38,585 Not disclosed 2009 onwards Headcount reduction (1,300, 1%) Research site rationalization (27 sites)

Sources: 1. Annual reports 2.Company 4Q07earnings release

Growth

1

2 3


Expansion in



1.3 Acquisitions and the networked model have emerged as the key levers being deployed by the industry to meet these strategic imperatives.

Section 1

Taking wings32

Companies increasingly using acquisitions as key strategy for sustained growth…

M&A activities in the pharma and biotech industries have increased over the last three years.•

The year 2009 has been the landmark year in this area, with a spate of large ticket acquisitions taking place with the aim to • augment R&D pipelines and achieve cost benefits through synergies in operations.

Big Pharma is making acquisitions within itself, with biotech and generics players satisfying its business imperatives. •

M&A activity in the pharma space

Value of transaction No. of deals

M&A activity in the pharma space

112

74

117

79 85

167226

271298 284

268

108

0

50

100

150

200

2004 2005 2006 2007 2008 2009 (Till 30 June)

0

100

200

300

400

Value of deals Number of deals

Source: www.mergermarket.com

Key acquisitions by Big Pharma

Type of acquisition Deal Value

Big Pharma — Big PharmaPfizer – Wyeth USD64b

Merck – Schering Plough USD43b

Big Pharma — biotechRoche – Genentech USD44b

Eli Lilly – ImClone USD5.8b

Big Pharma — genericSanofi Aventis – Zentiva USD2.9b

Daichii Sankyo – Ranbaxy USD5.9bSource : www.mergermarket.com


…and adopting a “networked” operating model as a strategy to boost efficiencies, and gain access to technologies and emerging markets

Over the past 20 years, pharmaceutical companies have become increasingly reliant on using third parties to improve efficiencies • through in-licensing, out-licensing, collaborations and outsourcing – moving toward a networked pharma operating model.

The degree to which companies have embraced the networked pharma model to date varies extensively, with some heavily reliant • on third parties, while others are using third parties to a lesser degree.

A networked model with reliable third parties not only enhances capital efficiency but also improves flexibility and the overall cost • structure, maximizes access to novel technologies for increasingly complex molecules, optimizes time to market and releases internal capacity/resource for core tasks.

Source: Datamonitor

Core tasks(in-house)

Outsourcing

Responsibility for a function provided to third party

Pharma company sells the rights to a product or a technology to a third party

Out-licensing

In-licensingCollaborationsPharma company acquires the rights to a product or technology from a third party

Pharma company and third party play a role in

the project concerned

Taking wings34

Outsourcing increasingly becoming a strategic decision for Big Pharma companies

How do pharma companies describe their outsourcing strategy?

Big pharma companies’ inclination to outsource, as a strategic imperative, has increased significantly over last few years.

According to a survey conducted by Contract Pharma across • more than 200 sponsor-side respondents in 2009, 55% of global pharma companies regard their outsourcing as a strategic decision.

Except for responses from emerging bio-pharma companies, • the majority responses from all other types of pharma companies described outsourcing as a strategic decision.

Further, a comparison of the Contract Pharma Survey results • of 2009, with the same survey conducted in 2006, shows that 57% of Big Pharma respondents regard their outsourcing decisions as strategic compared to 42% in 2006.

Source : According to a survey conducted by Contract Pharma across more than 200 sponsor side respondents in 2009

Contract pharma study 2009 (% of respondents)

43%

48%

54%

45%

57%

52%

46%

55%

Big pharma

Small/mid-tierpharma

Emergingbio-pharma

Total

Tactical Strategic

58%

43%

42%

57%

2006

2009

Tactical Strategic

Source : According to a survey conducted by Contract Pharma across more than 200 sponsor side respondents in 2009 and 2006

Comparison of Big Pharma responses across two Contract Pharma surveys


Global outsourcing market, valued at USD51b, 19% of total R&D and manufacturing spend

The R&D and manufacturing outsourcing market amounts to USD51b in size and represents 19% of the total global pharmaceutical • R&D and manufacturing spend in 2008.

Further, the outsourcing market is growing at a CAGR of 14%.•

A recent survey by Contract Pharma in 2009 revealed that 64% of the respondents said that they will continue or increase • outsourcing in 2010 .

Outsourcing is here to stay despite the financial crisis and economic slowdown.

*Note: The R&D outsourcing spend above does not include clinical trialsSources: 1. Goldman Sachs, 20062. CMR International 2008 Pharmaceutical R&D Factbook, 3. India Pharmaceuticals In-Depth – Global Outsourcing – Best Ideas, Morgan Stanley

Report, 2007 4. Ernst & Young analysis

Share of outsourcing in global pharma R&D and manufacturing spend

R&D and manufacturing outsourcing (USD51b)*

Global pharma R&D and manufacturing spend USD264b

Sources: 1. India Pharmaceuticals In-Depth – Global Outsourcing – Best Ideas, Morgan Stanley

Report, 2007 2. Kalorama Information, Outsourcing in drug discovery, 2008 3. State of the Pharmaceutical Outsourcing Industry, 2007, Jim Miller, President,

PharmSource, 4. Ernst & Young analysis

Global outsourcing spend

4451

14%

USDb

5866

0

20

40

60

80

2007 2008 2009P 2010P

Source: According to a survey conducted by Contract Pharma across more than 200 sponsor-side respondents in 2009

Outsourcing spend 2010 estimates

Increase, 39%

No change, 25%

Decrease, 36%

Taking wings36

Outsourcing taking place across value chain with API manufacturing constituting large portion of total outsourcing pie

Outsourcing trends

Utilization of outsourcing across value chain components


Launch

Discovery

On-patent growing


research

Expiry


Research biology

& chemistry

Pre-clinc.

Ph I

Ph IIb

Ph III

Ph IIa


There has been a change in • the reasons for outsourcing and an expansion in the scope of outsourcing.

Over the past two decades, • there has been a shift in the pattern of outsourcing of pharma companies from non-core functions to routinely outsourcing a number of core functions such as clinical trial management and manufacturing. Drug discovery is one of the more recent core functions to be outsourced.

There is higher prevalence • of outsourcing across the late lifecycle than at the early stages.

Outsourcing in API • manufacturing is around 55%, the highest across the value chain

Utilization of outsourcing • in the discovery and development space, as well as in dosage manufacturing, is low since they are considered as core. However, it also indicates the scope for future growth.

Extent of outsourcing in each area of the value chain

Source: Frost & Sulivan, 2006

25%15% 20%

55%

15% 15%

Discovery API dev Dosagedev

API mfg Dosagemfg

Packaging

Further, pharma companies • have indicated a preference for API development and dosage manufacturing along with the intention of increasing outsourcing spends in these areas

Trend in change of outsourcing spend of pharma companies in 2010 over the previous year

Source : According to a survey conducted by Contract Pharma across more than 200 sponsor side respondents in 2009

48%

41%

38%

48%

15%

17%

22%

15%

37%

42%

40%

37%

API dev.

Dosage dev.

API mfg

Dosage mfg.

Increase No change Decrease


Outsourcing to shift to Asian markets with India and China being the most attractive destinations

Probability of a project being outsourced to AsiaAround 35% of the total number of pharma companies will outsource their projects to Asian markets in 2009. However, only 8% of emerging bio-pharma will outsource projects to Asia during the same period.1

Source: 1.According to a survey conducted by Contract Pharma across more than 200 sponsor side respondents in 2009

Source: According to a survey conducted by Contract Pharma across more than 200 sponsor side respondents in 2009, EY analysis

30%

52%

84%

43%

Top pharma

Small/mid-tierpharma

Emerging bio-pharma

Total

Yes May or may not No

Trends in outsourcing to Asia

41%

28%

8%

35%

29%

21%

8%

22%

Emerging bio-pharma being slow to come to Asia could be due to the current credit crunch. Capital constraints have decreased the risk appetite of such companies. This prevents them from looking at destinations that have not been tested in the past, in spite of the cost competitiveness of these destinations.

India and China have been ranked the top two best outsourcing destinations due to their huge market potential and cost-saving offered by them.

The need for a continued evolution of the Innovative Pharmaceuticals Business model, coupled with the war for technical talent, has put India at the heart of global sourcing initiatives. Strong cost competitive and well developed local industry base, combined with the large pool of technical talent has necessitated the inclusion of India as a part of all global sourcing initiatives across global pharmaceutical businesses.Dr. Hasit B. Joshipura Chairman GlaxoSmithKline Pharmaceuticals Ltd., India

Taking wings38

Winds of change blowing in the pharmaceutical outsourcing landscape

Increasing pressures in the pharmaceutical industry have resulted in the emergence of the networked model as companies seek alternative ways to drive revenue and profit growth. Outsourcing is a core part of this model and companies are increasing their reliance on third parties to deliver value across drug discovery, development and manufacturing, which have traditionally been considered as core functions.

Over the last three years, Big Pharma has increasingly shifted the focus of its outsourcing operations from being tactical to strategic.

The outsourcing industry is undergoing a paradigm shift with the rise of a number of new players from emerging economies who offer global capabilities and a substantial cost advantage. This is forcing Big Pharma and Western CMOs to introspect and recognize the need to transition from the West to the East, to fully leverage the benefits outsourcing can offer beyond simple cost-savings to strategic benefits.

Taking wings40

Section 2: Custom manufacturing services


Section 2

2.1 Rationalization of plants due to low capacity utilization, new operating models for companies and the emergence of biologics are the key factors driving the growth of the USD33b global custom manufacturing industry, which is projected to grow at the rate of CAGR of 13% between 2007–2010. The Indian custom manufacturing market is growing at thrice the rate of the global CMO market with Indian companies looking at expanding their capabilities to grow from 2.8% in 2007 to 5.5% of the total market in 2010.

2.2 India scores well on its ability to create a differentiating cost value proposition, powered by its lower manufacturing costs and manpower and technical capabilities, but it needs to build/improve on its culture of EHS compliance, IP protection and infrastructure.

Taking wings42

2.1 Rationalization of plants due to low capacity utilization, new operating models for companies and the emergence of biologics are the key factors driving the growth of the USD33b global custom manufacturing industry, which is projected to grow at the rate of CAGR of 13% between 2007–2010. The Indian custom manufacturing market is growing at thrice the rate of the global CMO market with Indian companies looking at expanding their capabilities to grow from 2.8% in 2007 to 5.5% of the total market in 2010.

Section 2


API and intermediates outsourcing 67% of global manufacturing outsourcing pie of USD33b with an estimated CAGR of 13% over 2007–2010

Global custom manufacturing outsourcing market – size, growth and key segments


Launch

Discovery

On-patent growing


research

Expiry


Research biology

& chemistry

Pre-Clinc.

Ph I

Ph IIb

Ph III

Ph IIa


Manufacturing outsourcing across pharma value chain

Pharmaceutical manufacturing outsourcing, also known as custom or contract manufacturing, spans the clinical trial phase II b through till the off-patent stage and includes manufacturing of intermediates, APIs and formulations.

API and intermediates contribute almost 67%1 of the total outsourcing market.

Source: 1.Boston Analytics, ‘An introduction to the Indian Pharmaceutical Industry – An In-depth study of India’s domestic and outsourced pharmaceutical market,” October 2007

Source: Morgan Stanley India Pharmaceuticals In-Depth – Global Outsourcing – Best Ideas, July 3 2007

Share of outsourcing in total pharma manufacturing spend

Custom manufacturing (USD33b)

Pharma manufacturing spend USD135b

Manufacturing outsourcing account for 24% of total pharma manufacturing spend


Global custom manufacturing outsourcing spend

2933

3742

0

10

20

30

40

50

2007 2008P 2009P 2010P

USDb

13%

Taking wings44

Outsourcing of custom manufacturing services affected by several trends

Closure of assets

Virtual/emerging bio-pharma/biotech

Biologics

Lack of integrated CMOs

Increasing regulatory costs

Drivers Challenges

Drivers Challenges

Closure of assets• : Big Pharma companies have built huge capacities over the years, and with products moving to their late lifecycle, these companies are operating plants at only 20– 30%1 of their capacity. As a result, more companies are looking at divesting such plants and outsourcing and retaining the marketing rights for the products, thereby reducing their fixed costs. Acquiring these assets gives CMOs a new business opportunity and a relationship with Big Pharma.

Virtual/emerging biopharma/biotech• : Many of these companies do not have the internal capacity for manufacturing, and outsource it, only retaining their marketing rights.

Biologics• : As a high percentage of the current pipeline is from biologics, and the cost of investing in a new manufacturing facility is high, companies prefer to outsource their manufacturing rather than invest in a facility.

Lack of integrated CMOs• : Pharmaceutical companies are looking at collaborating with a CMO, which offers end-to-end services spanning development services to packaging and managing logistics. However there are only a few CMOs that are able to provide such services. This is especially true for western CMOs that are present in either formulations or API, unlike some large CMOs in India.

Increasing regulatory costs• : The cost of complying with regulations contributes a high percent of the fixed costs of CMOs. With technological advances taking place regularly, investments in upgrading facilities, to provide the requisite expertise to pharmaceutical companies to sustain business, is essential.

Source: 1.Total European Pharma/Biotech Contract Manufacturing Market , Frost and Sullivan , 2008


Sources: 1.Ernst & Young Analysis , Morgan Stanley India Pharmaceuticals In-Depth – Global Outsourcing – Best Ideas, July 3 2007 2.Boston Analytics , An introduction to the Indian Pharmaceutical Industry – An In-depth study of India’s domestic and outsourced pharmaceutical market, October 2007

Indian custom manufacturing outsourcing market growing at thrice the global market rate and estimated to reach USD2.3b in 2010

Indian pharmaceutical manufacturing outsourcing is valued at USD1.1b and is growing at a rate that is thrice that of the global market.

Indian custom manufacturing outsourcing market (USDb)


0.81.1

1.6

2.3

0

1

2

3

2007 2008P 2009P 2010P

43%

India’s share of the outsourcing market is estimated to increase from 2.8% in 2007 to 5.5% in 2010.• 1

API/Intermediate outsourcing is more prevalent in India than formulation outsourcing. Around 64%• 2 of total outsourcing is in the area of APIs/Intermediates.

Further, most Indian players participate in mid-late lifecycle products and in contributing to the N-2 state of APIs. Indian CMOs do • not participate in the production of the final API/formulation sourced for patented product launch/filing for submission.

Taking wings46

Indian players extending their capabilities to offer wider portfolio of services

Segments Indian service provider

API and intermediates Dishman, Divi’s Labs, Dr. Reddys, Hikal, Jubilant, Piramal, Shasun, Syngene

Formulations Dr. Reddys, Emcure, Intas, Jubilant, Piramal, Strides Arcolab , Syngene

Biologics Dr. Reddys, Emcure, Strides Arcolab, SyngeneSource: Company website , Annual Report. Note: The service providers are indicative and not an exhaustive list and are presented in alphabetical order of preference.

Indian players have been taking the inorganic route of mergers and acquisitions to gain access to customers, new geographies (especially regulated markets) and technology (biologics, sterile injectables , cytotoxics ).

Names of Indian CMOs Acquisitions Capability

Piramal Healthcare Torcan, Avecia, Morpeth API – Clinical Trial Supplies (CTS) , Custom Manufacturing (CM) , fermentation manufacturing facility

Jubilant Biosys, Trigen, Hollister-Stier, Draxis, PSI supply Formulations, injectables in US

Dishman Carbogen and Amcis, Synprotec Drug development and commercialization in Switzerland, UK

Shasun Rhodia Custom Synthesis (CS) and CM in France and UK

DRL Roche, BASF, Trigenesis CM in US and Mexico

Strides Arcolabs Diaspa Fermentation manufacturing facilityNote: The deals mentioned are indicative and are not an exhaustive list. Source: Company website, Annual Report , Mergermarket


2.2 India scores well on its ability to create a differentiating cost value proposition, powered by its lower manufacturing costs and manpower and technical capabilities, but it needs to build/improve its culture of EHS compliance, IP protection and infrastructure.

Section 2

Today, the definition of a successful CMO is going through a transition. Earlier, innovator companies saw outsourced services as a transaction, driven by a combination of speed, cost effectiveness and dependability. Today, outsourced services are seen in a much more strategic light. Relationships are going beyond outsourced development to collaborative development. Hence, for an Indian company to become a successful CMO in the long term, it needs to be trustworthy as a long term strategic collaborator in development and manufacturing. This means that if the CMO wishes to be in the early phase development space, it needs to have strong technical capabilities and be able to deliver quickly as per commitment. As a competitive player in the late life cycle stages, the CMO needs to have the ability to continually innovate to improve on cost efficiencies. There needs to be a match in overall attitude and philosophy towards quality, safety, health and environment, since customers’ risk taking capacity on these aspects is constantly diminishing. In summary therefore, to be successful, a CMO needs to establish strong technical credibility, along with robust management practices (project management, quality management, SHE practice management, financial management and people management) to ensure profitability and business viability.Ajay Piramal Chairman Piramal Healthcare Ltd.

The Indian Pharma Outsourcing has matured significantly during the last decade. The Companies operating in this space have built excellent capabilities not only for API manufacturing but also finished formulations including specialized galenic forms such as cytotoxics, lyophilized injectables, ophthalmologicals etc thus keeping pace with global trends and future needs. India offers a lucrative package comprising of wide spectrum of products, significant cost advantage, unmatchable process efficiencies and nimbleness, which are key success factors for a sound play in Emerging markets - one of future growth drivers for most global pharma majors.Nilesh Wadhwa Director - In Licensing Aventis Pharma Ltd., Sanofi-Aventis Group

Taking wings48

Assurance, quality and service the ticket to play in the CMO space while cost and innovation serve as differentiating criteria for selection

Vendor selection is a function of the country and company-level parameters.

Tick

et to

pla

yD

iffer

entia

tion

Assurance

Quality

Service

Cost

Innovation

Capacity, on time supply, confidentiality, sourcing

Culture, EHS, accreditation

Project management, responsiveness

Manufacturing and manpower cost, cost of capital, tax incentives

Technical capability (biologics, cytotoxics, etc. ), skilled manpower

India is the first place we look for companies with resources, capacity and capability. India business needs to continue to focus on the end to end business model but work harder to build contacts with stakeholders in Pharma R&D - both API and Formulations.Senior Executive based in Europe Global Big Pharma


India story driven by “cost value proposition” comprising cost efficiency along with skilled manpower and technical capabilities

This analysis is based on the Ernst & Young–OPPI survey and interviews carried out with 38 respondents across 17 Big Pharma and medium pharma companies. The respondents were from manufacturing strategy and sourcing teams and senior executives spread across Europe, US and Asia.

India attractiveness evaluation

Source : Ernst & Young analysis

0% 20% 40% 60% 80% 100%

Tax incentives

Infrastructure

EHS compliance

Proximity to market

IP protection

Regulatory environment

Innovation

Project management

Response time (speed)

Cultural compatibility

Technical capabilities

Skilled manpower

Cost efficiency

Poor Below average Average Above average Excellent

Para

met

ers

of e

valu

atio

n

Areas of strength Areas of improvement

The X axis represents the % of respondents

India has been rated as excellent by 67% of the respondents on cost efficiency

However factors such as tax incentives, infrastructure and EHS compliance are areas of improvement.

Bayer believes in value sourcing rather than low cost sourcing and here we see India as a key country that fits into our strategic sourcing plans nicely.K. R. Shekhar Vice President, Procurement and Logistics Bayer CropScience Limited

Taking wings50

India’s cost efficiency driven by low manufacturing costs — only 35–40% of the cost of manufacturing in the US…

Cost efficiency attractiveness

0% 20% 40% 60% 80% 100%

Puerto Rico

Eastern Europe

China

India

Ireland

Singapore


India has been rated as excellent by 67% of the respondents

Source: Ernst & Young analysis

India rank: 1

Source: Crisinfac, 2007 , Ernst & Young analysis

Overall indexed manufacturing cost ( US FDA approved plant )

0

20

40

60

80

100

US Europe India

Cost index

80 -85%

35 -40%

100%

On comparing India with some prominent manufacturing locations, it is seen that India rates higher on cost efficiency than all the other countries. This has been possible due to the intrinsic nature of the Indian pharmaceutical Industry and its evolution. The three key factors that contribute to this efficiency include:

Source: 1.Drugs and Pharmaceuticals for the Eleventh Five Year Plan , Planning Commission of India, December 2006

Manufacturing costs1. : The Indian market is highly fragmented with almost 80001 manufacturers. This high competition has driven Indian companies to relentlessly drive their costs down over the life cycle of a product. The competency developed as a result also reflects in the manufacturing costs of US FDA plants in India, whose costs are 65% lower than that in the US and 50% lower than that in Europe.


…supported by low installation and manpower costs…

2. Installation costs: The cost of setting up a plant in India is 30% lower than that of establishing an FDA plant in the US.

3. Manpower costs: India’s pool of trained chemists and pharmacists is six times as large as the USA’s and is available at less than 1/10th the cost.

Source: CRISINFAC/ Motilal Oswal Securities Report, 2006

Relative indexed cost of skilled chemists

7

70

10095

0

20

40

60

80

100

US Germany Italy India

Cost index

Source: Enam CRAM sector report, March 2007

Installation cost – US vs India

Cost index

70

100

0

20

40

60

80

100

US India

India plays a key role in the Best Cost Country Sourcing Strategy of Bayer Health Care. India is seen as a reliable partner for the more advanced products whereas China is seen as a supplier for early intermediates and less value adding processes.Ingrid Reinkober Vice President Global Procurement – Raw Materials & Intermediates Bayer HealthCare AG Leverkusen, Germany

The Indian market has become a major player for API sourcing. The key strengths lies in its ability to provide low cost API’s (mainly mature API’s) to an appropriate standard combined with an well improved manufacturing and development capability which differentiate themselves from other low cost countries.The areas for improvement are Supply chain management with ‘lean’ focus combined with a greater ability to through out a product lifecycle continuously improve the manufacturing process to drive down the total cost of goods, whilst still maintaining the low cost base.Nicklas Westerholm Director of API Supply, Global External Sourcing AstraZeneca

Taking wings52

…and offering large pool of skilled manpower…

Skilled manpower attractiveness

0% 20% 40% 60% 80% 100%

Puerto Rico

Eastern Europe

China

India

Ireland

Singapore

Poor Below average average Above average Excellent

Around 58% of the respondents rated India as excellent


India is rated as the country with the highest skilled manpower for custom manufacturing. One of the reasons for this is the large number of students who qualify every year, giving companies an abundant pool from which to choose. For example, of the total number of post graduate students qualifying every year, almost 37.5%1 have chemistry as their specialization.

Source: University development in India, basic facts and figures, University Grant Commission, Government of India; NCAER’s National Science Survey – 2004; Ernst & Young analysis; Changing trends in Pharmacy Profession, Express Pharma, Industry sources

Annual supply of talent in India

1,600,000

653,000

400,000

50,000

ScienceGraduate

EngineeringGraduates

PostGraduate

Pharmacist

This large talent pool qualifies from almost 7000 institutes which are approved by the All India Council for Technical Education ( AICTE ), which offer both degree and engineering courses. Almost 9% of these offer pharmacy courses. In addition, there are around 300 college -level educational and training institutes offering degrees or diplomas in biotechnology, bioinformatics and biological sciences, and produce almost 50,000 qualified professionals annually2.

Sources: 1.CII, Ernst & Young analysis , 2.Report of the Working Group for the Eleventh Five Year Plan , Department of Biotechnology, Ministry of Science and Technology

India rank: 1


... who exhibit a high level of cultural compatibility with customers across the world

Cultural compatibility attractiveness

0% 20% 40% 60% 80% 100%

Puerto RicoEastern Europe

China

India

Ireland

Singapore


Around 58% of the respondents rated India as above average and 17% as excellent


Not only is there a large pool of qualified professionals, but English is widely used in higher education, business and medicine-making. India is the second-largest English-speaking country in the world after the US .

India has positioned itself as one of the leading global pharmaceutical players. It not only offers lower cost manufacturing solutions, but innovation through R&D. Process development, drug discovery support services, chemical synthesis and clinical trials are some of the areas which are being outsourced by global pharmaceutical companies. Custom manufacturing of API’s and intermediates presents the biggest opportunity for Indian companies in the CRAM’s sector. India now has the highest number of FDA approved plants outside the US. High costs, margin and pricing pressures faced by global pharma companies can be mitigated by outsourcing their manufacturing to India. Indian companies which maintain global quality, intellectual property and environment, health and safety standards could become preferred suppliers to Big Pharma companies. That being said, India is emerging as the preferred destination and a hub for outsourcing across the entire value chain from drug discovery to drug product manufacturing”Sameer Hiremath Deputy Managing Director Hikal Ltd.

India rank: 3

Taking wings54

India’s forte its technical capability…

India is ranked the highest in terms of technical capability with almost all the respondents rating it as “Above average” or “Excellent”. The key reason for its strong technical capability is its strong manufacturing base.

Currently India accounts for 8% of global pharmaceutical production, making it the world’s fourth-largest pharmaceutical producer1. Its prowess is in API, where it is the third-largest player worldwide with 500 different APIs, and in formulations where it manufactures 60,000 packs across 60 therapy areas.2

Technical capability attractiveness

0% 20% 40% 60% 80% 100%

Singapore

Eastern Europe

China

Puerto Rico

India

Ireland


Amost all the respondents have rated India as either above average(83%) or excellent(8%)


India rank: 1

USFDA-approved plants

Source: Indian Pharma CRAMS, July 2008Note: * Ministry of Commerce and Industry, Department of Commerce, Govern-ment of India - Strategy for Increasing Exports

119

55

27 25

10 8 5

0

40

80

120

India Italy China Spain Taiwan Israel Hungary

India has the highest number of US FDA approved plants outside the US India has the around 119 USFDA3 plants in addition to around 844 UK MHRA approved plants Many of these plants also have approvals from countries such as Canada, Australia, Germany and South Africa. These approved sites aptly demonstrate the ability of Indian companies to deliver quality products worldwide and act as a platform for CRAMs players.

Sources: 1.Report of the Working Group on Drugs and Pharmaceutical s for the Eleventh Five Year Plan (2007 – 2012)Planning Commission Report, Planning commission of India 2.Strategy for increasing exports of pharmaceutical products , Department of Commerce GOI , December 2008 3.Ministry of Commerce and Industry, Department of Commerce, Government of India - Strategy for Increasing Exports of Pharmaceutical Products, December 12, 2008 4.UK MHRA , March 2008

Most large Indian pharma companies are vertically integrated.

In India, companies have adopted a vertically integrated model to become more competitive in the price-competitive Indian market.This advantage has been leveraged by some leading outsourcing players who offer end-to-end services across development and manufacturing in formulations and APIs, unlike western CMOs which generally have a presence in either formulations or APIs, but not in both.


… reflected in large number of filings in the US and increasing exports

India accounts for one-third of the DMFs in the US and has filed the largest number of ANDAs from any other country apart from the US.

Indian companies have been active in filing DMFs in the US since 2000 and had a 36% share of the total filings in 2007. Between 2000 and 2007, India filed 1,155 DMFs with the US FDA, a much larger number as compared to countries such as China, Italy and Japan during the same period.

Cumulative DMF filings

Source: Reliance Money, Indian Pharma CRAMS, The Imminent CRAMs opportunity

51329

1155

268142 131

10% 8%

34%

4% 4% 2%

0

200

400

600

800

1000

1200

1400

India China Italy Japan Spain France Mexico0%

5%

10%

15%

20%

25%

30%

35%

40%

DMF filings

DMF filings % share

% Share in total DMF filing

66 1.5%

India’s share in total ANDA approvals

Source: Reliance Money, Business Standard, March 6 2009

140

20

40

60

80

100

120

140

160

2001 2002 2003 2004 2005 2006 2007 20080%

5%

10%

15%

20%

25%

30%

35%

Total ANDA approvals % share

136

12572

49262421

ANDA filings % share

6% 7% 7%9%

14%

20%

27%30%

Filing such a large number of DMFs and ANDAs has also helped India to develop technology transfer capabilities essential for custom manufacturing players.

Resulting in a growth of exports by 24% over 2004–2008Further, rising exports in formulations and bulk drug production, especially to regulated markets, indicate the high quality of manufacturing capabilities in India.

Exports of formulations and bulk drugs

Source: Strategy for Increasing Exports of Pharmaceutical Products, Report of the Task Force, December 2008, Ernst & Young analysis

1.6

4.11.6

3.3

0

2

4

6

8

2004 2008

Formulations API

USDb

C AG R

20

%

C AG R

26

%

Country name Export share%

USA 19.1

Germany 4.7

Russia 4.7

UK 3.7

China 2.8

Brazil 2.6

Canada 2.5

South Africa 2.2

Nigeria 2.2

Spain 1.7

Taking wings56

Continuous building of capabilities by Indian companies in emerging areas with support from the government

Increasing capability in bio-similars Currently, India has 200 companies working in the area of biotechnology with an emphasis on vaccines and bio-services. There are over a 100 national research centers in the country that support these activities.

India has identified the need to augment its capabilities in oncology and biologics…Oncology is the largest and one of the fastest growing therapy areas in the country and also has the highest number of active INDs; biologics is not far behind and has the third-highest number of active INDs present in the pipeline. India has nascent capability in these areas currently since they require higher investment and highly specialized technology.

…and has taken several initiatives to build its capabilities in this area.

Segment Potential (2010)1

Biopharmaceuticals USD2b

Bio-services outsourced research services)

USD1b

Governmental measures1

The government is in the process of setting up five biotechnology parks in India to promote upcoming biotech companies.• 1

The Department of Biotechnology has set up 35 facilities between 2002–2007 to produce and supply biologicals, reagents, • culture collections and experimental animals to scientists, industries and students at a nominal cost.2

A National Biotechnology Regulatory Authority will be set up to provide a single window clearance mechanism for all • biotechnology products.

International collaboration to assist in the transfer of knowledge between various countries is on the anvil. India has tied up with • Denmark, Finland, France, UK, US, Switzerland and the Netherlands to achieve this.

Enabling public institutions to work with the industry: Public-funded R&D companies will be allowed to set up “not for profit” • companies to facilitate collaboration with the industry. Scientists can pursue innovative projects for a defined period on a user charge basis, providing access to centralized equipment and scientific consultation.

Sources: 1.Department of Biotechnology 2.Report on the working group for the Eleventh Five Year Plan ( 2007 – 2012 ) Department of Biotechnology


India’s proximity to emerging markets likely to impact its current ratings positively

Proximity to market attractiveness

0% 20% 40% 60% 80% 100%

Puerto Rico

Singapore

China

India

Ireland

Eastern Europe


Around 27% of the respondents have rated India as above average; 55% have rated it as average


According to the survey, countries that are in the western hemisphere rate higher than Asian countries in terms of their proximity to market. This is due to the fact that western countries contribute almost 72%1 of the global market today.

However, according to IMS estimates, the growth in the North American and European markets will slow down to -1–2%1 and 3-6%1, respectively, over 2008–2013 period. On the other hand, Asia, Africa and Australia will grow at the rate of 11–14%1. This market is playing an increasingly big role in Big Pharma strategy and is therefore expected to increase the “proximity to market“ rating for India.

Potential growth by region

Source: Ernst & Young analysis, IMS Health Prognosis March 2009

Note : The growth has been calculated based on the best case IMS estimates of CAGR by region over 2008-13

6 6 6 7 7

15 16 17 18 19

13 14 17 19 21

3 3 3 3 4

7 7 8 10 11

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013

North America Europe Asia/Africa/Australia Japan Latin America

Asia/Africa/Australia has the highest share of the market growth

Growth in Asia/Africa/Australia is three times that of the US in absolute terms

Source: 1.IMS Health Market Prognosis, March 2009, Ernst & Young analysis

Taking wings58

Shifting of clinical trials to emerging markets likely to positively impact India’s ranking in clinical trial supply outsourcing

More clinical trials moving to emerging markets will increase India’s proximity to the market…

… especially in the case of Phase III trials, where India is growing almost seven times the global average of 5% CAGR between 2004-2008

Growth in clinical trial studies (CAGR: 2004–2008)trends in clinical trial globalization

Source: Tufts CSDD analysis of BMIS Source: www.clinicaltrials.gov

86 80 77 70 62 57

99 10

1113 14

12 13 19 25 29

5

0%

25%

50%

75%

100%

1997 1999 2001 2003 2005 2007

US Western Europe Rest of world

40% 39% 38% 31% 28% 24% 23% 18% 17% 17% 10% 14%Ko

rea

Chin

a

Rom

ania

Indi

a

Phili

ppin

es

Hun

gary

Russ

ia

Pola

nd

Braz

il

Taiw

an

Aus

tral

ia

Glob

al

No. of Phase III trials started in 2008

Source: www.clinicaltrials.gov

CAGR – 2004 to 2008 35% 39%22%24% 20%14% 39% 22%45% 28%12%

020406080

100120140160

Pola

nd

Aus

tral

ia

Russ

ia

Indi

a

Braz

il

Hun

gary

Kore

a

Rom

ania

Taiw

an

Chin

a

Phili

ppin

es


India’s improved project management capabilities and responsiveness to customer requirements

Response time attractiveness

0% 20% 40% 60% 80% 100%

Puerto Rico

Eastern Europe

China

India

Ireland

Singapore


Around 67% of the respondents have rated India as above average or better


Although most respondents have rated India as above average on both these parameters, it is still rated behind Singapore and Ireland. One of the keys to improve responsiveness and project management is to ensure a reliable supply of raw materials.

Project management attractiveness

0% 20% 40% 60% 80% 100%

Puerto Rico

Eastern Europe

China

India

Ireland

Singapore


Around 67% of the respondents have rated India as above average or excellent.


India rank: 3

India rank: 3

This requires a strategic perspective toward sourcing of raw material rather than a tactical approach. Indian companies are looking at identifying multiple vendors for critical raw materials, to conduct vendor audits and establish a long-term relationship with selected vendors to assure their customers about supplies.

“In terms of strengths, I can think of the fact that India does have a strong pool of talent in the project management function courtesy the highly successful service industry that exists in the nation. CRAMS is a service industry where the products we sell are only incidentalThese are aspects in which many companies need to move several steps towards attaining maturity

Project management still needs recognition as a separate line function and it cannot be a time share for R&D folks.1. While it is a science and technology oriented business, leaving project management with R&D which as a function has too much emotional 2. attachment to the science leads to risk of loosing business focusProject management as earlier mentioned needs to be recognized as a full time line function and it needs autonomy by means of a direct 3. top management sponsorship. It needs to function almost like QA when it comes to autonomy lest the organization looses the customer focusProject management is a techno commercial role at best and NOT a technical role4. Much needs to be done in terms of attaining cross industry learning from an industry like IT where India has excelled in the recent past. 5. Project management operates exactly to the above principles

Senior Executive, Large Indian Service Provider

Taking wings60

Global CMOs attracted to set up bases or collaborate with Indian companies

These capabilities have attracted western CMOs to work in India.

Lonza• is planning to set up a base in India with an investment of USD150m in Hyderabad, which will be engaged in biopharmaceutical manufacturing.1

Patheon• has a strategic tie-up with Kemwell (a provider of formulation contracts, manufacturing and development services in India). The alliance will enable both Patheon and Kemwell to market each others’ services to their clients.2

Albany Molecular Research Institute (AMRI) has followed up its push into new markets for its drug discovery operations by acquiring • the assets of Ariane Orgachem & Ferico Laboratories.2

Sources 1.Fierce Biotech, 22 May 2009, 2.Outsourcing-pharma.com


In spite of cost value proposition offered by Indian companies, IP risk perception limiting growth

Sources: 1.India: Ministry of Commerce and Industry, Strategy for Increasing exports of pharmaceutical products December 2008 2.India: Data Exclusivity, Anand and Anand

IP protection attractiveness

0% 20% 40% 60% 80% 100%

Puerto Rico

Eastern Europe

China

India

Ireland

Singapore




Outsourcing players still perceive IP risk in India …According to the survey, India is rated fifth in terms of perception of IP protection.While, it has implemented the WHO –TRIPS patent regime, companies still perceive a risk on protection of their IP in the country. As a result, many companies are still reluctant to outsource certain parts of their value chain to India, especially in the area of formulations of patented products in the growth phase.

In its Special 301 Submission for 2009, Pharmaceutical Research and Manufacturers of America (PhRMA) recommended that India remains a Priority Watch List country and that the US Government conducts an Out-of-Cycle Review of the deteriorating IP regime in the country.

Key areas of concern: data protection and exclusivity1,2

Currently there are no provisions in Indian laws regarding whether the data collected from clinical trials can be used by the Drug Controller General of India ( DCGI ) in its approval procedures for other drugs. The data protection law will ensure that although the government can approve a generic drug that can claim bioequivalence by using this data, it cannot disclose this data to any third party. The concern of the innovator companies is that in the absence of such a law, the data they provide may be shared with other companies, leading to its commercial usage by other companies.

In addition, there is a debate whether data exclusivity laws need to be enacted in India . Data exclusivity laws would ensure that the regulatory authority will not be permitted to use the data submitted during clinical trials to approve a generic drug till the end of this exclusivity period. This may result in the protection of the innovator product for a period over its 20-year patent life. For example, if a product is introduced in the market in the 18th of its 20-year patent life, and if the country has a five-year data exclusivity law, this would effectively extend patent protection to 23 years.

Taking wings62

Launch of patented products in India — an indication of waning IP risk

Although there are concerns on data protection and data exclusivity, companies have launched “on patent products” in Indian markets, which shows that IP risk perception about the country might be waning.

Company name On-patent brands launched in India

Pfizer Vfend, Viagra, Lyrica, Caduet, Genotropin, Macugen, Champix

GSK Windia, Coreg, Arixtra, Flutivate – E , Boostrix, Infranix, Tykerb

Roche Tamiflu, Avastin, Tarceva, Pegasys

Sanofi Aventis Aprovel, Stilnox

MSD Lescol XL, Lucentis

Novartis Gardasil, JanuviaSource: CrisInfac, Ernst & Young analysis


Different models adopted by Indian players to mitigate risk perception

The IP risk perception for Big Pharma is increasing due to the Para IV filing strategy of Indian generic players. As a result, Big Pharma is reluctant to outsource products under patent to Indian companies that have a Para IV filing generic strategy.

Indian players use different strategies to mitigate the perception of Big Pharma:

Companies have clearly defined their generic policy of not filing Para IV products and have a non-competing policy with the Big • Pharma, e.g., Piramal Healthcare.

Companies that only work in the API space and have not entered the formulations space, e.g., Divis Labs and • Dishman Pharmaceuticals.

Companies interested in generics have also established separate organizations that are independent from the parent organization, • to prevent any conflict of interests, e.g., Biocon-Syngene.

Companies file Para IV but work predominantly with biotech companies in the US and Europe for whom the risk of Para IV filing is • low, e.g., Dr Reddy’s Labs.

Taking wings64

Need for India to improve regulatory timelines

Regulatory environment attractiveness

0% 20% 40% 60% 80% 100%

Puerto Rico

Eastern Europe

China

India

Ireland

Singapore


Around 9% of the respondents have rated India as excellent while 45% have rated it as above average


India fares better than Eastern Europe and China in terms of the regulatory environment, but it is an area of improvement as compared to western countries.India has regulatory approvals and processes which take anywhere from 8–12 weeks and involves import licenses (NOC from DCGI), manufacturing licenses, a Certificate of a Pharmaceutical Product (CoPP) and a Certificate of Origin (CoI).

However, initiatives are in progress to change the regulatory scenario in India. One of these initiatives has been the move from the decentralized approach to drug control to a single Central Drug Authority (CDA)* on the lines of the US FDA.

Source: CDSCO

Current regulatory scenario

Central authorities State authorities

Five years to transition completely

Central authority

Future scenario

• Laying down standards for drugs, cosmetics, diagnostics and devices

• Regulating market authorizations• Regulating clinical research• Regulating standards of drug imports• Testing of drugs by central labs• Monitoring adverse drug reactions• Approving licenses to manufacture

parenterals and vaccines

• Licensing of drug manufacturing and sales establishments

• Approving drug formulations for manufacture

• Monitoring quality of drugs and cosmetics manufactured in a particular state and sold in that state

• Investigating and prosecuting contravention of legal provisions

• Recalling substandard drugs• Conducting pre- and post- licensing

inspection

• Modeling autonomous on lines of the US FDA• Separating divisions for regulatory oversight

of clinical trials, new drugs, medical devices, GMP, DCGI

• Granting manufacturing licenses

Note: * Bill under consideration in Parliament


A number of initiatives being taken to improve the efficiency and speed of the regulatory process and the infrastructure

Some of the other steps being taken, which will help to improve the regulatory environment, are listed as in table below.

Initiative Measures by the government

Streamlining and reducing timeframe for approvals

Implementation of the Common Technical Document (CTD )format for biological and qualification of National Regulatory Authority (NRA) assessment by WHO and introduction of CTD format for New Chemical Entity (NCE)1

Single window clearance for all approvals from regulators — currently, six departments are involved at various stages of the approval cycle.1

The DCGI proposes to have a fast track process for license applications for SEZ-based units, which either have a NCE under clinical development or a molecule under patent for which a value addition is required.3

As part of this process, in the case of exports of services, a separate NOC • manufacture and NOC export might not be needed.

In the case of export of physical material, if both NOC manufacture • and export are submitted, the timelines for granting the licenses are proposed to be two weeks ( 10 working days ).3

Recruitment drive to increase manpower (200 drug inspectors4) and shift to new location to improve operations to meet timelines1

e-Governance initiatives under progress to include online submission of all forms, a digitized interactive portal, digitalization of records and online approvals1

Only the central drug authority will have the right to issue the export quality Certificate of Pharmaceutical Product (COPP). This will be issued in the WHO GMP format2 and will help to remove the inconsistencies seen in the COPPs earlier awarded by different state authorities.

Infrastructure support

A separate dedicated temperature and atmosphere-controlled area to maintain the safety, efficacy and quality of imported and export drugs/pharma products at airporst and sea ports, known as “Pharmazones” — this facility will be in line with product requirements and GMP compliance and will also have a mini-lab, e.g., the international airports at Delhi, Hyderabad and Mumbai.

Sources: 1.CDSCO Initiatives 2008-12 2.“Is India evolving to support global drug development ?” Anthony Woodman and Suresh Gupta 3.DCGI 4.Business Line , Drug regulator to get more inspectors , 19 July 2009

We are streamlining the regulatory approval pathway to facilitate development of New Chemical Entities (NCE) to make India a global destination for drug discovery & development.Dr. Surinder Singh Drug Controller General of India Ministry of Health and Family Welfare

Taking wings66

Focus on regulatory capability building and enhancement of EHS compliance culture

Initiative Measures by the government

Capability building

MOU with USFDA •

Collaboration in clinical practices, biological drugs, pharmacovigilance, medical devices, IT•

MOUs with WHO, Health Canada, ANVISA, South Africa, EMEA•

Setting up of US FDA office in India •

Training and workshops with USFDA on GCP, clinical research inspection, pharmacovigilance•

Proposal to set up a national biotechnology regulatory authority• Source: “Is India evolving to support global drug development ?” Anthony Woodman and Suresh Gupta

EHS compliance attractiveness

0% 20% 40% 60% 80% 100%

Puerto Rico

Eastern Europe

China

India

Ireland

Singapore




According to the respondents, only 17% of them perceive that EHS standards in India are above average.

The Ministry of Chemical and Fertilizers has created an “Environment Cell” to improve the standards of EHS in India Department of Pharmaceuticals ( DOP). The primary objective of the cell will be to collect knowledge and compile data on the latest technologies available for effluent treatment and disaster management and disseminate information in the pharmaceutical industry.1

Source: 1.“Is India evolving to support global drug development ?” Anthony Woodman and Suresh Gupta


Government taking steps to enhance capacity and capability to support physical infrastructure …

Infrastructure attractiveness

0% 20% 40% 60% 80% 100%

Puerto Rico

Eastern Europe

China

India

Ireland

Singapore




To tap this opportunity, India will need to augment its infrastructure. It is currently ranked as the lowest among these six countries in terms of infrastructure.

Particulars US UK India China

Electric consumption per capita (KwH) 14,240 6,756 618 1,684

Steel consumption per capita (Kg) 357 195 34 244

Rail route per mn people (Km) 755 276 56 57

Cargo handled at ports per capita (Kg) 7,953 9,733 572 4,265

No. of passengers handled at airports per 1,000 persons

4,780 3,517 71 151

Source: Published media, Global Research

The government is responding by increasing its outlay for infrastructure development.With a view to accelerate infrastructure development in the country, the Government of India has planned an estimated capital outlay of USD530b* over the 11th Five Year Plan. This will constitute 9.2% of its GDP by 2011–12 as against 5.6 in 2006 –07.

Investment in infrastructure sector in 10th & 11th plan (USDb)

Infrastructure spending as % of GDP

Source: Planning commission, Global research Source: Planning commission, Global research

171%

195

530

10th plan

2002-03 to 2006-07 2007-08 to 2011-12

11th plan

9.2%8.1%

7.2%6.5%5.9%5.6%

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Note * : INR45 = USD1

Taking wings68

…and setting up special economic zones to improve the fiscal benefits provided to companies

Tax incentive attractiveness

0% 20% 40% 60% 80% 100%

Eastern EuropeChina

India

Singapore


Only 11% of the respondents felt that India offered above average tax incentives


Puerto Rico

Ireland

Although Indian companies are highly cost competitive, some of this advantage is offset by the tax incentives provided to companies in the country as compared to other countries. This is especially true for the high corporate tax levied on Indian companies.

Big pharma companies have been optimizing their tax benefits by sourcing APIs and intermediates from emerging markets such as India and China till the N-2 stage and then moving the final production of APIs and/or formulations to countries such as Puerto Rico and Ireland. To negate this, CMOs in India have set up operations in Special Economic Zones ( SEZs ), which provide direct and indirect tax incentives.

Countries Corporate Income Tax rate

Ireland 12.5%1

Puerto Rico 4%1b

Singapore 18%1

China (Peoples Republic of China) 25%1

Eastern Europe (Poland, Romania, Hungary) 16–19%1

India 33.99%1*

SEZ advantages in India

Direct tax 15-year tax holiday with 100% for five years, 50% for the next five years, 50%• a for the last five years

Indirect tax

Custom duty exemption on goods imported for authorized operations in SEZs and exported to any place • outside India

Exemption from service tax on taxable services procured by SEZ developer for authorized operations• Source: Ernst & Young analysis Note [a] Subject to the extent of profits ploughed back and transferred to SEZ Re-investment Reserve Account to be utilized for the purpose of capacity expansion

Source: 1.Ernst & Young, 2009 Worldwide Tax Guide. The tax rates are for an indicative purpose only Note [*] Includes education cess and surcharge Note [b] Flat tax on IDI derived by companies that obtain exemption grants — tax rates differ depending on zone of development


Big Pharma using India as an offshore and outsourced location due to these factors

SponsorsMNC pharma — Big Pharma, medium and small pharma and biotech

Offshoring Outsourcing

Traditionally, India has been considered an ideal geography for sourcing of APIs/intermediates and formulations for generic and off-patent products. However, in recent years, both Big Pharma and biotech companies have increasingly moved toward sourcing APIs/intermediates and formulations across the pharma life cycle from India. Big Pharma companies such as Pfizer, GSK, Eli Lilly, BMS and AstraZeneca have mainly adopted the outsourcing route. However, there are instances such as Nycomed and Zydus Cadila that have established partnerships.

Company Offshoring Outsourced

Pfizer √

Eli Lilly √

AstraZeneca √

Novartis √

Sanofi Aventis √ √

GSK √

Wyeth √

Schering Plough √

Abbott √

Merck √ √

BMS √ √

Nycomed √

Solvay √

Allergan √ Source: Annual reports, Ernst & Young analysis

Company APIs and intermediates

Formulations

Pfizer √ √

Eli Lilly √ √

AstraZeneca √

Novartis √

GSK √

Merck √

Nycomed √

Allergan √

Solvay √Source: Annual reports, Ernst & Young analysis

Note : Offshoring defines that the company uses India as a base for other markets and is a substantial part of its exports as available in the Annual Report.

Taking wings70

India well poised to become strategic partner of choice in arena of contract manufacturing due to its cost value proposition

Although India is already established as a low-cost manufacturing base with significant technical and manpower capability driving its growth, it is important to realize that countries such as China are also investing in capability and will pose a threat to India’s position in the medium/long term. Infrastructure, a culture of quality and EHS and niche technology capabilities, e.g., biologics, cytotoxics and lyophilization, are areas India needs to immediately ramp-up to stay ahead of the curve and assume the leadership position, thereby transitioning from a vendor of choice to a strategic partner.

• Improve EHS standards• Shorten regulatory

timelines• Change perception about IP

protection in India• Enhance cytotoxic and

lyophilization capabilities• Instill quality culture

Time period

• Create better infrastructure• Build capability in biologics

Short – medium (<3 years) Medium – long (3–6 years)

We need to understand that it is not enough to have advantages of1. Infrastructure (USFDA approved plants)2. CostWe need to have a mindset of quality both in results and in process.Deepak Naik Managing Director, Eisai, India India has made tremendous progress of the past 10 years as a key component of the Pharma supply

chain in terms of Plant, Infrastructure, technical competence, Quality and EHS capability. However this has introduced greater complexity and potential risk to the supply chain from a European and American perspective. To address this, the next key challenge facing India over the next few years is the need to focus on Logistics, transport infrastructure and supply chain management. - it goes without saying that this needs to be achieved without India losing its competitive edge.Senior Executive based in Europe Global Big Pharma

Taking wings72

Section 3: Drug discovery and development services


Section 3

3.1 The global drug discovery and development market is valued at USD49b. The outsourcing market is valued at USD18b, i.e., ~37% of the total pie, and is growing at 17% p.a. India is emerging as a hot spot n drug discovery and development outsourcing, growing at ~ 65%, i.e., at more than three-and-half times the global growth rate.

3.2 India’s pharmaceutical outsourcing landscape is well positioned to provide services in the area of late stage discovery (research chemistry) and drug development services. The country has recognised the need to develop its early stage discovery (research biology) capabilities and has begun investing in this area.

Taking wings74

3.1 The global drug discovery and development market is valued at USD49b. The outsourcing market is valued at USD18b, i.e. ~37% of the total pie, and is growing at 17% p.a. In drug discovery and development outsourcing, India is emerging as a hot spot, growing at ~ 65%, i.e., more than three-and-half times the global growth rate.

Section 3


Drug discovery and development outsourcing — contract research — spanning target identification through lead optimization and clinical Phase Trial IIa


Launch

Discovery

On-patent growing


research

Expiry


Research biology

& chemistry

Pre-Clinc.

Ph I

Ph IIb

Ph III

Ph IIa


Drug discovery and development outsourcing across pharma value chain

Drug discovery and development outsourcing, also known as contract research, spans target identification and lead optimization to Clinical Trial IIa.

Research biology Research chemistry Pre-clinical to clinical trial Phase II a

Drug discovery Drug development

Target identification

Target validation

Compound generation, Lead identification

Screening

Lead optimization

Analytical method development and validation

Process chemistry development

Solubility, stability and other studies

Scaling up from micrograms to grams and kilograms

Clinical APIs and formulation manufacturing

ADME, toxicology, in vitro – in-vivo PK

Pre-formulation and formulation development

Taking wings76

Global drug discovery and development outsourcing market valued at USD18b and growing at 17% annually

Share of outsourcing in global pharma R&D spend

Out-sourced USD18b

Drug discovery and development USD49b*

Global pharma R&D spend USD129b

• Drug discovery and development accounts for 38% of total R&D

• ~ 37% of total drug discovery and development is outsourced

*Note: excluding clinical trialsSource: • Goldman Sachs, 2006• CMR International 2008 Pharmaceutical R&D Factbook• Ernst and Young analysis

Global drug discovery and development outsourcing market – size and growth

India’s drug discovery and development outsourcing market is valued at USD0.6b and is growing at ~65% p.a.

The Indian drug discovery and development outsourcing market – size and growth

Global drug discovery and development outsourcing market –size and growth

Source: • India Pharmaceuticals In-Depth – Global Outsourcing – Best Ideas,

Morgan Stanley report, 2007• Kalorama Information, Outsourcing in drug discovery, 2008• State of the Pharmaceutical Outsourcing Industry, 2007, Jim Miller,

President, PharmSource• Ernst & Young analysis

5 6 78

10

17%

1412

17

0

5

10

15

20

25

2007 2008 2009P 2010P

Drug discovery Development

*Note: excluding clinical trialsSource: India Pharmaceuticals In-Depth – Global Outsourcing – Best Ideas, Morgan Stanley Report, 2007, Ernst & Young analysis

India’s share in global drug discovery and development outsourcing market

India (USD0.6b)*

Global drug discovery and development outsourcing market USD18b

India accounts for ~3% of global drug discovery and development outsourcing

Indian drug discovery and development outsourcing market – size and growth

Source: : India Pharmaceuticals In-Depth – Global Outsourcing – Best Ideas, Morgan Stanley Report, 2007, Ernst & Young analysis

65%

0.30.6

0.9

1.5

0

0.5

1

1.5

2007E 2008E 2009P 2010P


3.2 India’s pharmaceutical outsourcing landscape is well positioned to provide services in the area of late stage discovery (research chemistry) and drug development services. The country has recognized the need to develop its early stage discovery (research biology) capabilities and has begun investing in this area.

Section 3

Our vision is to catapult India into top five pharma discovery and innovation hubs by 2020 with a significant number of drugs discovered worldwide by 2020 coming from India. We want to position India as the destination of choice for global pharmaceutical R&D.In pursuit of this vision, we are working towards a novel and major initiative through a public-private-partnership to harness India’s innovation capacity. We are planning focused action aimed at building world-class infrastructure for talent and research; encouraging public-private-partnership in infrastructure development for discovery research and clinical research; offering public private financial instruments to encourage and incubate innovation; and shaping a favorable growth supportive environment. These efforts will be directed towards reaping social and economic benefits including creation of approximately 500,000 new jobs employing pharmaceutical scientists, researchers and technicians and finding cost effective cures for diseases endemic in India and elsewhere in addition to many more opportunities for indirect employment. The contribution of the pharma industry to the Indian GDP needs to be targeted to increase by about USD20b in 2020. This would include worldwide sales generated by new drugs discovered in India, those developed through off-shore partnerships, as well as drug discovery and innovation by companies and organizations overseas who locate their research projects in India to take advantage of world class research infrastructure, rich talent and human resource and competitive cost advantage emanating from our efforts under this proposed vision.Ashok Kumar Secretary, Government of India, Ministry of Chemicals & Fertilizers, Department of Pharmaceuticals

Taking wings78

Capabilities required across value chain according to their influence

Research biology Research chemistry Pre-clinical to clinical trial

Phase II a

Speed of delivery

As the drug candidate moves from discovery research to development, the importance of speed of delivery becomes more important as a delay of even a few days can jeopardize millions of dollars in potential revenues.

Innovation

Innovation is the ability to deliver new value to the customer in a non-deterministic environment. As the drug candidate moves from discovery research to development, where both expectations and activities become more deterministic, operational excellence takes the place of innovation.

Process safety

Implementation of a high level of safety standards are of paramount importance since the development of new drugs involves new reactions/ chemicals, whose effect on the safety of people, equipment and facilities are not completely known.

Low High

Degree of influence

Flexibility

Financial crises, high rate of failure of drugs in development stages, changing market dynamics – all create an environment of uncertainty where customers value the ability to scale up/down or focus/de-focus in certain areas as and when needed.

Integrated capabilities

Integrated capabilities, demonstrated by a one-stop shop offering end-to-end services right from research biology to chemistry, scale up from laboratory to pilot plants across API as well as formulations are of paramount importance.

Cost value proposition

The margins of pharma companies are dwindling due to increasing genericization and rising R&D costs. With this background, one of the key themes of outsourcing is cost saving with no compromise on quality.

Drug discovery Drug development

Critical parameters would be to maintain the competitive edge in terms of cost and timelines, quality being a given. It is imperative to anticipate all major milestones, including the regulatory process, in one go, reflect those in a reasonable manner in the timelines and then adhere to those timelines.Mukund Ranade Director Emcure Pharmaceuticals Ltd.


India’s strengths — drug development and research chemistry

A view of how India measures against the key evaluation criteria for outsourcing decisions

The analysis is based on the Ernst & Young–OPPI survey and interviews conducted with 25 respondents across 10 big and mid-tier global pharma companies and Indian suppliers. The respondents were from research and development teams, sourcing teams and included senior executives spread across Europe, US and Asia.

Evaluation criteria Drug discovery Development

Research biology Research chemistry

Speed of delivery L M-H M-H

Flexibility L-M M-H M-H

Capability L M H

Cost value proposition L-M M-H H

Innovation L L L

Process safety NA NA L

Capability rating: H = High, M = Medium, L = Low

India offers a unique cost value proposition in drug development and research chemistry, supported by process, analytical and research chemistry, a large talent pool and GLP-compliant facilities.

India advantage

Process, analytical and

research chemistry

Cost value proposition

Talent pool

GLP-compliant R&D facilities

Taking wings80

India’s technical capabilities — development, research chemistry…

India has strong capabilities in process and analytical chemistry…India has developed strong process chemistry capabilities ranging across a wide range of reaction types spanning old • technology-based chemistry, complex and hazardous chemistry and high-end reactions.

India has strong analytical chemistry capabilities, e.g., method validation and transfer, solubility, flowability and • compressibility studies.

India has strong process development and scale up capabilities for clinical APIs and formulation manufacturing of solids, • semi-solids and liquids and are growing for powders (lyophilization) and parenterals.

Reaction type High end Hazardous Complex chemistry Old technology

Existing capability Chloroalkylation• Sulphonation•

Cyanation•

Oxidation• Benzoylation•

Dealkylation•

Methylation•

Emerging capability Ring chlorination•

Catalytic • hydrogenation

Nitration •

Cytotoxics•

Pyridines•

Grignard•

Chiral•

Source: Ernst & Young research

Capabilities Compound generation Screening Lead optimization

Existing capability Analogue preparation•

Synthesis•

Analytical chemistry•

Compound synthesis•

Medium throughput • screening

Medicinal chemistry•

Emerging capability Drug design•

Structural chemistry•

Assay development• Assay execution•

Structure activity • relationships

Need to build capabilities High throughput screening • (HTS)

Cell-based model for • efficacy

Source: Ernst & Young research

…which has helped it to build its capability in research chemistry.India’s R&D legacy has been focused on the development of generics for western markets, which involved developing non-infringing process- and cost-effective routes. It has been able to leverage this capability in research chemistry, especially in the areas of medicinal chemistry, analytical chemistry and compound synthesis.

India has strong process and analytical chemistry skills which have driven India’s capability to offer clinical development and manufacturing of APIs and intermediates. India offers these services during pre-clinical and clinical development at micrograms and grams level and can scale up to kilogram and several tons level.Senior Executive based in India Global Big Pharma

India has strong capabilities in New Chemical Entity (NCE) development. We are sourcing a several NCE intermediates from India which go into manufacturing of NCE molecules during clinical trials, from phase I to phase III.Senior Executive based in India Global Big Pharma


…and pre-clinical services but needs to build research biology skills

Reaction type Pharmacology PKDM Toxicology Animal models for efficacy

Existing capability Safety •

Efficacy•

Bioanalysis•

In Vitro ADME•

In Vivo ADME•

General•

Reproductive•

Genotoxicology•

Immunotoxicology•

Carcinogenicity•

Rodents•

Dogs•

Emerging capability Primates• Source: Report of the working group on drugs and pharmaceuticals for the 11th Five Year Plan (2007–2012), Planning Commission of India, 1 December 2006

In drug discovery and early development, we are likely to see a major push to set up risk based collaborative programs. The great question will be the ability to develop the biology and preclinical animal models to be effective. Also, we will need to look at novel ways to financing these collaborations, as operating profits will be needed to funded revenue growth and the timelines for research are significantly back ended.Dr. Ranga Raju Chairman and CEO SaiAdvantium

India has also developed pre-clinical services capabilities…India has at least eight animal testing facilities (existing and under development) that are capable of using dogs as an animal model for efficacy. These include Zydus Cadila (Gujarat), Advinus, Jubilant, Dr. Reddy’s Laboratories and Wockhardt. Two sites for a primate-based animal model for efficacy are under construction1.

Source: 1.Industry sources

…and is moving toward building research biology capabilities…Traditionally, India’s focus area has been chemistry-based skills, which resulted in a limited focus on research biology capabilities. However, it has realized the importance of basic biology capabilities and has begun building them.

Gene sequencingBioinformaticsChemoinformaticsProteomicsGeneticsTarget identification

BioimagingGenetically modified mice

Disease model

Protein biochemistry

Functional genomics

Existing capability Emerging capability Need to build capability

Target validation

Source: Off shoring in the Pharmaceutical Industry: Mridula Pore, Yu Pu, Charles Cooney, Massachusetts Institute of Technology, Ernst & Young analysis

Taking wings82

Large and growing English-speaking pool of skilled and experienced professionals offered by India

Growing pool of talent in the area of chemistryIndia has a large number of science graduates and postgraduates (especially MSc chemistry), pharmacists and doctorates.

Annual supply (2007–08)

1,600,000

400,000

150,000

50,000

1,500

Science graduates

Science post graduates

Chemistry post graduates

Pharmacists (Graduate + post gradute)

Phd. Science

Source: • Annual Report 2007-08, HRD Ministry• Science Education in India : by Prof. G. Padmanaban), Report of the Committee

to Review the Pay Scales and Service Conditions of University and College Teachers, 2008

• University development in India, basic facts and figures, University Grant Commission, Government of India

• NCAER’s National Science Survey – 2004• Industry sources and Ernst & Young analysis

Segment Qualification (s)

Research chemistry Doctorates in chemistry•

Post graduation and Graduation in chemistry•

Post graduation, Graduation, Diploma in pharmacy •

Process chemistry

Analytical chemistry

Growing pool of students enrolling in science coursesIt was estimated that India would have ~ 2.1 m students enrolled in (graduate +) science graduate courses in 2007–08.

Gross enrolment in higher education (Graduate+ ) for science course

Source: University development in India, basic facts and figures, University Grant Commission, Government of IndiaNCAER’s National Science Survey – 2004; Ernst & Young analysis

1.3

1.8

2.1

0

0.5

1

1.5

2

2.5In millions

1995 - 96 2003 - 04 2007 - 08

Patent expiries of blockbuster drugs, ballooning R&D costs together with low R&D productivity, more and more stringent regulatory standards coupled with intense cost containment measures are exerting intense pressure on the bottom lines of the global pharmaceutical companies. Such a scenario is increasing interests of these companies towards various ‘Business Processes Outsourcing’ initiatives such as contract research and manufacturing services (CRAMS) to lower cost countries like India. At the same time, many Indian pharmaceutical companies are engaging themselves in basic research and development either independently or through various collaborative ventures.To encourage innovation, OPPI has collaborated with two premier R&D focused institutes in India, National Institute of Pharmaceutical Education & Research (NIPER) and Council of Scientific & Industrial Research (CSIR) through a public-private-partnership arrangement, constituting Scientists and Young Scientists Awards at both the institutes. The winners will be awarded a cash Prize of INR1 lakh each, along with a citation and trophy at the OPPI Annual General Meeting.Tapan Ray Director General Organisation of Pharmaceutical Producers of India


Existence of GLP-compliant R&D facilities in the country but need for enhancement of existing level of speed, flexibility and process safety

India has 48 GLP-approved process and analytical chemistry facilities…

Facility type No. of facilities

Toxicity studies 11

Mutagenicity studies 9

Analytical and clinical chemistry testing 8

Physical-chemical testing 7

Environmental toxicity studies on aquatic & terrestrial organisms 4

Residue studies 3

Studies on behavior in water, soil and air; bioaccumulation 2

Studies on natural enemies and predators 1

Studies on effects on mesocosms and natural ecosystems 1

Safety pharmacology and pharmacokinetic studies 1

Others (drug metabolism and pharmacokinetics [DMPK] and tissue distribution studies) 1Source: Ministry of Commerce and Industry, Department of Commerce, Government of India - Strategy for Increasing Exports of Pharmaceutical Products, 12 December 2008

India has more than 200 Department of Scientific and Industrial Research (DSIR)-approved in-house pharmaceutical R&D units,1 which are eligible for all R&D related fiscal incentives.

Source: 1.Report of the working group on drugs and pharmaceuticals for the 11th Five Year Plan (2007-2012), Planning Commission of India, 1 December 2006

...but needs to enhance speed of delivery, flexibility and process safety standards to become a favorite destination for drug development outsourcing. Due to India’s legacy of process innovation, Indian players focus more on attaining process optimization, and consequently, miss project deadlines sometimes. While process optimization is an important criteria, agility of response and flexibility to adapt to customer needs matter the most in drug development. Further, in India, which is a generic market, drug development involves known reactions and chemicals. This has resulted in inadequate attention being paid to the required safety and health standards in labs and pilot plants.

Sourcing capabilities also directly influence the ability to provide timely and speedy delivery. Indian suppliers have a tactical approach to sourcing as compared to the strategic approach required. There is a tendency to be more price-oriented rather than build long-term contracts. Indian suppliers have recognized this need and have now begun exploring partnerships or setting up operations and offices abroad to leverage strategic sourcing advantages.

Taking wings84

Significant cost arbitrage offered by India for development and research chemistry outsourcing

In end-to-end research and development, India offers 61% cost savings vis-à-vis the US. Research chemistry and drug development • are stages where close to 85% of savings can be achieved.

India has a pool of trained resources with chemistry capability and pharmacists six times as large as that in the US at less than • 1/10th the cost.1 The annual salary of a medicinal chemist in the US is around USD250,000, while in India it is around USD20,000.

Source: 1.CRAMS Sector Report – The India Advantage Story, Enam Securities, March, 2007

Potential savings in outsourcing end-to-end research and development to India

Source: Boston Analytics Research, An Introduction to the Indian Pharmaceutical Industry, October, 2007, Ernst & Young analysis

24Total cost savings of 61%

27

39

9

100

Total R&D cost in the US

Research biology

Research chemistry

Development cost

Total R&D cost in India

Cost index

Relative indexed cost of skilled FTEs Annual salary comparison (medicinal chemist)

Source: CRISINFAC/Motilal Oswal Securities Report, 2006 Source: Report of the working group on drugs and pharmaceuticals for the 11th Five Year Plan (2007–2012), Planning Commission of India, 1 December 2006

7

70

10095

0

20

40

60

80

100

US Germany Italy India

250

200

50

100

150

200

250

USD ‘000Cost index

US India


Indian players building presence across drug development and research chemistry…

Indian players have capabilities across late stage drug discovery and development…

Company LI HS LO PCB SA AMDT PC&D AC ST

Acoris (100% subsidiary of Hikal)

√ √ √ √

Chembiotek √ √ √ √ √ √ √ √ √

Dishman √ √ √ √

Divi’s Laboratories Ltd.

√ √ √ √

Emcure √ √ √ √

GVK Biosciences √ √ √ √ √ √ √ √ √

Indus Biosciences (subsidiary of CiVentiChem)

√ √ √ √ √

Jubilant Biosys & Chemsys

√ √ √ √ √ √ √ √ √

Kemwell √ √ √ √

Piramal Healthcare √ √ √ √ √ √ √ √ √

Rubicon √ √ √ √

SaiAdvantium √ √ √ √ √ √ √ √ √

Suven Lifesciences √ √ √ √ √

Syngene √ √ √ √ √ √ √ √ √ Source: Ernst & Young research and analysis (based on company websites), Note: This is not an exhaustive list in terms of players or their capabilities

LI: Lead Identification

HS: Hit screening

LO: Lead optimisation

PCB: Preclinical biology (PK/ADME)

SA: Safety Assessment (in vitro/in vivo toxicology)

AMDT: Analytical method development and transfer

PC&D: Process chemistry and development

AC: Analytical chemistry

ST: Scale up and transfer

Taking wings86

…and extending their business development and delivery footprint across frontiers

Indian players are building global assets to move closer to customers…In the case of drug development, customers, especially emerging biopharma/small biotech companies, prefer the geographical proximity of their outsourcing partners. As 75% of the R&D pipeline is expected to come from these companies, Indian players have realized the importance of moving closer to their customers to provide the latter much needed comfort.

Names of Indian players Acquisitions/Expansion Geographies

Biocon30% stake in IATRICa US

Nobex Corporation US

Dishman Carbogen and Amcis Switzerland

Jubilant Target Research Associates US

Kemwell Pfizer’s Site in Uppsala Sweden

Piramal Healthcare LimitedAvecia Limited

Billingham, UK

Torcan, (Canada)

Grangemouth (Scotland)

Pfizer’s facility in Morpeth Morpeth, UK

Shasun Rhodia (pharmaceutical custom synthesis business) FranceSource: Ernst & Young research and analysis

….and forming alliances with global players in the drug development spaceKemwell, an India-based company providing contract research services in drug development, has formed an alliance with Patheon, a leading global provider of contract dosage form development and manufacturing services. The alliance will enable them to market each others’ services to their clients1.

Source: 1.www.outsourcing-pharma.com


Big Pharma companies and global outsourcing service providers focusing on India for drug development and research chemistry…

Global Big Pharma companies are attracted to India for chemistry-related work…Big Pharma companies have been outsourcing to/collaborating with Indian companies right from lead identification and optimization to clinical manufacturing (custom chemical synthesis and formulation development).

Company LI HS LO PCD CD

Eli Lilly √ √ √ √ √

Merck √ √ √ √ √

Forest Labs √ √

Amgen √ √

Astra Zeneca √ √ √ √

Wyeth √ √

Ortho McNeill Jannson, J&J √ √ √ √ √

Novo Nordisk √ √ √ √

BMS √ √ √ √ √

Glaxo Smith Kline √ √ √Source: Ernst & Young research and analysis (based on company websites) Note: This is not an exhaustive list in terms of players or their capabilitiesLI: Lead Identification HS: Hit screening LO: Lead optimisation PCD: Preclinical development CD: Clinical development

…and western drug development outsourcing service providers are setting up bases in IndiaLonza is planning to set up a base in India with an investment of USD150m at Hyderabad. The investment will be in two phases — • Phase I (from 2011 to 2013) will include development of R&D labs for over 100 resources and Phase II (from 2014 to 2015) will include expanded manufacturing capabilities and additional R&D lab capacity for biologics with additional 200 resources1.

Albany Molecular Research (AMRI) has followed up its push into new markets for its drug discovery operations by tapping into the • well-established trend to source contract pharmaceutical manufacturing from India. The company has acquired the assets of Ariane Orgachem Pvt. Ltd. in Aurangabad and Ferico Laboratories Ltd. in Navi Mumbai.2.

Sources: 1.www.fiercebiotech.com 2.www.outsourcing-pharma.com

Taking wings88

…and exploring various operating models

SponsorsGlobal pharma – big pharma, medium and small pharma and biotech

Captive (offshoring) Dedicated R&D unit in partnership Fee for services Collaborative/JV

MNC pharma company sets up own drug discovery (R&D) center in India, e.g., AstraZeneca

MNC pharma company partners with an Indian outsourcing service provider to set up a dedicated R&D unit, e.g., Bristol-Myers Squibb

MNC pharma company pays a fixed fee for all the services it avails from the service provider, e.g., Eli Lilly

MNC pharma company enters a risk-reward-sharing collaboration for drug discovery and development, e.g., Eli Lilly

Captive (offshoring) Dedicated R&D unit in partnership

The captive offshoring model, which works in synchronization with the global R&D network, offers the unique advantage of a 24x7 workforce and thereby increases the speed of delivery. Further, control on the intellectual property is direct and hence more reliable than other models. However, costs may be much higher vis-à-vis other models.

A dedicated R&D unit in partnership requires a higher degree of co-ordination between the customer and vendor, resulting in better understanding of mutual expectations. Cost advantages still exist as manpower can be varied according to requirement.

Fee for services Collaboration/JV

Traditionally, fee-for-services has been the most common type of customer-vendor relationship in the Indian drug discovery and development outsourcing space. Fee-for-services is a fixed-term association which leverages cost advantage. However, there may be larger risks in terms of IP, communication gaps and project timelines.

Collaboration and JV work on a risk-reward sharing model and is based on milestone success. The sponsor offers the lead molecule to the service provider to develop it through clinical trial phases. The service provider receives milestone payments and a certain percentage of sales after the commercial launch.


AstraZeneca case study — leveraging developing market cost advantage by establishing captive R&D centers

AstraZeneca, the UK-based USD31b Big Pharma, is one of the first companies to use India as a base for carrying out its R&D work. It has established two captive centers for carrying out research work in India.

Captive R&D center• : As early as 2003, it established a captive R&D facility at a cost of USD10m in Bangalore, with a view of making it a Center of Excellence with a mandate to discover new chemical entities for the treatment of diseases of the developing world. The facility is presently dedicated to finding a new therapy for tuberculosis that will act on drug-resistant diseases and will reduce the complexity and/or duration of treatment. More than 80 scientists, including biotechnologists, pharmacologists and medicinal chemists, work in the center. These scientists work closely with AstraZeneca’s Global R&D network, including the infection research center in Boston, US, as well as with academic leaders in the field.

Captive Process Research & Development centre ( PR&D )• : In March 2007, AstraZeneca opened a new PR&D laboratory in Bangalore, India, to leverage India’s strength in process chemistry. It was the first time that AstraZeneca established a PR&D lab outside UK or Sweden. This facility built at a cost of USD15m, covers 8000 square meters on a 14,200 square meter plot, and can accommodate up to 75 process scientists. The successful delivery of global projects in terms of cost,quality and time has resulted in the decision of expanding the PR&D, Bangalore, to 120 scientists by the end of 2010. The success can also be attributed to the existence of suitable Indian vendors who have been able to meet the PR&D requirements of early intermediates as well as larger amounts of later campaign material . This center was located close to the discovery R&D center to facilitate knowledge sharing and reducing costs by optimizing use of shared resource.

According to David Brennan CEO AstraZeneca, the advantage of doing research in India, besides the cost advantage is, “We are moving some of our work from Europe to India. We get high quality work from our people here. So, the cost is certainly a factor but it is quality of work and the speed that we get here that are the primary drivers. Another advantage is getting a 24-hour cycle instead of our old 12-hour cycle. You gain a day and that speeds things up. Besides, our people here have shown to our people in Europe that they are highly skilled and can handle high quality work. We spend a billion dollars to get a drug to market, we have to look at fastest options.”1

The success of PR&D Bangalore in meeting the Global project needs in terms of quality cost and time while working with local vendors has spawned interest among the other AZ global departments with outsourcing needs to look at India as a potential destination for outsourcingSenior Executive based in India, AstraZeneca India Ltd.

Source: 1.Business world

Taking wings90

Bristol-Myers Squibb case study – driving R&D through strategic collaborations

Collaborating globally for strategic advantage:Bristol-Myers Squibb, with an R&D spend of 17%, is amongst the world’s top five drug companies with 65 product lines1. In addition to its in-house research and development efforts, the company actively pursues products through research collaborations and strategic alliances. This enables it to leverage its partners’ expertise and expand its capacity in a cost-disciplined way. Globally, the company has strategic research partnerships with other leading pharmaceutical companies such as Astrazeneca, Pfizer.

R&D collaboration model adopted in India:BMS has been active in the R&D space in India through its research partnership with Biocon through its subsidiary Syngene since 1998, to develop integrated drug discovery and development capabilities. The company opened a 200,000 sq ft dedicated R&D facility in partnership with Biocon, called the BMS-Biocon Research and Development Centre (BBRC ), in Bangalore, India. The R&D work at the facility spans initial hit to lead optimization, early pharmaceutical development, clinical nomination ,and further into clinical phase studies2.

The facility can accommodate 450 researchers. Currently, there are 300 researchers employed in it and the number is expected to reach to 360 by the end of 20092.

Biocon (Syngene) has set up the facility, and, according to business arrangements, will charge BMS an annual fee based on the number of scientists employed in the facility.3

This initiative indicates the sustained interest of BMS to undertake R&D in India in a cost- effective manner. According to a BMS spokesman, the company has plans of investing about USD300m in R&D in India over the next eight years4.

Supporting development of scientific excellence in India:In addition to expanding its R&D capabilities in India, BMS supports the development of scientific excellence in the country. Since 2007, it has established fellowships supporting doctoral and post-graduate students at academic institutions in the areas of biology, medicinal chemistry, pharmaceutics, drug metabolism, toxicology , chemical engineering, clinical pharmacology and translational medicine.5

Note: All the information contained in the case study above has been obtained from the following publicly available sources:

1.Datamonitor and ESPICOM, 2.The Financial Express, March 23, 2009, 3.Frost & Sullivan’s Movers & Shakers interview with Syngene (2009), 4.www.reuters.com, 5.www.biospectrumindia.ciol.com


Eli – Lilly case study: dissolving boundaries to build network

Moving from “FIPCO” to “FIPNET”: Eli Lilly has made considerable progress in transforming itself from a fully integrated pharmaceutical company – the old FIPCO model into what it refers to as a fully-integrated pharmaceutical network— the FIPNET model. In the new model, the company draws on a broad range of resources outside the company’s walls to increase effective capacity, access external capabilities, reduce level of risk, accelerate development and help to lower the average cost of the R&D per molecule.

As part of this model, the company has sold its 600,000 sq. ft. Greenfield Laboratories facility in Indiana, which carries out preclinical toxicology and other early-stage drug discovery work, to Covance for USD50m. Covance has also received guarantees of USD1.6b in drug development contracts from Lilly for over the next 10 years.

Further, the company has announced that it will transfer its clinical trial monitoring work in the US and Puerto Rico to Quintiles and the majority of its data management work in the United States to i3, a full-service, global clinical research organisation.

The emergence of Lilly as the hub of a FIPNET should contribute to the company’s productivity gains across the business. Since 2003, Lilly has reduced its headcount by about 11% worldwide, increased its net sales per employee by 64%, improved gross margin as a percent of sales, and reduced manufacturing, R&D and administrative infrastructure while increasing overall output.

Bringing India into the network:Under the FIPNET model, the company has adopted a mix of traditional outsourcing (fee for services), collaborative partnership (risk-reward sharing) and JV to leverage India’s strengths in R&D:

Traditional outsourcing (fee for services): The early-stage • discovery efforts with Jubilant in India is an example of traditional outsourcing where Lilly has signed a five-year drug discovery pact with Jubilant in 2006.

Collaborative partnership (risk-reward sharing): The • company has entered a collaborative partnership with Piramal, which is developing selected molecules from the company’s pipeline up to the end of Phase II, in exchange for milestone payments and a royalty if a product reaches the market. According to the business arrangement, Lilly has the option to bring the molecules back into its portfolio. Lilly has a similar risk-sharing collaboration with Suven Pharmaceuticals in Hyderabad.

Joint Venture with Jubilant: Lilly has set up a 50:50 joint • venture with Jubilant in Bangalore that will see the two companies collaborate on the development of new drugs in oncology, metabolic diseases, cardiovascular diseases and diabetes. The JV, called Vanthys, will take the lead compounds obtained from the two parents or outside through the development till the Phase II stage by outsourcing work to a host of companies engaged in CRAMS business in India. The molecules will then be returned to their originators for further development.

Source: Eli Lilly and Company 2007 Annual Report, www.outsourcing-pharma.com

Drug Discovery and Early stage development outsourcing in India will move from simple FTE based or project based business models to more complex and integrated ones, with risks and rewards being shared by both partners. Indian CROs are evolving rapidly in their capabilities and are aspiring to share the rewards of the intellectual property generated early on through the outsourcing deals. Big Pharma, pressed for resources, are looking for high quality throughput from the partners they engage with, to get flexibility, speed and access to talent and capacity outside of their own walls. As the early stage work is maturing, there is a need being felt for integrated players who have the capabilities and capacities to carry the molecules through the entire development work here.Mukta Arora Head – Global Sourcing Eli Lilly and Company (India) Pvt. Ltd.

Taking wings92

India lacks a culture of innovation due to legacy issues such as low levels of funding, educational infrastructure and collaboration between industry and academia...

In most parts of the world, relevant innovations take place at all three key centers such as universities, public institutions and industry. In India, beyond the initial beginnings in public sector and public institutions, linkages were not established sufficiently between these three centers of innovation.

Low level of financial resources allocated to R&D …India is lacking on the two key parameters of monitoring resources devoted to R&D in the science and technology area — Gross Expenditure on R&D (GERD) and R&D Intensity (measured by ratio of GERD to GDP) as compared to developed countries and China.

Gross expenditure on R&D (GERD) and GERD as a % GDP

Source: Measures of Progress of Science in India, 2006 Report by National Institute of Science, Technology and Development Studies (NISTADS)

274.6

Billion USD PPP

98.6

55.5 51.531.3 27.0 22.7

13.0 12.00.1

2.8%

3.1%

1.9%

1.2%0.8%

2.2%

1.1%

2.5%

1.1%

2.1%

0

50

100

150

200

250

300

USA Japan China Germany France UK India Brazil Russia Singapore0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Gross expenditure on R&D (GERD) GERD as a % of GDP

According to the planning commission1 report “ Several MNCs are of the opinion that 20–25% of science graduates are suitable for the deliverables the industry is looking at.”

Key reasons Collaboration between industry and academia: A two-way traffic of knowledge and experience between industry and academia is • quintessential for innovation. Unlike in the West, this is comparatively lower in India due to minimal movement of people between the above. The movement from industry to academia needs to increase significantly to ensure cross-fertilization of ideas.

Education system: To innovate, scientists need to draw from different disciplines such as mathematics, biology and chemistry. • However, the education system in India creates scientists who have little exposure across disciplines due to the excessive focus on specialization and minimal opportunity to change disciplines. This has hampered innovation in drug discovery in India, since innovation in drug discovery is essentially the result of interdisciplinary processes.

Lack of exposure: Educational institutes lack the relevant exposure to the industry due to the non-existent interface between the • academia and the industry.

Outdated curriculum: Courses need to be developed for existing professionals to include programs in regulatory affairs, IPR, legal • issues and scientific development.

Less attractive career option: A number of young students prefer to choose engineering as a career option rather than pure • sciences such as biology or chemistry.

Brain drain: Migration of Indian pharmacists to other countries also affects the Indian pharmaceutical industry. It is estimated that • 39% of the pharmacists working in the US are of Indian origin.

Source: 1.Report of the working group on drugs and pharmaceuticals for the eleventh five – year plan (2007-2012), Planning Commission of India, 1 December 2006


…reflected in India’s low standing in research output indicator

Between 1996 –2006, India has published less than 1/10th of the total number of papers published in the US. Also, during the same period, China has published close to twice the number of papers as India.

During the same period, only 0.33% of the papers authored by scientists from India were among the top percentile (1%) of Web of Science (coverage of WoS stands at + 85,00 across all disciplines in science) papers when arranged in decreasing order of citations received. While 0.52% of the papers authored by scientists from China were among the top percentile (1%). India was ranked 13th by percentage of papers in the top 1% cited papers while China was ranked 10th.

Total papers published between 1996 – 2006 Percentage of papers cited among top 1%

Source: King, C., Science Watch, May/June 2007

125

180

211

248

263

369

395423

536

661

743

791

2,908 1.87%

0.72%

1.27%

1.53%

1.11%

0.52%

1.34%1.04%

0.82%

1.13%

0.33%

0.52%

0.44%

Rank by percentage of papers in top 1% cited papers

1

9

4

2

6

10

37

8

5

13

11

12Taiwan

S. Korea

India

Australia

Spain

Italy

Canada

China

France

UK

Germany

Japan

US

India has only 1/10th and 1/5th the number of total research workers in the US and China.

Research workers (FTEs)

Source: Measures of Progress of Science in India, 2006 Report by National Institute of Science, Technology and Development Studies (NISTADS)

India

China

US 1,261,200

810,500

117,500

Taking wings94

Initiatives being taken to provide much needed impetus to research and innovation in pharma and biotech…

Objective Key initiatives undertaken

Promote Indian drug discovery platforms

Vision 2020 program

The Government of India is embarking on a major multi-billion dollar initiative with 50% public funding through a public-private partnership model to harness India’s innovation capability. The vision is to catapult India into one of the top five pharma Innovation hubs by 2020 with one out of every 5–10 drugs discovered worldwide by 2020 coming from India.

Collaborations between industry, academia and government

New Millennium Indian Technology Leadership (NMITLI)

Partnered with 222 public sector and 65 private sector entities on projects aimed at innovation centred technology development, e.g., joint development between CDRI, NIPER and an Indian pharmaceutical company for a new single ingredient oral herbal drug for psoriasis, which is under Phase II trial

Drugs and Pharmaceuticals Research Program (DPRP)

Set up a number of public funded research and development centers to conduct joint research projects

Some of the achievements under this program:

Synthesis of anti-mycotic and structurally unique anti-cancer agents •

Rational design and synthesis of novel anti bacterial agents•

Focus on specialized pharmaceutical education

National Institute of Pharmaceutical Education and Research (NIPER)

The government has set up 7 NIPERs as institutes of “national importance” to achieve excellence in pharmaceutical sciences and technologies, education and training.

Translational Health Science and Technology Institute (THSTI)

DBT has partnered with Massachusetts Institute of Technology (MIT) to set up a THSTI. The vision of the institute is to emerge as a world leader in translational research at the interface of medicine and engineering, built on a strong foundation of basic and applied sciences.

Fiscal incentives for profitable operations

Department of Scientic and Industrial Research (DSIR) recognition for availment of fiscal incentives

DSIR is the nodal department for granting recognition to in-house R&D units in industry. In-house R&D units, as recognized by DSIR in the area of Pharma and bio-tech sectors, are eligible for the following benefits:

Duty-free import of specified goods for R&D, production and pharmaceutical reference standards •

Weighted tax deduction of a 150% of any expenditure incurred on scientific research (except for • expenditure on cost of any land, building)

Source: Report of the working group on drugs and pharmaceuticals for the eleventh five – year plan (2007-2012), Planning Commission of India, 1 December 2006

Indian Government is playing an effective role in fostering the growth in pharma by adopting product patent regime in 2005 and recently proposed a “2020 initiative” to transform India into a global leader in pharma innovation in order for India not only move up in the drug discovery arena but also make India as an attractive destination for innovative research and development outsourcing For innovation led growth huge infrastructure is to be created to upgrade educational system to train scientists, new world-class research incubators and for patenting needs along with fiscal benefits to the industry for taking up drug discovery and development activities. Long term commitment with a special fund needs to be created which the Government through Department of Pharmaceuticals has announced to the tune of $2 billion and if that implemented it will be a boon to Indian Pharma.In addition to the above some other proactive fiscal measures have to be taken like the total R&D expenses (including clinical trials and patent related) whether incurred in India or abroad should be included for weighted average deduction under section 35 (2ab) and these benefits should be extended permanently but not for 3 to 5 years to promote new chemical entity (NCE) based research. Finally Indian Government should promote Public/private partnerships between the National institutes, Academia and Industry for the long-term sustained growth in this sector.Venkat Jasti Managing Director Suven Life Sciences Ltd.


…fueling Indian pharmaceutical companies to pursue drug discovery programs

In spite of lack of credible track records India has shown tremendous progress in developing good medicinal chemistry and biochemical assay development skill. To really become a serious discovery player, we need to develop high level animal biology and pharmacology skills which are still at a nascent stage. Discovering novel drug targets will also help us to boost our confidence in innovative biology, an area where we need to change the general perception of our capabilities.Dr. Goutam Das COO Syngene

Indian pharma companies increasing investment in R&D

Indian companies are pursuing new drug discovery research…Companies are using two strategies to mitigate risk and reduce costs in this area — finding a new drug within an existing family that has been discovered and out-licensing the drug candidate to MNCs after its pre-clinical stage.

India began investing in R&D for drug discovery-related work in the mid 90s .

R&D activity has seen a significant impetus in the last seven years, resulting in the total R&D spend increasing by almost 12 times over this period. In 2008, the Top 10 companies (by sales in value) had a cumulative sales of USD5.1b and invested a cumulative sum of USD387m in R&D, which accounted for 7.5% of their total sales.1

Source: 1.CMIE Data Base Prowess

Specifics 2001 2008 Comments

R&D expenditure as a% of sales

1.4% 9.9% 7 times

R&D expenditure in absolute terms (USD m)

55 660 12 times

Source: Ernst & Young analysis of top 25 pharmaceutical companies operating in India

Drug development pipeline of key Indian companies

Discovery/Preclinical Phase

Phases

I II III

Ranbaxy 6 0 1 0

Dr Reddy’s 1 1 0 1

Glenmark 6 2 3 0

Zydus Cadila 4 3 2 0

Piramal Healthcare

10 3 4 0

Lupin 4 1 2 1

Sun 3 0 1 0Note : This is only an illustrative list of companies involved in discovery research in India. Source: Company websites, Ernst & Young analysis

Category of diseases Indian pharma companies are working on…

Company Category of diseases worked on

Ranbaxy Infectious, respiratory, urinary diseases and diabetes

DRL CVS, infection, diabetes and cancer

Glenmark Respiratory and inflammatory diseases, diabetes and obesity

Zydus Cadila Diabetes, inflammation, obesity, novel drug delivery

Piramal Healthcare

Oncology, inflammation and diabetes

Source: Company websites

Taking wings96

Need for India to rapidly build its research biology and enhance its development capabilities to emerge as a partner of choice for global pharma

Although Indian companies have only recently started partnering with global companies in drug discovery and development, the industry been growing at a rapid pace. Indian players are today at a threshold where investing in the right capabilities will differentiate them from the rest of the world as global players. These include:

Creating global reach through acquisitions and partnering models •

Developing end-to-end capabilities from research biology to clinical trial supplies across API and formulations•

Building a culture of process safety and quality•

Creating a project management mindset to enhance efficiency and speed of delivery•

Collaborating with government and academia to harness the power of innovation in delivering new value to the customer•

Investing and building capabilities to tap the biologics market, which is expected to be the next frontier of growth in the global • pharma industry due to an estimated growth of 56% and an increase in market share from 17% in 2008 to 23% in 20141

Investing and building research biology, lyophilization and cytotoxics capabilities to capitalize on future high growth and niche • opportunities

Source: 1.World Preview 2014, EvaluatePharma Report, May 2009

• Enhance process safety standards

• Enhance project mangament capabilities to increase speed of delivery

• Enhance global asset network

• Research biology capability• Drug discovery and

development capability in biologics

• Research collaborations between universities, public institutions and industry

Short – medium (<3 years) Medium – long (3–6 years)

Roadmap of initiatives needed to fuel domestic R&D and drug discovery and development outsourcing

Drug Discovery is a very complex interdisciplinary area where successful outcome is not guaranteed. It needs significant resources in terms of technology and highly trained people. For success in this area India needs to have a short term and long term plan. In short term, highly trained personnel have to be recruited in key leadership positions who have consistently delivered high quality clinical candidates and letting them build an international quality R&D facility and a project portfolio that will yield better than average chance of success in clinical development. For long term, an education system that trains students in deep understanding of physical and natural sciences has to be developed. This training also should focus on application of this knowledge to solving the complex issues that stymie drug discovery progress towards high quality clinical candidates. Part of the training should also focus on developing excellent leadership, interpersonal and communication skills. These are important in creating very highly functional discovery project teams that understand the complex mission. The mantra is ‘Excellent project teams deliver excellent productsDr. Sham S. Nikam Vice President Global Discovery, RDP/GD Nycomed

Taking wings98

Aatosh Chauhan Sr. Relationship Manager, External Manufacturing Chemical Operations Merck

Ajay Piramal Chairman Piramal Healthcare Ltd.

Alok Sonig Managing Director, India Bristol-Myers Squibb Company

Dr. Ananth Narayan President & Director, Pharma Solutions Piramal Healthcare Ltd.

Ashok Kumar Secretary, Government of India Ministry of Chemicals & Fertilizers Department of Pharmaceuticals

Dr. Ashoke Banerjee Executive Director GlaxoSmithKline Pharmaceuticals Ltd.

Dr. Bala Subramanian Director, Infection Pharmacology AstraZeneca India Ltd.

Dr. Balu Balasubramanium Executive Director, Research and Development Bristol-Myers Squibb Company

Bhaskar R. Venepalli President and CEO CiVentiChem

Bjorn Treptow Head Emerging Markets, Sourcing & COARTEM Novartis Pharma AG

Chithur Devaraj Strategic Sourcing Director – Asia Pacific Wyeth Ltd., India

Deepak Naik Managing Director Eisai, India

Denzyl Sardinha Head – India Sourcing Centre, GES AstraZeneca Pharma India Ltd.

Dr. Duncan Judd Manager, Computational and Structural Chemistry Research and Development, Harlow GlaxoSmithKline Pharmaceuticals Ltd

G. K. Raman Director - External Affairs Bristol-Myers Squibb India Pvt. Ltd.

Dr. Goutam Das COO Syngene

Dr. H. Sivaramakrishnan President, Research and Development Piramal Healthcare Ltd.

Harish Kapoor Marketing & Sourcing – Special Assignments Associated Capsules Pvt. Ltd.

Dr. Hasit B. JoshipuraChairman, GlaxoSmithKline Pharmaceuticals Ltd., India

Helmut Altmann Base Business, Director Generics Sourcing Sanofi Aventis

Ingrid Reinkober Vice President Global Procurement – Raw Materials & Intermediates Bayer HealthCare AG Leverkusen, Germany

Janmejay R. Vyas Managing Director Dishman Pharmaceuticals and Chemicals Ltd.

Jayant Dwivedy President – Global Supply Chain Piramal Healthcare Ltd.

Joe Principe Head - Business Development (US) Piramal Healthcare Ltd.

K. R. Shekhar Vice President, Procurement and Logistics Bayer CropScience Limited

Kamlesh Patel Director, APIs & Key Intermediates Direct Materials & Capital, Global Procurement Merck

Lorraine Hazlehurst Director, GMS Strategy, Emerging Markets GlaxoSmithKline Pharmaceuticals Ltd.

Dr. Martin J. Hewlett Director of Procurement – APIs Production Procurement Shared Service GlaxoSmithKline Pharmaceuticals Ltd.

Acknowledgements


Michael J Monaghan Director – Third Party Manufacturing, GMS GlaxoSmithKline Pharmaceuticals Ltd.

Mukta Arora Head – Global Sourcing Eli Lilly and Company (India) Pvt. Ltd.

Mukund Ranade Director Emcure Pharmaceuticals Ltd.

N Govind Rajan CEO & MD Shasun Chemicals and Drugs Ltd.

Nicklas Westerholm Director of API Supply, Global External Sourcing AstraZeneca

Nilesh Wadhwa Director - In Licensing Aventis Pharma Ltd., Sanofi-Aventis Group Dr. Pankaj Shah Executive Director, Research and Development Bristol-Myers Squibb Company

Phil Priest VP, Head of Strategy, GMS GlaxoSmithKline Pharmaceuticals Ltd.

R. Shah Director - Sourcing & Exports Pfizer Ltd., India

Rahul Gupta General Manager, Corporate Regulatory Affairs Piramal Healthcare Ltd.

Ramesh Krishnan Vice President - Program Management Piramal Healthcare Ltd.

Ramesh Subramanian Asia Pacific President Merck & Co, Inc.

Dr. Ranga Raju Chairman and CEO SaiAdvantium

Ranjit Shahani Country President, Novartis Group in India Novartis

Roger Cassidy Procurement Director – Outsourcing, Primary Supply Global Manufacturing and Supply GlaxoSmithKline Pharmaceuticals Ltd.

S. R. Emani Manager - Business Development GVK Biosciences

Sameer Hiremath Deputy Managing Director Hikal Ltd.

Scott P. Laird Business Director, External Chemical Manufacturing Operations Merck

Dr. Sham S. Nikam Vice President Global Discovery, RDP/GD Nycomed

Shayam Tiwari Head - Sourcing Global Services Novartis, India

Dr. Shireesh Ambhaikar Director- Manufacturing & Industrial Purchasing UCB India Pvt. Ltd.

Sri Mosur President and CEO Jubilant Biosys Ltd.

Steve Fishwick Head – LCCS, Global Procurement AstraZeneca

Dr. Sudhir Nambiar Head - PR&D AstraZeneca India Ltd.

Dr. Surinder Singh Drug Controller General of India Ministry of Health and Family Welfare

Dr. Tanjore BalGanesh Head of Research AstraZeneca India Ltd.

Tapan Ray Director General Organisation of Pharmaceutical Producers of India

Uday Dhupkar Manager, Global Sourcing, Emerging Markets Abbott India Ltd.Venkat Jasti Managing Director Suven Life Sciences Ltd.

Venkat JastiManaging Director Suven Life Sciences Ltd.

Taking wings100

Glossary of termsTerm Explanation

AC Analytical Chemistry

ADME Absorption, Distribution, Metabolism, Excretion

AICTE All India Council for Technical Education

AMDT Analytical Method Development and Transfer

AMRI Albany Molecular Research Inc.

ANDA Abbreviated New Drug Application

ANVISA Agência Nacional de Vigilância Sanitária (National Health Surveillance Agency Brazil) The Agency is linked to the Ministry of Health in Brazil. The institutional purpose of the agency is to foster protection of the health of the population by exercising sanitary control over production and marketing of products and services subject to sanitary surveillance.

API Active Pharmaceutical Ingredient

BBRC Biocon Research and Development Centre

BMS Bristol-Myers Squibb

CAGR Compound annual growth rate

CD Clinical Development

CDER Center for Drug Evaluation and Research It is a division of the U.S. Food and Drug Administration (FDA). Its primary objective is to ensure that all prescription and over-the-counter (OTC) medications are safe and effective when used as directed.

CDRI Central Drug Research Institute CDRI was established under the Council of Scientific & Industrial Research, an autonomous registered Society of the Government of India, as a centre of excellence dedicated to drug research. CDRI is considered to be a pioneer research organization in the field of biomedical research where all the infrastructure and expertise are available to develop a drug right from its concept to market.

CDSCO Central Drugs Standard Control Organization CDSCO is responsible for approval of new drugs, regulation of clinical research, laying down the standards for Drugs, laying down regulatory measures, amendments to Acts & Rules, control over the quality of imported Drugs, coordination of the activities of State Drug Control Organizations and providing expert advice with a view of bring about the uniformity in the enforcement of the Drugs and Cosmetics Act.

CEO Chief Executive Officer

CII Confederation of Indian Industry CII is a non-government, not-for-profit, industry led and industry managed organization, playing a proactive role in India's development process. It works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes.

CM Custom Manufacturing

CMIE Centre for Monitoring Indian Economy

CMO Custom manufacturing organization

CNS Central nervous system

COI Certificate of OriginA Certificate of Origin (CO) is a document which is used for certification that the products exported are wholly obtained, produced or manufactured in India. It is generally an integral part of export documents.

CoPP Certificate of Pharmaceutical Product CoPP is a certificate issued by the national health authorities upon request from either the manufacturer, the customer or the authorities in the importing country. The certificate is issued for a specific product and states whether or not the product is marketed in the country of origin. Furthermore, it states that the manufacturer of the product complies with GMP and that they are inspected regularly by the national health authorities.

CRAM Contract Research and Manufacturing

CS Custom Synthesis

CTD Common Technical Document CTD is a set of specification for application dossier for the registration of Medicines. It was developed by the European Medicines Agency (EMEA, Europe), the Food and Drug Administration (FDA, USA) and the Ministry of Health, Labour and Welfare (Japan). The CTD is maintained by the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH)


Term ExplanationCTS Clinical Trial Supplies

CVD Cardio vascular disease

DCGI Drug Controller General of India

DMF Drug Master File A drug master file (DMF) is a master file that provides a full set of data on an API.

DOP Department of Pharmaceutical

DPRP Drugs and Pharmaceuticals Research Program

DSIR Department of Scientific & Industrial Research

EHS Environment, Health & Safety

EMEA European Medicines Agency EMEA is a decentralized body of the European Union with headquarters in London. Its main responsibility is the protection and promotion of public and animal health, through the evaluation and supervision of medicines for human and veterinary use.

FDA or USFDA

Food and Drug Administration FDA is a federal agency of the United States Department of Health and Human Services

FIPCO Fully Integrated Pharmaceutical Company

FIPNET Fully-Integrated Pharmaceutical Network

FTE Full time equivalent

GCP Good Clinical Practice

GDP Gross Domestic Product

GERD Gross Expenditure on R&D

GMP Good Manufacturing Practices

GSK GlaxoSmithKline Pharmaceuticals Ltd

HRD Ministry

Ministry of Human Resource Development

HS Hit Screening

HTS High throughput screening

I&I Immunology & inflammation

IDI Industrial Development Income

IND Investigational New Drug IND program is an application to the US FDA by which a pharmaceutical company obtains permission to ship an experimental drug across state lines (usually to clinical investigators) before a marketing application for the drug has been approved.

IP Intellectual Property

IPO Initial Public Offering

IT Information Technology

J&J Johnson & Johnson

JV Joint Venture

LI Lead Identification

LO Lead Optimization

M&A Merger & Acquisition

mAbs Monoclonal antibodies

MHRA Medicines and Healthcare products Regulatory Agency The MHRA is an executive agency of the Department of Health. It is responsible for ensuring that medicines and medical devices work, and are acceptably safe.

Taking wings102

Term ExplanationMIT Massachusetts Institute of Technology

MNC Multi National Company

MOU Memorandum of Understanding

NCAER National Council for Applied Economic Research

NIPER National Institute of Pharmaceutical Education and Research

NISTADS National Institute of Science, Technology and Development Studies

NME New Molecular Entity

NMITLI New Millennium Indian Technology Leadership

NOC No Objection Certificate

NRA National Regulatory Authority

OPPI Organization of Pharmaceutical Producers of India OPPI established in 1965, is a premier association of research based international and large pharmaceutical companies in India. It caters to the needs of Research based Pharmaceutical Industry thereby creating and sustaining an environment conducive to innovation and growth, simultaneously, facilitating industry and stakeholders partnership through various advisory and consultative processes to achieve the Healthcare objectives of the Nation.

Para IV Paragraph IV filingA Para IV Filing is made when the ANDA applicant believes its product or the use of its product does not infringe on the innovator's patents listed in the Orange Book or where the applicant believes such patents are not valid or enforceable.

PC&D Process Chemistry and Development

PCB Preclinical Biology

PCD Preclinical Development

PhRMA Pharmaceutical Research and Manufacturers of America PhRMA, founded in 1958, is an industry trade group representing the pharmaceutical research and biotechnology companies in United States

PKDM Pharmacokinetics and Drug Metabolism

PMC Post-marketing commitments

PR&D Process Research and Development

QA Quality Assurance

R&D Research & Development

SA Safety Assessment

SEZ Special Economic Zones

ST Scale up and Transfer

THSTI Translational Health Science and Technology Institute

TRIPS Trade Related Aspects of Intellectual Property Rights The Agreement on TRIPS is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation.

UK United Kingdom

USD US Dollar

WHO World Health Organization

WHO is a specialized agency of the United Nations (UN) that acts as a coordinating authority on international public health. It is responsible for providing leadership on global health matters, shaping the health research agenda, setting norms and standards, articulating evidence-based policy options, providing technical support to countries and monitoring and assessing health trends.

WoS Web of Science


About OPPI

OPPI mission To make continuing contribution towards achieving healthcare objectives of the nation while professionally addressing the collective interests of its members and encouraging innovation for inclusive growth.

Organisation of Pharmaceutical Producers of India (OPPI) established in 1965, is a premier association of research based international and large pharmaceutical companies in India and is also a scientific and professional body. It caters to the needs of Research based Pharmaceutical Industry thereby creating and sustaining an environment conducive to innovation and growth, simultaneously, facilitating industry and stakeholders partnership through various advisory and consultative processes to achieve the Healthcare objectives of the Nation.

OPPI Members Follow:

Good Manufacturing Practices (GMP)•

International Code of Pharmaceutical Marketing Practices•

OPPI’s position on Intellectual Property Rights (IPR)•

OPPI functions mainly on the following areas:

Continuous dialogue with the stakeholders•

Actively engage in knowledge creation & knowledge sharing with value addition•

Engage in ‘Corporate Academia’ Interaction•

OPPI identifies itself with the country’s national healthcare objectives and encourages its members to make substantial contributions to social concerns and actively promotes Corporate Social Responsibility (CSR).

OPPI is an active member of International Federation of Pharmaceutical Manufacturers Associations (IFPMA), Geneva.

ContactOrganisation of Pharmaceutical Producers of India Peninsula Chambers, Ground Floor, Ganpatrao Kadam Marg, Lower Parel, Mumbai 400 013. Tel: +91 22 24918123, 24912486, 66627007 Fax: +91 22 24915168 E-Mail : [email protected]

Taking wings104

Notes


Notes

Taking wings106


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EYIN0907-116 Taking wings.indd (India). Artwork by Amit Malhotra and Mukul Dhingra

oppi ernts n young_ pharma sector 2009

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