outsourcing pharmaceutical industry

BIOTECHNOLOGY AND PHARMACEUTICALS

Outsourcing in the pharmaceutical

industry: 2011 and beyond

kpmg.ca/biotechandpharma

http://www.kpmg.ca/biotechandpharma

Corporate process outsourcing 2

R&D processes outsourcing 3

RDO drivers and benefits 4

RDO risk and mitigation 4

Regulatory affairs and operations processes outsourcing 5

Regulatory process outsourcing benefits 5

Regulatory outsourcing issues and hurdles 7

Pharmacovigilance outsourcing 8

Pharmacovigilance service providers 8

Looking ahead: The next 18 months 9

Conclusion 9

Table of Contents

© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Outsourcing in the pharmaceutical industry: 2011 and beyond | 1

An anticipated loss of approximately $78 billion in 2009 - 2014 resulting from patent cliffs. Shrinking profit

margins and increasingly heavy competition. Growing regulatory pressure due to highly publicized drug

dangers. Recurring threats of litigation over real or perceived drug side effects. Shifting demographic trends

in both western and emerging markets, driving the demand for more and better pharmaceuticals. Growing

threats to intellectual property. Weak pipelines for new drugs in many large firms. Skyrocketing expenses.

These are just some of the challenges the global pharmaceutical industry is facing today.

To address these issues and minimize their negative impact to the extent possible, pharmaceutical firms are

proactively and significantly changing their business models. They are consolidating via mergers, acquisitions,

and joint ventures to leverage economies of scale, capitalize on synergies, and expand their pipeline (or

other lacking areas), into new markets and new product categories such as pharma plus biotech. They are

also increasing partnerships in areas previously considered proprietary, redefining corporate strategy via

diversification versus specialization, and deliberately focusing on improving collaborations.

They are continuing to implement across the board cost reduction programs to grow profit and offset

slowing sales growth by restructuring research and development (R&D) without impacting drug development

programs, reducing clinical phase and early stage R&D costs, decreasing their sales forces and conducting

internal audits when using a contract research organization (CRO).

And, they are increasingly leveraging outsourcing to enable focused excellence on the core business of

pharmaceuticals while abating the above issues.


2 | Outsourcing in the pharmaceutical industry: 2011 and beyond

With its long R&D cycle and an acute need for speed to market, the global pharmaceutical industry was one of the earliest adopters of information technology outsourcing (ITO) and back-office business process outsourcing (BPO). Indeed, for years pharma companies have been outsourcing almost everything in IT, from mainframes and servers to networks, call centers and applications development and maintenance (ADM), and most are in their second, third or fourth iteration of their outsourcing agreements in these

functions. These organizations have also been progressive when it comes to outsourcing other processes such as Human Resources (HR), Finance and Accounting (F&A), and Procurement. Additionally, functions like Real Estate and Facilities Management (REFM), have risen in importance when it comes to outsourcing alternatives.

For example, GlaxoSmithKline, Novartis and Schering took the lead in outsourcing REFM processes in 1999. AstraZeneca and Astellas began

outsourcing their IT infrastructure in 2001. In 2002, Johnson & Johnson was the first pharma company to outsource its ADM; it was also the first to engage in legal process outsourcing (LPO) in 2006. 2006 also marked the year in which GlaxoSmithKline and Pfizer embraced finance and accounting outsourcing (FAO). And Bristol-Myers Squibb was the pioneer in outsourcing Order-to-Cash (OTC) and HR, in 2007 and 2008, respectively.

Corporate processes outsourcing


The macro trends driving R&D outsourcing (RDO), which are similar to those driving other types of pharma outsourcing, are spurring most major global pharma firms to consider more aggressive RDO uptake. However, given that most global Pharma firms have grown via extensive M&A efforts, both the level of and philosophy toward RDO varies across the organizations. For example, per polling of a representative sample of RDO decision makers and secondary research conducted in late 2010, KPMG has not found many pharma firms with

a single unified RDO strategy, much less an operational plan of action and timeline, which is in stark contrast to more traditional and established BPO and ITO efforts within these firms.

As a result, there is much RDO “dabbling” among pharma firms in the market today. They are engaging tactically, while simultaneously defining a strategic direction. Clearer visions than strategies typically exist due to competing priorities, numerous decision makers, and uncertainties or disagreements over the expected

maturation and adoption pace of RDO. Thus, RDO is not progressing monolithically across organizations, and different areas have different agendas, goals and risk profiles.

In terms of outsourced RDO processes, KPMG’s research in late 2010 found that while pharma companies are mature in areas such as preclinical and clinical trials work, most are still exploring other areas such as drug research and registration work (see Figure 1).

R&D processes outsourcing

Figure 1: Pharma R&D outsourcing

Op

erat

ing

Mo

del

Act

ivit

ies

Off

sho

red

Competitive Intelligence− Pipeline analysis− Clinical trial mapping

Business Intelligence− Product/performance

tracking

Market Research− Survey design− Therapy area research

Captive + Outsourced

Captive + Outsourced

Captive + Outsourced Captive Outsourced

Preclinical− Bioanalytics− Pharmacokinetics− Toxicology studies

Clinical Trails− Programming/

scheduling− Data management− Site management− Clinical statistics

Material Preparation− Dossier production− CD production

Analytics− Commercial analytics− Sales force analytics− Brand modeling and

forecasting

Functional Genomcs− Specialized chemistry− Bioinformatics support

Lead identification

Discovery chemistry− Lead verification− Lead optimization− Chemical synthesis− Hit/lead optimization

Only Captive

OpportunityAnalysis

Ext

ent

of

Ou

tso

urc

ing

DrugResearch

Discovery Development RegistrationLaunch/

Marketing

Most outsourced Least outsourced

REGULATION REGULATION REGULATION REGULATION



RDO drivers and benefitsWhile KPMG’s above-mentioned polling of RDO decision makers did not confirm a clear set of common RDO drivers across major pharma firms, it did help identify some directional trending. For example, the three most cited RDO drivers were:

• Gain cost savings to fund R&D transformation

• Shift internal R&D focus to more strategic activities

• Improve R&D performance

Interestingly, the benefits sought by firms are mixed, and sometimes inconsistent, with identified RDO drivers, and most of the decision makers KPMG polled indicated it was too early to fully assess whether their firms are consistently achieving the RDO desired benefits. Per their responses, straightforward goals such as cutting costs are being more frequently achieved, while more complex ones, such as shifting the retained R&D organization to more strategic activities, are so far proving more elusive.

RDO risk and mitigationMany buyers understandably feel that the risks associated with RDO are higher than with in-house R&D because getting a drug to market in the most cost effective and timely manner is a major contributor to the success and growth of any pharmaceutical company, and clearly a strategic core competency. However, the siloed manner in which many pharma firms approach RDO allows each functional area to have visibility into and control of only its own scope. While this strategy feels safer, from an overall corporate benefit standpoint the

organization is leaving significant dollars on the table, and failing to leverage potential process improvement and end-to-end performance enhancements.

There are four major risk categories for which pharma firms must account when undertaking RDO. Following are some of the ways to mitigate the risks:

Execution• Ensure appropriate control, ongoing

monitoring and communication

• Start with small projects and expand base on success and lessons learned

• Leverage SG&A outsourcing experience, teams, and models and, where practical, consider expanding work in existing service provider relationships

Contractual• Develop strong business terms

focusing on intellectual property protection, privacy, compliance and indemnity clauses

Employee• Communicate strategy and

plans clearly

• Focus on change management requirements, especially related to the transition process

Provider• Test a few providers, geographies

and service models (onshore, offshore, nearshore)

• Monitor dynamics of large players expanding into RDO markets

• Monitor dynamics of smaller, specialized provider growth and market consolidation

Since many pharma companies have already started with multiple small projects, almost all of which are distinct and separate from the other RDO initiatives, it is time to deploy a more overarching and integrated RDO strategy. There are several benefits to this approach:

• Better potential maximization of cost savings

• Employment of a select group of providers with consistent, measurable and tracked metrics to maximize accountability

• Development of partnerships with providers with demonstrated successes both onsite and offsite

• Establishment of a service provider landscape that provides for collaboration with the client and among the service providers

Words of caution: successful outsourcing of any kind requires ongoing communication between stakeholders and providers, as well as well-defined governance structures and processes. Additionally, there is certainly no room for a one size fits all strategy within RDO. A more orchestrated sourcing strategy will provide benefits that many pharma firms are not achieving.

Finally, pharma buyers must recall and leverage all their learnings from other outsourcing efforts. From involving key senior management to getting all stakeholders on board early to striving to maintain a transparent and fact-based process, these practices are as critical to RDO as to any other type of Pharma outsourcing.


Traditionally, outsourced regulatory services were linked directly to the effort necessary to support clinical trials. For CROs, this ran the gamut from a per-trial basis for under-resourced pharma/biotech organizations to a virtual regulatory affairs department. In the new economic reality of drug development, the leveraged outsourcing model that has been successfully used to support clinical trials is now being seriously tested for regulatory affairs and operations support.

Regulatory affairs and operations processes ripe for outsourcing include medical writing, report publishing, submission publishing, submission planning, regulatory data management, regulatory information management, country regulatory affairs, regulatory chemistry, manufacturing, and controls (CMC), labeling, agency liaison, regulatory strategy, translation, administrative documents, dossier conversion and literature searches.

Regulatory process outsourcing benefitsThe benefits pharma companies can realize from outsourcing regulatory affairs and operations processes include:

Cost efficiencies• Moving from high fixed costs

of in-house resources for all regulatory activities – Fringe benefits – Facilities and technology – Training – Relocation – New hires in new geographies – New hires with specialized

expertise

• To a blended variable-cost approach – Cost of consulting fees versus

full-time staffing costs for a defined set of functions, programs and products

– Saving on staff reductions – Savings achieved by refocusing

stranded employees on other essential activities

Increased asset value by keeping products on the market and expanding market share• Implement proactive compliance

• Prevent revenue loss by staying in the market

• Gain revenue in new markets

• Increase speed to new market approvals

• Increase percent of market share (reimbursement, exclusivity)

• Extend brand formulations and indications

Gain from new product approvals and optimized reimbursement• Priority approvals valued, on average,

at $448 million* in additional revenue• First cycle approvals valued,

on average, at $640 million* in additional revenue

• Increased market share and product advocacy

Proactive risk management• Loss from product approval delays

or recalls – Additional development costs

per day – Loss of product revenue valued,

on average, at $1.08 million* per new molecular entity per day

• Fines, penalties and loss of reputation

• Loss of stock price and/or investor funding

* Source: David P. Katz, Ph.D., KPMG, 2010


Regulatory affairs and operations processes outsourcing



Figure 2 compares current models of regulatory support with the traditional model, which focused solely on the outsourcing of clinical trial applications, primarily to CROs. In the current model, CROs and others are now interested in expanding their services and scope to include all five categories in the lifecycle.

Figure 2: Current modes of outsourced regulatory support

Lifecycle Management of ProductsPre-IND IND/CTA Ph. I Ph. IIa Ph. IIb Ph. III NDA/MAATimeline

Key PartneringOfferings Clinical Trial

Applications

PediatricInvestigational

Plans

NDAs/MAA“Maintenance”

Activities

New “RegionalEntry”

NDA/MAAsMAH Transfers

Managingregulatoryrequirementsinvolved ininitiating andconductingclinical trials

Designing andimplementingPediatricInvestigationalPlans

Managing theextensive set of businessprocessessupportingupkeep ofmarketingapplications

Extending ourclient’s footprintby managing allregulatoryactivitiesassociated withregisteringproducts in newmarkets

Managing allactivitiesinvolved in thetransfer ofproductownership, bothfor buyers andsellers



As depicted in Figure 3, regulatory service delivery models are highly flexible, and sliceable by region, product or function, depending on what strategy best suits the organization.

Regulatory outsourcing issues and hurdlesJust as with outsourcing any process or set of processes, potential regulatory process

outsourcing buyers have a wide range of concerns. In the regulatory environment, these issues include data security, system access, third party performance, internal

change management, increased compliance risk, loss of control, resolving shared internal responsibility, unsustainable savings, internal process codification, and trust. According to the

results of a leading service provider’s query to its client advisory board members, the top three concerns are, not surprisingly: data security, system access and third party performance.

Figure 3: Global presence and capability can support strategic regulatory outsourcing

Benefit Dimension

Objective

By Region By Product

Register in NewRegions

Maintain aSpecific Class of Product

Improve and/or Transfer a Function

By Function

321

Lifecycle Management of ProductsPre-IND IND/CTA Ph. I Ph. IIa Ph. IIb Ph. III NDA/MAATimeline

Key PartneringOfferings Clinical Trial

Applications

PediatricInvestigational

Plans

NDAs/MAA“Maintenance”

Activities

New “RegionalEntry”

NDA/MAAsMAH Transfers

Managingregulatoryrequirementsinvolved ininitiating andconductingclinical trials

Designing andimplementingPediatricInvestigationalPlans

Managing theextensive set of businessprocessessupportingupkeep ofmarketingapplications

Extending ourclient’s footprintby managing allregulatoryactivitiesassociated withregisteringproducts in newmarkets

Managing allactivitiesinvolved in thetransfer ofproductownership, bothfor buyers andsellers



Pharmacovigilance work requires highly skilled individuals, from registered nurses to specialist doctors, who perform relatively clerical functions such as sifting through data and probing case reports. Despite the clerical nature of the work, it requires such a high level of expertise that it carries a very high price tag. Additionally, the requirements and the stakes of this kind of work continue to rise. Exacerbated by negative news coverage, each new drug is heavily scrutinized, and the volume of events to be reviewed and addressed is increasing at an incredible rate, driving costs even higher. As a result, pharmacovigilance – not only for cost savings but also for process efficiency – is growing in popularity as an outsourced function, especially to offshore locations. Further, while pharma companies were traditionally

somewhat reluctant to partner with a third-party for pharmacovigilance as the data managed and interpretations made requires such deep medical knowledge, they are becoming more comfortable with outsourcing as many of the service providers have extremely experienced MDs and PhDs working on their teams.

Pharmacovigilance service providersThere are essentially two classes of providers moving strategically, and quickly, into the pharmacovigilance space. The first is traditional CROs, those companies focused on drug development and managing trials through their various steps and processes. These companies, such as Quintiles, Covance and MDS Pharma Services, are well suited to step up and address pharmacovigilance. From a

staffing perspective, they have the right ingredients, with doctors on staff who are focused on the relevant processes.

The second is traditional BPO organizations, particularly those based in India or with large Indian operations, such as Capgemini, Tata Consultancy Services (TCS), Infosys and Keane. India is the most obvious choice for offshore pharmacovigilance outsourcing for a number of reasons.

India-based operations have employees with excellent language skills and a large number of doctors and other medical professionals who are looking for higher-dollar work in a related field. And although India’s labor arbitrage appeal is decreasing, performing pharmacovigilance work in India is still quite inexpensive by US standards.

Pharmacovigilance outsourcing



The pharmaceutical industry is looking at emerging market expansion and growth potential of 12 percent year on year, and the biologics market is expected to grow to $41 billion by 2014. There will be continued and accelerated consolidation through M&A activity, including spin-offs to allow increased focus on corporate strategy and core competencies. And because of the volatility of the market, cost reduction programs will become more rigorous and closer to the bone.

As a result, we will see:• Creative alliances and significant

outsourcing relationships evolving in areas including real estate and facilities, regulatory, R&D, legal and government pricing

• Providers proving greater experience in dealing with multiple regulatory regimes, but recognizing that regulations will continue to evolve

• Increased emphasis on the role of governance for new and modified existing contracts

• Outreach for expert assistance on an operational level regarding ways of bringing together or tearing apart existing outsourcing contracts due to anticipated mergers and spin-offs

• Expanded use of third-party service providers in both operational and strategic process areas such as R&D, sales and marketing

• Continued review of what is considered core and non-core as these definitions continue to morph

• Deeper penetration into existing outsourcing areas

• Greater focus on more immediate cost savings; while desire for transformation and innovation have not disappeared, up-front emphasis will be placed on labor arbitrage to drive nearer-term savings with less risk of achieving benefits

• Fewer full-bundled deals, more targeted aggregation and multisourcing

• Smaller deals with, over time, a progressive rollout of increased scope

• Selling of captives or more hybrid models to manage sustainability risk

• Greater attention to volume volatility

• More outsourcing contract renegotiations to reduce pricing

• Increased due diligence, governance focus and flight to quality

• Emergence of enterprise-wide sourcing governance and global business services

• An increasing move toward a diversified global business model to access alternative sources of growth and reduce risk

• Delivery of more, and more valuable, products to guard against blockbuster dependence and to mitigate pricing pressures, underpinned by cost controls to generate sustainable sales/earnings growth and improve returns to shareholders

There’s no question that today’s pharmaceutical companies are facing a multitude of unyielding challenges. But substantial, strategic alterations to their business models will help them tackle the issues and lessen their detriment.

Conclusion


Looking ahead: The next 18 months


Contact us

National

Bob JolicoeurNational Sector Lead,Biotechnology and PharmaceuticalsT: +1 416 777 3733E: [email protected]

Paola CipollaPartner,Sector Lead, BiotechnologyT: +1 416 777 8346E: [email protected]

Montréal

Gino CordiPartner, AuditT: +1 514 840 2315E: [email protected]

Carl DeslongchampsPartner, TaxT: +1 514 840 2135E: [email protected]

Mark TétreaultPartner, AuditT: +1 514 840 2334E: [email protected]

Toronto

David W ReganPartner,Tax, SR&EDT: +1 416 549 7809E: [email protected]

Doug VartyPartner, AuditT: +1 416 777 8520E: [email protected]

Vancouver

Paul WilkinsonPartner, AuditT: +1 604 646 6391E: [email protected]

kpmg.ca/biotechandpharma

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6457

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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