Strategic outsourcing of clinical Strategic outsourcing of clinical trials: An analysis of the Sponsor-trials: An analysis of the Sponsor-CRO relationship with focus on CRO relationship with focus on

growing markets of Asia.growing markets of Asia.

Presented byPresented by

Dr. A.P.Netraranjn, PhDDr. A.P.Netraranjn, PhD

Content

• Strategic reasons of R&D outsourcing

• Financial aspect of outsourcing

• Role of a CRO

• Advantages and disadvantages of CRO

• Services provided by CRO

• Types of CRO-Sponsor relationship

• Clinical trial scenario in India and China

Reasons of outsourcing R&D:

Rising cost pressures on pharmaceutical companies

Growing pressures to bring drugs to market more quickly

Increasing technology expertise of CROs

Increased complexity of clinical trials and regulatory submissions: for example, the new EU Clinical Trials Directive (EUCTD) has led to widely varying interpretations of regulatory standards conducting clinical trials. As a result, the Directive has sparked the need for CROs to guide sponsors through the regulatory mire.

To meet a temporary lack of capacity

To allow the sponsor to focus on its core competencies

Financial Aspect of strategic outsourcing

Increasing cost constraints on the pharmaceutical industry have created a need to reduce costs in

order to maintain profit margins. By outsourcing specific clinical projects to CROs, a sponsor can convert the fixed costs of maintaining the personnel, expertise and facilities necessary for clinical trial management into variable costs paid to an external contractor. Cost savings can be even more significant for CROs, such as Fulcrum Pharmaceuticals, that will partner with sponsoring companies to share the risk and returns of developing a promising compound. A rising number of CROs will accept lower service fees in exchange for equity, milestone payments, portfolio development deals, etc., which can often make the difference in a small drug developer being able to afford CRO services.

Role of a CRO

A CRO acts as an extension of a drug developer’s in-house R&D group, performing tasks at various stages of the development process. The CROs contributes specific functions and expertise that are either not available internally or can be provided at lower cost than the sponsoring company.

Globally contract research revenue reached an estimated $ 21.6 bn in 2009. The bulk of the CRO revenue in 2009 were derived from Phase II & Phase III a clinical trials (40%), followed by labs (20%), preclinical testing (15%), Phase IIIb and Phase IV trial (10%), Phase I trials (8%) and other studies (7%).

Benefits of using a CRO

In general, CROs allow drug developers to save on the long term expenses of establishing a comprehensive in-house infrastructure for preclinical and/or clinical testing. Overall, CROs are able to shorten clinical testing times by as much as 30%.

Research reveals that compared to low CRO usage projects, those with high CRO usage:

Show a median of 78 days, compared to 98 days, from protocol readiness to First Patient, First Visit (FPFV);

Reach study data availability from protocol readiness in 196 days vs. 231 days;

Move from protocol readiness to Last Patient, First Visit (LPFV) in 294 days, compared to 308 days;

Require an average of 42 days to move from Last Patient, Last Visit (LPLV) to database lock, compared to 56 days.

Possible disadvantages of using a CRO

The disadvantage to using CROs, however, is that short term R&D costs can become extremely

high. CROs set prices to not only cover their costs plus a healthy profit margin; they also include provisions that penalize sponsors in the event of unforeseen occurrences such as early termination of a project, delays, additional requirements, etc. This results in relatively high fees for CRO services.

If a sponsor can manage a project in a manner that results in minimization of long term R&D expenses while containing short term costs, they will obtain a net advantage in the use of a CRO.

Services provided by CRO

Drug discovery

Preclinical testing

Clinical trial Management

Bio-manufacturing

Bio-statistical Analysis

Clinical packaging

Clinical data Management

Laboratory Services

Regulatory affairs Advice

Increased technological expertise by CROs

The leading players have responded with expanding bio-analytical services such

as immunology and toxicology, as well as pharmacology. For example, Covance’s

recent biotechnology expansion in Europe doubled service capacity, adding 8,000

sq.-ft. to its biotechnology services facility. In January 2009, PPD acquired

Merck’s 130,000-sq.-ft. vaccine testing lab and equipment in Wayne, PA.

Many CROs now promoting themselves as full service providers, offering an

exhaustive list of core and ancillary R&D services. This may include R&D enabling

technologies (e.g. drug discovery, genomics, high throughput screening,

combinatorial chemistry) using proprietary techniques for which they often own the

intellectual property rights. It may also include post-commercialization services such as contract

sales and marketing.

Types of Sponsor-CRO relationship

Type Description Benefit to CRO Benefit to Sponsor

Preferred vendors

Sponsor directs business to selected short listed CROs

Obtains more business from

Sponsor; save the bidding

costs.

Sponsor reduces time to evaluate a vendor; obtains more favourable pricing from CROs. A close working relationship with CRO.For example, in 2001, Solvay Pharmaceuticals developed preferred provider relationship with Quintiles.

Functional service providers

Sponsor selects CROs on basis of specific capabilities.

CRO obtains work which otherwise it may not have.

Sponsor can select vendors based on specific skills who are each expert in their domain.

Risk sharing CRO shares risk and reward with Sponsor on project-by-project basis.

CRO can have more than average profit if project is successful.

Sponsor pays lower upfront cost for developmental tasks performed by the CRO.For example, Quintiles entered into risk-sharing relationships in October 2009 with Eisai for Phase II Onco trials.

Technology partnership

CRO offers a third party developed technology to clients.

CRO enhances their relationship with the clients; may be able to bill for additional services.

Sponsor benefits from the value-added service. For eg Medidata solutions to various Sponsors; Covance’s access to Qualyst’s B-CLEAR system in 2006 for the in vitro assessment and in vivo prediction of critical pharmacokinetic properties.

Drug licensing CRO conducts drug research for its own products.

CRO can have large profit if the drug is approved.

Licensing sponsor can earn revenue from a drug which it would not have developed of its own.

India & China: Emerging destinations for outsourcing clinical trials

Why India & China:

Costs to conduct studies in these regions is 30% to 60% lower than costs of comparable research in the US and EU.

Among Asian countries, Japan, Korea and Australia offer much more limited opportunities due to relatively high currencies and cost structures; Malaysia, Thailand, Cambodia, Indonesia and the Philippines can provide greater economies but other issues including smaller populations, smaller healthcare infrastructure and/or political unrest make these

areas less desirable for CROs. For these and other reasons, China currently ranks as the most attractive Asian country for outsourcing, followed very closely by India.

Clinical trial scenario in India

As of late 2009, more than 100 CROs were operating in India, including over two dozen full service CROs and many other specialized operations.

Factors favouring India as favourite destination of clinical trial are:

In 2009, India had more than 15,000 hospitals and a total bed capacity of 900,000, including beds in other institutions such as Public Health Centers (PHC), clinics and sanatoriums.

Approximately 600,000 doctors were registered with state medical councils in India, of which about 30% held specialist qualifications.

Huge English speaking population. India’s large, drug naïve patient population offers a strong infrastructure for human clinical

testing. Furthermore, much of India’s population can trace its ancestry to Aryan/Caucasian roots,

providing greater ethnic similarity with the US and EU drug consuming populations than other low-cost clinical testing venues such as China.

Indian CROs can also assist with medical writing. CROs have also benefited from a gradual reduction in taxes and duties on clinical trial related

specimens and supplies since 2003.

In 2009, CRO revenues in India reached an estimated $400m. This is expected to double over the next five years, to approach $800m by 2014.

Clinical trial scenario in China

China is home to more than 300 CROs of all sizes, including many top international firms.

In 2009, CRO fees in China reached an estimated $320m. With expected annual growth of

27.5%, this is expected to reach almost $1.1bn by 2014.

China has a much more established preclinical infrastructure than India with 21 Chinese CROs offering a variety of services in this area. Nine of them are also able to conduct in vivo efficacy testing for non-human primates.

China formed the State Food and Drug Administration (SFDA) in 2003.

The Contract Research Organization Union China (CROU) under the China National Pharmaceutical Technology Market Association, has recently developed the first industry standard for the Chinese CRO sector, Guidelines for Clinical Trial Services of Contract Research Organizations.

Government initiative for Clinical trails in China:

With a long history of supporting state-funded research institute, the Chinese Government continues to provide financial backing and incentives to drug developers such as tax relief and import duty exemptions, this includes:

A 150% deduction of R&D expenses incurred in relation to new products, new technologies or new techniques;

Reduced corporate income tax (CIT) rate of 15% for high and new technology enterprises (HNTE);

Business tax exemption on qualified technology transfer, technology development and related technical consulting and services;

A tax holiday comprising a two-year exemption and three-year half reduction if the HNTE is established in specified areas (Shenzhen, Zhuhai, Shantou, Xia’men, the Hainan Special Economic Zone and the Shanghai Pudong New Area);

CIT exemption/reduction on income derived from technology transfer;

Duty-free import of capital equipment or VAT refund on local purchased equipment used for R&D activities.

Factors responsible for concern to conduct clinical trials in China

Usage of English is much less common in China than in other low-cost countries;

Patient recruitment can be slow since the Chinese population is unfamiliar with clinical trials risks and often are unwilling to sign consent forms;

The Chinese population is racially dissimilar to the US and EU populations, which can cause variation in drug performance;

Contract research administrators must often spend more time at study sites because doctors are not yet comfortable with the new regulatory paperwork and procedures

Every clinical study must be approved by the SFDA and the SFDA decides where each trial will be conducted. The SFDA requires inspection of sites and approval to conduct trials and gaining these regulatory approvals can be complicated and time consuming.

SFDA drug applications require extensive details in the chemistry, manufacturing and controls (CMC) section that are frequently more than a company is willing to disclose.

For biotech drug makers, an additional concern involves CMC and a Certificate of Analysis (CoA). International companies that applied for clinical trial approval to the SFDA had been required to obtain a CoA from local labs. While the SFDA has begun to accept CoAs from labs outside of China, CoAs from local labs are still mandatory for biological entities. This testing could potentially provide access to proprietary knowledge about a compound, which could be of concern if IP protection is not strong.

CRO presence in China MDS Pharma was the first foreign-based CRO to operate in China.

Larger Chinese CROs include WuXi AppTec (formerly WuXi PharmaTech). ShangPharma is another major domestic player in the Chinese CRO market.

Multinational CROs operating in China include Loudon Far East, Covance, MDS Pharma, Quintiles, Kendle and ICON.

Covance opened its own central lab in Shanghai in late 2007

More so than in India, universities and medical centers are also active areas of outsourced R&D. In mid 2007, for example, AstraZeneca struck a deal with Peking University that quickly expanded the number of its early-stage clinical trials underway in China.

With about 20% of the Chinese CRO market in its control, Quintiles is also actively expanding its presence in China. Quintiles has continued to enhance its relationship with the Peking Union Medical College Hospital (PUMCH). PUMCH provides Quintiles’ central laboratory services in China and serves Quintiles’ clinical operations in China, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

Other CROs are expanding in China through acquisitions.In January 2008, PPD expanded its global central lab services into China through an exclusive agreement with Peking Union Lawke Biomedical Development Limited. In October 2009, PPD acquired the Excel Pharma Studies, one of the largest contract research organizations in China.

Thank you

The facts and figures mentioned in the presentation are based on market research data published on various journals and news letters. These may vary in actual situation.