Strategic outsourcing across the pharmaceuticals value chain

Strategic outsourcing across the pharmaceuticals value chain

The face of the pharmaceuticals market is changing Double digit growth rates (15% in 1999) have been shrinking to single digit (4-5% in 2009). R&D productivity is declining, e.g. due to launch delays, non-approvals and negative effects of scale in ever increasing organizations. Furthermore generics are becoming more dominant, therein reducing the originals market share. The importance and influence of emerging markets (e.g. China, India, CEE) is increasing. Moreover payers are gaining much more influence on the therapeutic decision process. More than ever before evidence for the scientific and commercial value of medicines is demanded. This will lead to significant changes in the set up of the industry Development cost continue to rise and lifecycle margins shrink Prescribers are increasingly interested in the economic outcome of their prescription behavior and follow economic reviews (NICE, IQWiG) Company strategies have to move away from the blockbuster model and become a pull model based on cost-benefit advantages Additional cost containment options have to be eplored (R&D, logistics, distribution, G&A) Industry players will have to concentrate more on core competencies, e.g. R&D, M&S etc. In future, strategic outsourcing will receive much more importance than today Outsourcing is epected to have a positive impact on fleibility and the efficiency of processes. Costs are supposed to be reduced; turning fied into variable costs. Assets can be removed off the balance sheet. Due to its compleity the pharmaceutical value chain offers numerous outsourcing opportunities for the industry.

The growing outsourcing market provides services all across the pharmaceuticals value chain The decision whether to outsource or not and which parts should be contracted eternally requires an in-depth analysis of the company s value chain, core competencies and future strategies. Pros and cons concerning eternal provision of services, the market environment as well as upcoming s and trends of the healthcare industry have to be considered before making a decision. Market size R&D and Registration $122bn $130bn Supply & Logistics $16bn Marketing & Sales $250-350bn Sales data provision $7bn Today, the share of outsourcing in the different parts of the value chain ranges from 15% to 100%. Finance & Enabling R&D and Registration Supply & Logistics Marketing & Sales Sales data provision Market growth (total) 10% 5% 10% n.a. 9% Already today, strategic outsourcing plays an important role in the industry. Pharmaceutical outsourcing companies provide services ranging from drug discovery & to manufacturing, logistics and commercialization of a product. Many contract businesses are established in the market - usually specializing on certain parts of the value chain only. Outsourcing market growth Share of outsourcing Market size outsourcing Stage of 15% 15% $18bn Mature 10% 30% $39bn Mature 12% n.a. 40% 20-30% $6.4bn 1 $2.5bn 2 Growing Mature 9% 100% $7bn Mature Drivers and impediments have to be balanced in the outsourcing decision. 1) Special logistics without traditional wholesale 2) Sales force only; marketing agencies account for >$50bn Quality control Guaranteed supply of material Desire to keep know-how in-house Regulatory barriers Difficulties in logistics and coordination Impediments to outsourcing Pressure to focus on core competencies Reduction of time-to-market and costs Decreasing value of products as patents approach epiration force Big Pharma to seek cheaper manufacturing alternatives Desire to maintain degrees of freedom and gain access to new technologies Strategic goal to have in-house manufacturing dedicated to highmargin pharmaceutical products Drivers for outsourcing The pharma outsourcing market is estimated to have reached $70bn in 2008. It grows at a higher rate than the pharmaceuticals market in general. This growth is driven not only by the fact that pharmaceutical companies tend to opt for buy instead of making non strategic parts on their own but also by evermore specific offers in the market. Product and service offerings become more and more customized and specialized. The potential to focus on core competencies, on access to new technologies, and on possible time/ cost reductions has to be balanced against the need to control quality and the loss of know-how.

Currently 15% of total R&D ependitures are outsourced Research and are nowadays often outsourced to contract research organizations (CROs) and it is epected that pharmaceutical companies will increase their outsourcing activities for R&D in the future. The largest 10 CROs stand for 60% of the market revenues and thus almost form a global oligopoly. The remaining market share is highly fragmented; the number of CROs has reached over 1.000 worldwide. Site-monitoring and data-management are generally the most time and cost consuming steps within the R&D value chain; each accounting for 12-15% of the total time (10-13 years) and cost ($122bn) of pharma research and. Total R&D ependiture [ bn] and time [years] ~55 0.2 3.5 3.6 2.9 4.4 5.0 16.2 5.7 18.1 4.4 7.2 0.7 122 0.2% 2,9% 3,0% 2,4% 3,6% 4,1% 13,3% 4,7% 14,8% 3,6% 5,9% 0,6% 100% Top 10 CROs 40-50 % Company Type of CRO Employees Countries Revenues 2007 (US$) dev. plan Project mgmt. Site mgmt. Preclinical Protocol dev. Investi- Patient gator recruit- recruit. ment Site SAF- monitorinreporting Data Statistical writing Report mgmt. analysis Com- Subpilinmission dossier Quintiles Full Service 22.000 50 2.7bn 5-7 years Covance PPD Charles River MDS Full Service Early Early 8.900 10.500 8.800 4.000 20 33 15 23 1.6bn 1.3bn 1.2bn 1.1bn 0,1% 2,5% 2,5% 2,1% 4,1% 3,7% 12,0% 4,1% 13,3% 3,3% 5,2% 0,6% 10-15 years Pareel 9.000 52 960m ICON Kendle SFBC (PharmaNet) PRA 5.600 4.000 2.600 3.500 36 90 41 60 630m 400m 470m 338m (2006) Within the $18bn global CRO budget 2/3 of the revenues originate from big pharma; but biotech companies are driving a lot of the industry s growth. Many pharmaceutical companies have established close and sustainable relationships with a small number of CROs. In the contracts it is becoming common to include milestones and royalties for successful commercialization. Quintiles signed a 3 year preferred provider agreement with a global top 10 pharma company in 2005 regarding clinical study management. In 2008, another top 10 player sold one of its own complete R&D locations to Covance for $850m and agreed on contracting R&D services worth $1.6bn in return. A current trend in the CRO industry is running clinical trials in emerging markets, e.g. India, China, and Latin America. Huge patient pools with a large treatment-naïve population and a western-like epidemiology are available at remarkably lower cost. However, hospital infrastructure often is poor, compliance to ICH/ GCP may be problematic and cultural, language as well as regulatory barriers eist. Contract clinical research revenues by segment; % Other Central Lab 28,3% 12,2% ~$18bn in 2008 16,5% Phase IIIb-IV 17,5% 6,1% 19,4% Preclinical Phase I Phase II-III Big CROs and their one stop shopping model offer regulatory services as well. These include regulatory strategy design, document preparation, consultation and liaison management, with all kinds of regulatory agencies.

Value added services become the differentiator in manufacturing Today nearly 1/3 of the pharmaceutical manufacturing output ($130bn) is produced via third parties. Most contract manufacturing organizations (CMOs) are predominantly active in API production and loan manufacturing. Primary packaging Secondary packaging Formulation API manufacturing 65% 78% 78% 85% Value added services are also a differentiator from competitors, especially in emerging markets, who are offering common drug manufacturing at cost up to 25% lower. Major CMOs Company Headquarters European sites Catalent Pharma Solutions Somerset, NJ 12 448 Vetter Ravensburg, Germany 1 275 Famar Healthcare Services Athens 11 240 Aeonova Tittmoning, Germany 9 215 Fareva Paris 8 193 Patheon Toronto 4 191 Haupt Berlin 9 170 Recipharm Stockolm 8 130 Netpharma Send, England 7 130 Delpharm Paris 4 105 Cenei Paris 1 83 2007 European Union revenues ( m) Labeling 58% supplies Sterilization Chem. Intermediates manufacturing Stability packaging Pharma companies are using CMOs for a variety of services. The future key for CMOs is to provide complete and customized solutions rather than only standard services. While commodity services have been the focus in the past, today value added services, e.g. design, delivery, process and optimization techniques, are increasingly demanded by the industry. The CMO market has reached almost $40bn and is still growing in many segments, whereas e.g. API production and packaging represent already mature markets. Process and research Active ingredient production Physical processing 32% 29% 37% Development of formulations 58% Bulk production Packaging Small and mid size generics manufacturers and value added services Company Losan Pharma GmbH Ac-Pharma AG Actavis Group Akina Inc. Andr Pharma +aresol ALZA Corp APR Applied Pharma Research Arrow Pharma Ltd. Astra Zeneca India Cardinal Health Germany Flan Corp Ethypharm +injectable Eurand Labopharm Mistral Pharma Inc. Net Pharma Penwest Pharma Simafe Strides Arcolab Swiss Caps AG Swiss Co Services AG Temmler Pharma GmbH & Co KG Tropon GmbH Solida Focus Dossier () FDA compliance Envisaged Submitted Primary Secondary Share of outsourcing Stage of 1) Depending on market segment 20% 50-60% 20% 20% 10-80% 1 75-85% Embryonic Growth/Maturity Growth Growth Growth Maturity Even small and mid size generics manufacturers, e.g. Cardinal Health, Swiss Caps, have started to offer more value added services. Besides and manufacturing of generics, they are able to take care of e.g. the dossier preparation.

H The biologicals contract manufacturing market is still marked by a strong demand eceeding the supply. Biologicals manufacturing has become a focus area for CMOs. Since large molecules usually imply profitable deals, contract manufacturers are epanding their facilities for bio-drugs. The production of biologicals is linked to a long and comple process. However, one major challenge for biotech-cmos is to meet GMP-validation. Biological s product cycle Activities Preclinical Phase I Phase II Phase III BLA Approval Launch Details Engineering Construction Qualification Validation GMP-runs Inspection YEAR 1 2 3 4 5 6 7 8 9 10 11 The supply chain offers plenty of opportunities for outsourcing service providers Pharmaceutical distribution is changing: Consolidation, pharmacy chains and mail order pharmacies, cross border trading and supply to new customers (e.g. direct to patient, homecare) are characterizing the landscape. Players in this market face these challenges. Manufacturers, wholesalers, pre-wholesalers, logistics companies, special logistics service providers, pharmacies (incl. mail order and hospital pharmacies), alternative retail all try to adapt. Leading European wholesalers, e.g. Celesio, epand their business, offering pre-wholesale and special logistics (through Movianto) as well as marketing and sales (through Pharme). Further liberalization of distribution structure Pharmacy third party ownership Pharmacy-obligation for OTC Mail order Cross border trading Vertical integration of wholesale and retail Due to recent legislative changes and strategic mandate from the manufacturer the distribution landscape has seen new offerings recently: Manufacturer driven DTP (direct to pharmacy) model e.g. Pfizer model in the UK Manufacturer cooperation model e.g. PharmLog in Germany Wholesale driven consignment model e.g. Phagro Kombi model in Germany Eternal logistics provider model e.g. Movianto in Europe Logistics service providers support pharmaceutical manufacturers with services across the whole supply chain. Specialized providers like Movianto offer almost all value adding steps along the pharmaceutical supply chain. From finishing manufacturing steps (e.g. labeling) to highly sophisticated logistic services (e.g. cold-chain or RFID track) all kind of solutions for pharmaceutical companies can be offered in almost all European markets. The special logistics market today already accounts for appr. $16bn globally. Core business Value added services Value added Inbound logistics 3 Kitting Labeling Relabeling Packaging Repackaging Postponement 1 Drivers for changing distribution Changes regarding portfolio and selling Separation of Generics, OTC and RX business Consolidation of customers Patient individual therapies Manufacturer Warehousing services Order entry Invoicing Order to cash Returns mgmt. Destruction Customer service Reporting Insurance Outbound logistics Transportation Warehousing 2 Special distribution services Direct to pharmacy Hospital services Home patient deliveries Cross border Temperature controlled Change and consolidation of health care provision Integrated health care models Special health care providers Insurances contracting Pharmacies, hospitals, patients Specialist services trials distribution Promotion material mgmt. Consulting Orphan drug mgmt. Named patient supply

Even in Marketing and Sales plenty of opportunities for strategic outsourcing eist Despite Marketing and Sales being core competences of the pharmaceutical manufacturers themselves, they offer plenty of room for outsourcing activities to third party providers. While advertising and PR have always been provided to the industry by independent agencies, recently key account management training of representatives and customer education have been identified by marketing service providers as opportunities to offer such services to the industry. Contract sales organizations (CSOs) which have come from a business model offering large GP sales force lines to the pharmaceutical companies, have now (as sales force lines are cranking and the GP is less in the focus of promotional activities) moved on to offering more value at services, e.g. small specialist niches, sales force lines, cross promoting products of several manufacturers in certain therapeutic niches, running complete marketing campaigns and offering market access programs. In some cases C-products can even be taken into ownership by CSOs. Leading CSOs in Germany Pharme Innove Marvecs MKM Mediline (+Actipharm) Careforce Pharma Rent Sellepert AMS Services Sales force provider, vacancy management, marketing, training, consulting, e-learning Sales force provider, vacancy management, health management services, market research, trainings, sales force effectiveness tools Sales force provider, vacancy management, Copromotion/ Co-marketing Sales force provider, market research, communications, PR, trainings Sales force provider, vacancy management, marketing Sales force provider, consulting, marketing Sales force provider, marketing, project management Sales force provider, training and education Sales reps ~930 ~900 ~400 ~150 (+120) ~100 ~100 ~100 ~90 Revenue 73m 76m 29m 12m (+ 10m) 9m n.a. n.a. 10m The CSO market is highly fragmented, with only a few global players; Innove and Pharme each employ over 900 sales reps in approimately 20 countries. Careforce is an eample for a regional CSO providing sales reps (100 in Germany) and additional marketing services. Specialized sales force Syndicated partnerships Risk-sharing-models Vacancy management CRM Take over C-products Marketing Services Sales forces for certain therapeutic niches in the specialist segments 2-3 small pharma companies share one sales force detailing noncompeting products Licensing agreements with CSOs temporarily take over the complete distribution and marketing for a certain product; risk and profits are shared Pool of sales reps covering maternity and sickness related vacancies Build up, train and run Customer Relationship Management systems C-products are taken into ownership by the CSO Product management, communication, market research, consulting, sales support material, PR campaigns Strategic partnerships will gain importance in the future New models of cooperation will play a major role rather than only outsourcing single activities. Complete solutions and value added services have an impact on the value chain and will have its influence on the pharmaceuticals market in general. NovaQuest (100% subsidiary of Quintiles) offers a wide range of services all along the value chain, from funding clinical to commercialization (including market analysis, pricing and reimbursement, sales force build-to-roll). NovaQuest sees itself as a strategic partner for pharmaceutical companies, sharing risk and rewards with them as partnerships are based on incentives and shared outcomes. Outsourcing of services for the pharmaceuticals industry has been growing across all steps of the value chain in recent years and will continue to grow. Collaboration with eternal providers is becoming a day-to-day business.

To analyze outsourcing targets, the following questions should be answered: Are we able to save cost and gain fleibility through outsourcing? Which services should be provided internally and eternally (accurate make or buy analysis required) and why? Will activities require a regional, local or global approach? Which company will offer the quality needed? Can we rely on them as a partner? Can synergies be generated by outsourcing several functions across the value chain at a time? About CEPTON CEPTON, a globally acting strategy consulting firm, has its roots in one of the most renowned consulting firms globally. Our company was founded to provide a new consulting approach and our advice to clients who are seeking solutions for their strategic questions. We believe in small teams of senior eecutives with many years of eperience in strategic issues and operative management gained hands-on in the industry or major consulting firms. CEPTON relies on the in-depth knowledge of a specific industry sector as its mainstay. It is not generic methods but knowledge matured over the years in a given national and international industry environment that will generate success. Our services are built on partnerships with our clients and rely on the quality of our eecutives who are time-tested in finding customized solutions together with our clients rather than for them. We offer eperts to work as interim managers of our clients companies, if desired, where they take an active responsible part in driving the implementation of the procedures required in a timely and effective manner.

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