Opportunities and Challenges of Pharma Outsourcing in India and China

1. Opportunities and Challenges of Pharma Outsourcing in India and China A comparative evaluation of two emerging sources for Pharma & BioPharma products and services

2. Presenter Bio • Shankar Suryanarayanan is the VP of Emerging Market at BSMA. He was the head of Takeka’s Indian operations, and before that a member of executive committee at Roche Consumer Health. Shankar has over 20 years of operations experience for life science and industrial companies. He has a M.S. in Management from MIT Sloan School of Management and M.S. in Mechanical & Aerospace engineering from University of Missouri in Columbia. His undergraduate degree in Mechanical Engineering is from the Indian Institute of Technology Yingming Yue is the Associate Director of Supply Management at Nektar Therapeutics. He has over fourteen years of experience in supply chain management in the life science and technology-based firms. Prior to his current position, he was an operations consultant with Deloitte Consulting and PRTM. Mr. Yue received an MBA degree from The University of Chicago and also attended Operation Management Program at University of Texas at Austin. He is Certified in Production and Inventory Management. 

3. The Endless comparisonIndia vs. China

4. Agenda I. Opportunities • Overview of Indian and Chinese Pharmaceutical Industries • High-level capabilities assessment • Compare and Contrast - Service Offerings II. Challenges • IP , Quality and Regulatory compliance • Communications and project execution • Compare and contrast - Soft capabilities III. Future Trends and critical success factors of Pharma outsourcing in China and India

5. Overview of Indian and Chinese Pharmaceutical Industries Both China and India have a larger and faster-growing domestic market. But their current share of global market are still small Market Size (Pharma/Contract Manufacturing) 5th largest ~$20B/~$1.2B 9th largest ~$10B/~$1.8B WW ~$700B/$35B Market Growth Rate (Pharma/Contract Manufacturing) 20%/20% 15%/20% Top 10 firms makes up 40% of total revenue, leading firms with significant int’l experience fragmented, top 10 firms makes up 20% of total revenue, less firms have significant int’l experience Industry Characteristics Source: China Pharma Association India Pharma. Association, Various 2010 10K

6. Overview of Indian and Chinese Pharmaceutical Industries -India • The Indian generic pharmaceuticals industry was born in the early 1970s when the government of India abolished product patents in favor of process patents • Created a vibrant private sector generics industry that served the captive domestic market and established chemistry skills, manufacturing scale and cost competitiveness • Generics companies then leveraged their comparative advantage to launch generics business globally starting with less regulated markets, then highly regulated markets • A few leading companies has established reputation and presence in Western markets (Dr. Reddy’s, Zydus, Ranbaxy, Lupin, etc) • Now the generics industry is climbing up the innovation ladder • Offering world class Contract R&D and Manufacturing for small molecules • Targeting biosimilars as next frontier for growth • Investing in R&D, aspiring to produce the first ‘Indian molecule’

7. International Strategy Marriage between cheap manufacturing facility, large pipeline of generics, with distribution setup and technical capabilities in developed countries Synergy Creation Acquisition of generic firms in developed economy create link with MNE and provides instant credibility to Indian pharmaceutical firms Market Share Increase Access to Regulated Market Set up shop closer to customers, ability to bid on early stage R&D and scale-up projects, alleviate concerns on IP protection Moving up the value Chain Avoid head-to-head completion with China, and Move into high-margin products

8. High-level capabilities assessment • Early Stage Discovery/Medicinal Chemistry (CRO) • Both countries have vast pool of talented chemists, with similar skill sets and capabilities in drug design and optimization • India: High capabilities in the area of bioinformatics, experienced and large workforce for public data collection and curation • China: stronger expertise in the synthesis of specialty chemicals and building blocks, Many chemicals that can not be profitably synthesized in other countries can be sourced in China at a reasonable price • Preclinical Research • China: • Abundant animal specifies in a favorable regulatory environment • Chinese company has capabilities in in vivo efficacy testing for non-human primates, none of the indian firms have the capabilities • Entrance of multinational CROs has raised the bar of service quality and made the sector quite competitive (JV, partnership, or wholly-owned branch)

9. High-level capabilities assessment • Clinical Research • India: • More Indians CROs are qualified to provide services • Indian CROs offer central lab service, • India has world-class capability in clinical data management, Pharmacovigilance, and statistical programming • China: • Vast pool of treatment-naïve patients and specialized hospitals that have medical facilities, specialists and knowledge to conduct the trials. • Most of the clinical trials are carried out by big Pharma or multinational CROs. However, locally founded CROs are quickly emerging

10. High-level capability assessment • Process R&D (CMO) • India: Stronger expertise in chemical development (From Lab scale to kg scale) • China: with the exception of a few leading suppliers, majority of these API producers do not have deep expertise in process R&D • API Bulk Manufacturing • India: moving up the food chain, focusing on smaller set of high-margin APIs (400 APIs) • China: Largest API producer in the world, 1400 APIs offered (out of 2000 WW) by ~1000 API producers. Better infrastructure and capability to optimize cost at metric ton scale. • Finished Drug Product Manufacturing • India: strong expertise in almost all type of dosage forms compared with limited number of dosage forms from Chinese suppliers • China: relatively weak in formulation development, particularly for difficult-to-make forms, such as injectibles and soft gels

11. Compare and Contrast of service offerings

12. Challenges • Intellectual Property Rights • Regulatory and quality concerns • Communications and distance • Technical expertise & Project Execution • Anything else?

13. IP Protection Policy Legal framework for IP protection are in place for both countries. There is still long way to go in terms of enforcement • India • From 1947 to 1970, pharmaceutical industry dominated by MNCs, lack of access to healthcare and affordable drugs • Indian Patent Act of 1970, only process patents are recognized • After TRIPs in 2005, both process and product patents are recognized • China • Patent law first enacted in 1984, excludes drug from patent protection, but will provide protection for manufacturing methods of pharmaceuticals • In 1992, the patent law was amended and legalized patent drug patent protection for 20 years • Following entry to WTO in 2001, patent law was amended again to harmonize with that of western countries, new patent law enacted in 2009

14. Government Policy & Company strategy on Contract Manufacturing Both countries have favourable policy to stimulate growth of Pharma outsourcing market • India • Clearly-defined contract manufacturing strategy. CRAMS division within major generics manufactures • Success as 2nd innovator has led to partnership with major MNCs • Government policy is conducive to contract manufacturing • China • Had a late start on contract manufacturing due to government imposed restrictions, it was consider illegal to carry out contract manufacturing in 1999 • In 1999, SFDA opened the door for CM, partly due to the desire to better utilize excess capacity. But many restrictions remains • Since 2001, CM has been legalized by SFDA, restriction on crude drug has been lifted

15. Regulatory Compliance Indian Pharmaceutical firms easily surpass Chinese Pharmaceutical firms from the standpoint of regulatory compliance, as evidenced by number of FDA-inspected Plants, and DMF filed with FDA, and ANDA approved by FDA. India China Number of Plants inspected by FDA > 100 70 Number of DMF*s filed with FDA >70 > 300 Number of ANDA* approved by FDA >30 >10 Source: Thomason Research DMF: Drug Master File ANDA: Abbreviated New Drug Application

16. Compare and Contrast – Soft Capabilities India China Project Cost Communication Flexibility Excellent Infrastructure /Supply Chain Good Quality System Average Basic Regulatory Expertise

17. Future Trends and Predictions -China • Larger number of western-trained Chinese scientists and managers are returning to China, drastically closing the gaps with India on communications and understanding of established market • Major Chinese pharmaceutical firms are recognizing the importance of contract manufacturing as a growth driver as the domestic growth will unlikely to sustain itself • More prominent CMOs will emerge as Chinese pharmaceutical industry continue the trend of consolidation • China’s infrastructure and dominance on API and intermediates will likely position itself for long-term COGS reduction • China will likely maintain the lead on biotech R&D and manufacturing due to early lead and favorable government policy

18. Future Trends and Predictions - India • With its stronger global presence and higher expertise in quality system and regulatory affairs, India will maintain the lead over China in the contract manufacturing business in the next few years • India will benefit from China’s quality missteps in the short-term , resulting from Heparin and melamine incidents • India will continue to lead in the small molecule API manufacturing space • India will continue to rely on raw material supply from China • Collaboration between China and India Pharma industry will expand

19. Critical factors to succeed in sourcing from China/India • Supplier Due-Diligence • Conduct research to understand the firm’s size, financial stability and reputation • Conduct Reference check • Leverage local team and share knowledge with the rest of the company • Work with sourcing specialists with Chinese/Indian background • Supplier Management • Establish PERSONAL relationship • Understand the cultural sensitivity and adjust communications accordingly • Insist on regular communications and level of details • Avoid subcontracting • Risk Management • Limit the scope of outsourcing projects • Proactively manage supply chain constrains • Contract or not? Keep it simple

20. Questions and Comments Shankar Suryanarayanan s1.shankar@yahoo.com Yingming Yue yingming.yue@gmail.com Thank you!