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The growing outsourcing market provides services all across the pharmaceuticals value chain
R&D and Registration Market size $122bn Manufacturing Supply & Logistics $16bn Marketing & Sales $250-350bn Sales data provision $7bn
The decision whether to outsource or not and which parts should be contracted externally requires an in-depth analysis of the companys value chain, core competencies and future strategies. Pros and cons concerning external provision of services, the market environment as well as upcoming developments and trends of the healthcare industry have to be considered before making a decision. Today, the share of outsourcing in the different parts of the value chain ranges from 15% to 100%.
$130bn
Manufacturing
CEPTON
Market growth (total) Outsourcing market growth Share of outsourcing Market size outsourcing Stage of development
1) 2)
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 & development 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. Drivers and impediments have to be balanced in the outsourcing decision.
Pressure to focus on core competencies Reduction of time-to-market and costs Decreasing value of products as patents approach expiration 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
15%
10%
12%
n.a.
9%
15%
30%
40%
20-30%
100%
$18bn
$39bn
$6.4bn1
$2.5bn2
$7bn
Mature
Mature
Growing
Mature
Mature
Special logistics without traditional wholesale Sales force only; marketing agencies account for >$50bn
CEPTON
Quality control Guaranteed supply of material Desire to keep know-how in-house Regulatory barriers Difficulties in logistics and coordination
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.
CEPTON
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.
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 development. Total R&D expenditure [bn] and time [years]
~55 0.2 3.5 3.6 2.9 4.4 5.0 16.2 5.7 18.1
14,8% 13,3% 2,4% 3,6% 4,1% 100% 4,7%
4.4
3,6%
7.2
5,9%
0.7
0,6%
122
2,9%
3,0%
Project mgmt.
Protocol dev.
Site mgmt.
Site SAFData StaReport mo- reporting mgmt. tistical writing nitoring analysis
5-7 years 0,1% 2,5% 2,5% 2,1% 10-15 years 12,0% 4,1% 13,3% 3,3% 5,2% 0,6%
4,1%
3,7%
CEPTON
Within the $18bn global CRO budget 2/3 of the revenues originate from big pharma; but biotech companies are driving a lot of the industrys growth. Contract clinical research revenues by segment; %
Other Preclinical
Many pharmaceutical companies have established close and sustainable relationships with a small number of CROs. In CEPTON contracts it is becoming common to include development the 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-nave 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 exist.
17,5% 28,3%
~$18bn in 2008 Phase I
6,1%
12,2%
Central Lab
19,4%
Phase II-III
16,5%
Phase IIIb-IV
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 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 Catalent Pharma Solutions Vetter Famar Healthcare Services Aeonova Fareva Patheon Haupt Recipharm Nextpharma Delpharm Cenexi Headquarters Somerset, NJ Ravensburg, Germany Athens Tittmoning, Germany Paris Toronto Berlin Stockolm Send, England Paris Paris European sites 12 1 11 9 8 4 9 8 7 4 1 2007 European Union revenues (m) 448 275 240 215 193 191 170 130 130 105 83
CEPTON
Small and mid size generics manufacturers and value added services
Company Losan Pharma GmbH Ac-Pharma AG Actavis Group Akina Inc. Andrx Pharma ALZA Corp APR Applied Pharma Research Arrow Pharma Ltd. Astra Zeneca India Cardinal Health Germany Flan Corp Ethypharm Eurand Labopharm Mistral Pharma Inc. Next Pharma Penwest Pharma Simafex Strides Arcolab Swiss Caps AG Swiss Co Services AG Temmler Pharma GmbH & Co KG Tropon GmbH Solida Focus Manufacturing x x +aresol x x x x x x x x x x x x x x x x x x x Dossier FDA development compliance (x) x x Envisaged n/a x n/a x x n/a n/a n/a x x x x Submitted x n/a x n/a x x n/a x x
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 development 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.
x x x x x x x x x x
x x +injectable x x x x x x x
CEPTON
Process development and research development Active ingredient production Primary Physical processing Development of formulations Bulk production Secondary Packaging
Share of outsourcing
20%
50-60%
20%
20%
10-80%1
75-85%
Stage of development
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 development and manufacturing of generics, they are able to take care of e.g. the dossier preparation.
CEPTON
The biologicals contract manufacturing market is still marked by a strong demand exceeding the supply. Biologicals manufacturing has become a focus area for CMOs. Since large molecules usually imply profitable deals, contract manufacturers are expanding their facilities for bio-drugs. The production of biologicals is linked to a long and complex development process. However, one major challenge for biotech-CMOs is to meet GMP-validation. Biologicals product development cycle
Activities Preclinical Phase I Phase II Phase III BLA Approval Launch Details Engineering Construction Qualification Validation GMP-runs Inspection Manufacturing 1 2 3 4 5 YEAR 6 7 8 9 10 11
CEPTON
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 External 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 Pharmacies, hospitals, globally. Manufacturer patients
H
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, expand their business, offering pre-wholesale and special logistics (through Movianto) as well as marketing and sales (through Pharmexx).
Inbound logistics
Outbound logistics
Core business
Transportation
Warehousing
Value added
Warehousing services Order entry Invoicing Order to cash Returns mgmt. Destruction Customer service Reporting Insurance
Special distribution services Direct to pharmacy Hospital services Home patient deliveries Cross border Temperature controlled
Specialist services Clinical trials distribution Promotion material mgmt. Consulting Orphan drug mgmt. Named patient supply
CEPTON
Even in Marketing and Sales plenty of opportunities for strategic outsourcing exist
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
Services Pharmexx Innovex Sales force provider, vacancy management, marketing, training, consulting, e-learning Sales reps ~930 Revenue 73m 76m
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
CEPTON
Sales force provider, vacancy management, health ~900 management services, market research, trainings, sales force effectiveness tools Sales force provider, vacancy management, Copromotion/ Co-marketing ~400
Sales force provider, market research, communications, ~150 (+120) 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 ~100 ~100 ~100 ~90
CEPTON
The CSO market is highly fragmented, with only a few global players; Innovex and Pharmexx each employ over 900 sales reps in approximately 20 countries. Careforce is an example for a regional CSO providing sales reps (100 in Germany) and additional marketing services.
To analyze outsourcing targets, the following questions should be answered: Are we able to save cost and gain flexibility through outsourcing? Which services should be provided internally and externally (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 executives with many years of experience 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 executives who are time-tested in finding customized solutions together with our clients rather than for them. We offer experts 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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