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 explored (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 expected to have a positive impact on flexibility and the efficiency of processes. Costs are supposed to be re-duced; turning fixed into variable costs. Assets can be removed off the balance sheet. Due to its complexity the pharmaceutical value chain offers numerous outsourcing opportunities for the industry.

The growing outsourcing market provides services all across the pharmaceuticals value chain

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.

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.

R&D and Registration Manufacturing Supply &

Logistics Marketing & Sales

Sales data provision

Market size $7bn$16bn $250-350bn$130bn$122bn

Finance & Enabling

R&D and Registration Manufacturing Supply &

Logistics Marketing & Sales

Sales data provision

Market size $7bn$16bn $250-350bn$130bn$122bn

Finance & Enabling

© CEPTON

Drivers for outsourcing

Impediments to outsourcing

• Quality control

• Guaranteed supply of material

• Desire to keep know-how in-house

• Regulatory barriers

• Difficulties in logistics and coordination

• 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 freedomand gain access to new technologies

• Strategic goal to have in-house manufacturing dedicated to high-margin pharmaceutical products

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The decision whether to outsource or not and which parts should be contracted externally requires an in-depth analysis of the company’s value chain, core competencies and future strate-gies. 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%.

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.

R&D and Registration Manufacturing Supply &

Logistics Marketing & Sales

Sales data provision

9%n.a.12%10%15%Outsourcing market growth

MatureMatureGrowingMatureMatureStage of development

9%n.a.10%5%10%Market growth(total)

100%20-30%40%30%15%Share of outsourcing

Market size outsourcing

$7bn$6.4bn1 $2.5bn2$39bn$18bn

1) Special logistics without traditional wholesale2) Sales force only; marketing agencies account for >$50bn © CEPTON

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60

41

90

36

52

23

15

33

20

50

Countries

3.500

2.600

4.000

5.600

9.000

4.000

8.800

10.500

8.900

22.000

Employees

400mClinicalKendle

630mClinicalICON

1.1bnEarly developmentMDS

338m (2006)ClinicalPRA

470mClinicalSFBC (PharmaNet)

960mClinicalParexel

1.2bnEarly developmentCharles River

1.3bnClinicalPPD

1.6bnFull ServiceCovance

2.7bn

Revenues 2007 (US$)

Full Service

Type of CRO

Quintiles

Company

Currently 15% of total R&D expenditures are outsourcedResearch and development are nowadays often outsourced to contract research organizations (CROs) and it is expected 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.

Top 10 CROs

Many pharmaceutical companies have established close and sustainable relationships with a small number of CROs. In the contracts it is becoming common to include development 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 exist.

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]

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.

Contract clinical research revenues by segment; %

Big CROs and their “one stop shopping” model offer regulatory services as well. These include regulatory strategy design, docu-ment preparation, consultation and liaison management, with all kinds of regulatory agencies.

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100%

10-15years

5-7years

40-50%

0,6%

0,6%

5,9%

5,2%

3,6%

3,3%

4,7%

4,1%

4,1%

3,7%

3,6%

4,1%

2,4%

2,1%

3,0%

2,5%

2,9%

2,5%

0.2%

0,1%

14,8%

13,3%

12,0%

13,3%

0.77.24.418.15.75.04.42.93.63.50.2 16.2 122~55

Pre-clinical

Clinicaldev.plan

Projectmgmt.

Pro-tocoldev.

Investi-gator

recruit.

Patientrecruit-ment

Sitemgmt.

Sitemo-

nitoring

SAF-reporting

Datamgmt.

Sta-tistical

analysis

Reportwriting

Com-piling

dossier

Sub-mission

100%

10-15years

100%

10-15years

5-7years

40-50%

5-7years

40-50%

0,6%

0,6%

0,6%

0,6%

5,9%

5,2%

5,9%

5,2%

3,6%

3,3%

3,6%

3,3%

4,7%

4,1%

4,7%

4,1%

4,1%

3,7%

4,1%

3,7%

3,6%

4,1%

3,6%

4,1%

2,4%

2,1%

2,4%

2,1%

3,0%

2,5%

3,0%

2,5%

2,9%

2,5%

2,9%

2,5%

0.2%

0,1%

0.2%

0,1%

14,8%

13,3%

14,8%

13,3%

12,0%

13,3%

12,0%

13,3%

0.77.24.418.15.75.04.42.93.63.50.2 16.2 122~55

Pre-clinical

Clinicaldev.plan

Projectmgmt.

Pro-tocoldev.

Investi-gator

recruit.

Patientrecruit-ment

Sitemgmt.

Sitemo-

nitoring

SAF-reporting

Datamgmt.

Sta-tistical

analysis

Reportwriting

Com-piling

dossier

Sub-mission

17,5%

6,1%

16,5%

12,2%

28,3%

19,4%

Preclinical

Phase I

Phase II-III

Phase IIIb-IV

Central Lab

Other

~$18bn in 2008

85%

78%

78%

65%

58%

58%

37%

32%

29%

Primary packaging

Secondary packaging

Formulation

API manufacturing

Labeling

Clinical supplies

Sterilization

Chem. Intermediates manufacturing

Stability packaging

Process development and research development

Active ingredient production

Physical processing

Development of formulations

Bulkproduction Packaging

Primary Secondary

Share of outsourcing

Stage of development

20% 50-60% 20% 20% 10-80%1 75-85%

Embryonic Growth/Maturity Growth Growth Growth Maturity

1) Depending on market segment

© CEPTON

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 manufac-turing organizations (CMOs) are predominantly active in API production and loan manufacturing.

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 optimi-zation 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.

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

Small and mid size generics manufacturers and value added services

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.

Company Headquarters European sites2007 European Union revenues (€m)

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

Nextpharma Send, England 7 130

Delpharm Paris 4 105

Cenexi Paris 1 83

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© CEPTONxxTropon GmbHxxxxTemmler Pharma GmbH & Co KGn/axxxSwiss Co Services AGxxxSwiss Caps AGxxxStrides Arcolabn/axSimafexxxxPenwest Pharman/axNext PharmaxxxMistral Pharma Inc.SubmittedxxLabopharmxxxxEurandxxx+injectableEthypharmxxxxFlan CorpxxxxCardinal Health Germanyn/axAstra Zeneca Indian/axArrow Pharma Ltd.n/axAPR Applied Pharma Research xxALZA Corpxx+aresolAndrx Pharman/axAkina Inc.xxxActavis Groupn/axxAc-Pharma AGEnvisaged(x)xxLosan Pharma GmbH

FDA compliance

Dossier development

ManufacturingSolida FocusCompany

xxTropon GmbHxxxxTemmler Pharma GmbH & Co KGn/axxxSwiss Co Services AGxxxSwiss Caps AGxxxStrides Arcolabn/axSimafexxxxPenwest Pharman/axNext PharmaxxxMistral Pharma Inc.SubmittedxxLabopharmxxxxEurandxxx+injectableEthypharmxxxxFlan CorpxxxxCardinal Health Germanyn/axAstra Zeneca Indian/axArrow Pharma Ltd.n/axAPR Applied Pharma Research xxALZA Corpxx+aresolAndrx Pharman/axAkina Inc.xxxActavis Groupn/axxAc-Pharma AGEnvisaged(x)xxLosan Pharma GmbH

FDA compliance

Dossier development

ManufacturingSolida FocusCompany

YEAR1 2 3 4 5 6 7 8 9 10 11Activities

Preclinical

Details

Phase IPhase IIPhase IIIBLAApprovalLaunch

EngineeringConstructionQualificationValidationGMP-runsInspectionManufacturing

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 develop-ment process. However, one major challenge for biotech-CMOs is to meet GMP-validation.

Biological’s product development cycle

The supply chain offers plenty of opportunities for outsourcing service providers Pharmaceutical distribution is changing: Consolidation, phar-macy 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, pharma-cies (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).

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HH

Warehousing

Manufacturer

Pharmacies, hospitals,patients

Value added

Inbound logistics

Transportation

Outbound logistics

Manufacturing

•Kitting• Labeling •Relabeling•Packaging•Repackaging•Postponement

Specialist services

•Clinical trials distribution•Promotion material mgmt.•Consulting•Orphan drug mgmt.•Named patient supply

Special distribution services•Direct to pharmacy•Hospital services•Home patient deliveries •Cross border• Temperature controlled

Warehousing services•Order entry• Invoicing•Order to cash•Returns mgmt.•Destruction •Customer service•Reporting • Insurance

Cor

e bu

sine

ssV

alue

add

ed s

ervi

ces

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 manufactu-rers 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.

• Integrated health care models• Special health care providers• Insurances contracting• …

• Pharmacy third party ownership • Pharmacy-obligation for OTC• Mail order• Cross border trading• Vertical integration of wholesale

and retail• …

1

23

Changes regarding portfolio and selling• Separation of Generics, OTC and RX business• Consolidation of customers• Patient individual therapies• …

Driversfor

changing distribution

Change and consolidation of health care provision

Further liberalization of distribution structure

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€10m

n.a.

n.a.

€9m

€12m (+€10m)

€29m

€76m

€73mRevenue

~90Sales force provider, training and educationAMS

~100Sales force provider, marketing, project managementSellexpert

~400Sales force provider, vacancy management, Co-promotion/ Co-marketing

Marvecs

~900Sales force provider, vacancy management, health management services, market research, trainings, sales force effectiveness tools

Innovex

~100 Sales force provider, vacancy management, marketingCareforce

Sales repsServices

~100

~150 (+120)

~930

Sales force provider, consulting, marketing

Sales force provider, market research, communications, PR, trainings

Sales force provider, vacancy management, marketing, training, consulting, e-learning

Pharma Rent

MKM Mediline(+Actipharm)

Pharmexx

© CEPTON

Even in Marketing and Sales plenty of opportunities for strategic outsourcing existDespite 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 of-fer 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 fo-cus 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 therapeu-tic 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

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.

Strategic partnerships will gain importance in the futureNew 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 development 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 external providers is becoming a day-to-day business.

© CEPTON

Specialized sales force Sales forces for certain therapeutic niches in the specialist segments

Syndicated partnerships 2-3 small pharma companies share one sales force detailing non-

competing products

Risk-sharing-models• Licensing agreements with CSOs temporarily take over the

complete distribution and marketing for a certain product; risk and profits are shared

Vacancy management Pool of sales reps covering maternity and sickness related

vacancies

CRM Build up, train and run Customer Relationship Management systems

Take over C-products C-products are taken into ownership by the CSO

Marketing Services Product management, communication, market research, consulting, sales support material, PR campaigns

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 CEPTONCEPTON, 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 in-dustry 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 imple-mentation of the procedures required in a timely and effective manner.

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