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Industry Audit + Company of the Year 2008

In July, the Pharmaceutical Researchers and Manufacturers of America (PhRMA) released its revised "Code on Interactions with Healthcare Professionals," which addresses the scope of permissible pharmaceutical company interactions with and marketing to healthcare professionals.  

In 2002, PhRMA published its original, voluntary code of ethics that established standards of conduct for pharmaceutical companies dealing with healthcare professionals. The theory behind the Code is clear: The risk is that providing certain benefits to healthcare professionals may cause them to prescribe a drug or product based on receiving these benefits rather than using independent clinical judgment. 

The new Code, effective January 1, 2009, will replace PhRMA's 2002 Code and further restrict the types of permissible interactions between pharma reps and healthcare professionals. The revised Code includes additional processes by which pharmaceutical companies electing to comply may be publicly recognized by PhRMA. Companies that publicly announce their commitment to abide by the provisions of the Code will be recognized on PhRMA's Web site upon the completion of an annual certification signed by the company's CEO and chief compliance officer. Moreover, the revised Code encourages companies to seek independent verification of their compliance with the PhRMA Code by having an external source verify, at least once every three years, that the company has adopted and implemented policies and procedures to foster compliance.  

These changes come at time of increased government scrutiny over the marketing practices of the pharmaceutical industry. Many of these practices may also violate federal and state healthcare fraud and abuse laws, potentially leading to civil and/or criminal sanctions. 

In contrast to the 2002 Code, the revised Code prohibits a pharmaceutical company from providing healthcare professionals with any items that do not advance disease or treatment education. Even practice-related items of minimal value, such as pens, notepads, mugs, hats, t-shirts, mouse pads, and similar items with a product or company logo, are prohibited. Likewise, pharmaceutical companies should refrain from sending boxes of cookies, candy, and gift baskets to physicians' offices. (Pharmaceutical companies may still provide items designed primarily for education, such as anatomical models.) This new prohibition represents a major departure from PhRMA's previous position with respect to practice-related items. 

 Pharmaceutical companies are now precluded from providing restaurant meals to healthcare professionals. Occasional meals may still be offered, but only if both they are both attending a bona fide informational presentation during the working day, and such presentation takes place at either a physician's office or hospital. Sending lunch to a physician's office is, in general, no longer permissible.  

 The revised Code strengthens PhRMA's prohibition on providing entertainment and recreation items to healthcare professionals, such as tickets to theater and sporting events, treating physicians to golf, and providing free sports equipment (such as golf clubs, golf balls, or general sports memorabilia) and leisure trips (i.e., vacations, boating, fishing/hunting trips, or any other travel-related excursion). These items should not be offered to any healthcare professional who is not a salaried employee of the pharmaceutical company, regardless of: the item's value, whether the healthcare professional is engaged as a speaker or consultant, or whether the benefit is secondary to an educational purpose.  

 The importance of pharmaceutical companies entering into consulting arrangements with healthcare professionals is still recognized. However, decisions regarding the retention of healthcare professionals as consultants should be based on defined, objective criteria such as medical expertise, reputation, and experience. Compensation should be for legitimate services (i.e., not a reward for prescribing or recommending a particular product), and should be reasonable and fair market value in all respects. In order to document and verify that the compensation paid to consultants is fair market value for bona fide speaking and consulting services, pharmaceutical companies should carefully monitor the tasks that the consultant performs, the approximate amount of time spent on such tasks, and the compensation paid to the consultant. One further caveat: The 2009 Code imposes additional requirements on arrangements with healthcare professionals who participate in committees that develop formularies or clinical practice guidelines. Before a pharmaceutical company engages such a professional as a speaker or consultant, the professional must disclose his/her prospective relationship with the pharmaceutical company to the committee in which he/she participates. This disclosure requirement should be ongoing, and extend for a period of two years after the termination of the professional's arrangement with the pharmaceutical company.  

 Further guidance is provided regarding the circumstances under which a pharmaceutical company may provide certain support for CME, such as: Decisions regarding CME program grants should be separated from (and not influenced by) sales and marketing departments; objective criteria should be established for CME grant decisions; the independent judgment of the CME provider should be respected, and applicable accreditation standards should be followed; and no advice or guidance should be provided to the CME provider regarding the content or faculty of a particular program, even if such advice is solicited. 

In light of the increased restrictions contained in the revised Code, and increased legislative and enforcement activity with respect to arrangements with healthcare professionals, pharma companies should consider taking the following proactive measures: 

Update existing policies and procedures to comply with the revised Code, and notify all employees in writing of such updates. 

Provide training on the revised Code, as well as applicable laws and relevant FDA requirements, to all sales representatives and other employees and agents who interact with healthcare professionals, or those who oversee such arrangements. Representatives should be evaluated periodically to assess their current understanding of, and compliance with, these requirements. Maintain copies of all training materials, as well as attendance records. 

Carefully review all existing arrangements with healthcare professionals to determine compliance with the revised Code. All arrangements that do not comply should be amended or terminated in writing. 

Review all compensation paid to healthcare professionals to confirm that payments are reasonable and fair market value for legitimate services provided. Consider using an outside valuation firm to conduct such reviews, and document all reviews (whether performed internally or externally). 

Require healthcare professionals with ongoing consulting or speaking arrangements to maintain a time log detailing the services provided on behalf of the pharmaceutical company. Such time logs should be reviewed on a regular basis to determine if the compensation is fair market value and reasonable with respect to the services actually provided. 

Any arrangements which are determined to be in excess of fair market value for services actually being provided should be terminated or modified in writing.  

Consider whether to participate in PhRMA's compliance certification and/or external review programs described above.  

The revised Code, as well as the recommendations listed above, should be considered at your company's next compliance committee meeting. The compliance committee's determinations should be forwarded to management for approval, with the objective of implementing any changes, reviews, and training prior to January 1, 2009. 

  is chair of Sills Cummis & Gross P.C.'s Health and Hospital Law  Practice Group.  He can be reached at 

 is an associate in Sills Cummis & Gross P.C.'s Health and Hospital Law Practice Group.  She can be reached at 

Toolkit

Effective January 1st, sales reps will have a new standard for dealing with doctors the PhRMA way

The New Code

Once upon a time, the very existence of a clinical trial was considered confidential, and sponsors would disclose new findings only after they had passed the rigors of the traditional biomedical peer review publication process. In recent years, however, there has been a groundswell of public criticism—and several highly publicized lawsuits—surrounding industry practices related to information from clinical trials. That has translated into a complex web of regulations and guidance that govern the registration of clinical trials and disclosure of results—and that ultimately have the potential to affect how data are published. 

As wave after wave of deadlines send companies scrambling to meet these new rules, the industry is taking a crash course in compliance. And with the next deadline at the end of this month (requiring trial sponsors to post basic results information on 

), pharmas are realizing that this is just the beginning. A gathering storm of international regulations has appeared on the horizon, with different countries setting out different, and often conflicting, requirements for trial registration and results disclosure.  

What are the implications of these regulatory changes? Here we outline the emergence of new regulations in the US and beyond, examine the industry's response to date, and suggest how companies might best future-proof their compliance strategy to stay up-to-date with these rapidly emerging requirements in a cost-effective manner. 

Clinical Data Disclosure: How Did We Get Here?

Starting in the late 1990s, patients and their advocates led the charge for more information about clinical trials, mostly because they wanted to participate in actively recruiting trials that could offer the potential for life-saving drugs. This was a perfectly reasonable goal, but the drive for more information may have touched off the firestorm of compliance challenges.  

Opening round: Drug trials to treat life-threatening conditions 

The first step toward regulating the disclosure of clinical trial protocols came in November 1997, when the US government signed the Food and Drug Administration Modernization Act (FDAMA) into law. FDAMA covered a wide range of provisions, including the extension of the Prescription Drug User Fees

But Section 113 (which remains in full force today) required the establishment of a "clinical trials databank" that would serve as a centralized information repository on clinical trials for drugs intended to treat serious or life-threatening conditions. Patients were the anticipated audience, but it was also thought that it could be of use to researchers and healthcare providers. The databank eventually emerged in February 2000 as the National Library of Medicine (NLM) Web site, 

In September 2004, the International Committee of Medical Journal Editors (better known as ICMJE, and previously known as the Vancouver Group) weighed in. This working group of editors from 11 highly influential medical journals (including the 

) announced that if sponsors wanted to publish results in their journals, they had to register all Phase II through Phase IV studies before enrolling their first patient. 

In particular, ICMJE wanted more transparency on clinical trials that "reflect unfavorably on a research sponsor's product." They were concerned about under-reporting of "negative"  results—a longtime problem in clinical research, as it tends to distort the body of scientific evidence. For the first time, there were material consequences should sponsors fail to register trials; companies that wanted their study results to remain eligible for publication had to comply. In the months preceding the ICMJE-imposed September 2005 deadline for trial registration, the number of studies registered on 

 jumped from 13,153 to 22,714, as companies scrambled to meet the requirements. 

Since then, ICMJE has updated its position on several particulars, but the core principles remain in effect—register or perish, perhaps? (See "How Did We Get Here?") 

Maine adds teeth—and results disclosure 

In June 2005, the state of Maine enacted legislation requiring both trial registration and disclosure of results of any Phase II through IV clinical trials initiated after October 15, 2002, for any drug prescribed, dispensed, or promoted in the state. The law allowed sponsors to register these trials on their Web site or at 

, but also required them to post a summary of trial results in the International Committee of Harmonization E3 (ICH-E3) format—which dictates the content and format of information—within one year of study completion. The legislation states that companies must post these data on a publicly accessible Web site. Many sponsors have met this requirement by posting to the industry-sponsored Web site, 

, while others simply post summaries to their own clinical registry Web site. Still  others do both. Maine also added a $10,000 penalty for non-compliance—the first monetary sanction in this escalating series of regulations. The law remains in effect. 

Lastly—at least so far—the US government signed the FDA Amendments Act (FDAAA) into law in September 2007. Like FDAMA, FDAAA is broad in focus, but its implications for clinical trial disclosure are clear—more information is required for more trials, and results are officially demanded.  

Title VIII of FDAAA expanded the registration requirements from FDAMA's original 113 regulations in two ways. First, the scope of trials covered is dramatically increased to include all controlled interventional trials in patients. Trials for medical devices are required in addition to those in drugs, biologics, and for all conditions. Only Phase I trials are excluded. Second, the required data elements for registration have been expanded to include, for example, detailed intervention data, a primary outcome completion date, and primary and secondary outcome measures. 

FDAAA further mandated that beginning in September 2008, and expanding in each of the two subsequent years, the results of clinical trials for approved drugs and devices will be publicly disclosed on 

, and should include detailed tables of data on participant flow, primary and secondary outcome measure results, serious and frequent adverse events, and eventually technical and lay results summaries.  

Finally, noncompliance comes with both monetary penalties and, perhaps more important for a company's image, public "shaming" on a government Web site. The government also increased monetary penalties to $10,000 per violation, up to $10,000/day for uncorrected violations after 30 days. 

More countries are now following the lead of the US  with active or pending initiatives surrounding clinical data disclosure. In some countries, these initiatives are voluntary, but many countries are moving toward mandatory requirements as a component of the regulatory submission process.  

Nations such as Brazil, Australia, China, New Zealand, and Croatia have already stated their plans to implement registry requirements in the near future. (See "Selected International Disclosure Initiatives") In Europe, sponsors must submit clinical trial information to the European Union Drug Regulating Authorities Clinical Trials, or EudraCT, a database of all clinical trials in Europe. While access to this database is currently restricted to European regulators, information covering pediatric studies is expected to be made public—tentatively scheduled for Q1 2009. In coming months and years, new international regulations and registry requirements from many more countries will become law, each presenting its own set of compliance requirements and its own mechanisms for updating its portal Web site. 

Selected International Disclosure Initiatives 

The pharmaceutical industry has made many significant changes to both its public face and its internal business processes in order to comply with the spirit and the letter of the emerging regulations. In January 2005, in response to the early trial registration initiatives and perhaps in anticipation of regulation on results, the leading biopharma industry associations published the "Joint Position on the Disclosure of Clinical Trial Information via Clinical Trial Registries and Databases." This gave rise to 

), a Web portal for results disclosure. The position statement also committed member companies to register all non-exploratory clinical trials, and to disclose a results summary in ICH-E3 format within one year of study completion for trials of approved drugs, or within one year of first commercial availability. The only exception would be if such disclosure would compromise publication in a peer-reviewed journal.  

It's also worth noting that seven of the top 10 biopharma companies see public disclosure as important enough to warrant a link from their corporate home page, and most have placed a public statement of their disclosure practices on their Web site. Many have also replicated their trial registry and results disclosure information directly on their corporate Web site, thereby showing a public commitment to the process. (See "Big Pharma's Registry Response") 

However, adhering to the process has been a struggle for the industry. Although biopharma companies are now reallocating staff and funding to manage the process, many are finding it challenging to remain in compliance when it comes to providing data in the required time frame. This will only worsen as the weight and complexity of the mandate to publish or perish grows. 

Global harmonization of clinical trials registration is a challenge at many levels, particularly when it comes to what data are to be reported, when, and how sponsors can interact with the Web portals. 

The World Health Organization (WHO) hopes to establish a number of harmonization initiatives surrounding the disclosure of clinical trial results, including norms for data elements and responsible parties, a network of primary trial and results registers, a one-stop "meta-search engine" that can search across all global registries in the WHO network, and a mechanism for a single, unique-trial identification number to avoid confusion among site searchers. However, these measures appear to be moving at a much slower pace than the emergence of new national or regional clinical data disclosure initiatives.  

Challenge to peer-reviewed publication process 

Publication in peer-reviewed biomedical journals remains one of the most respected channels of novel clinical findings from sponsor to physicians. However, the current requirement to post trial results within 12 months of "last patient, last visit" has put increasing pressure on the peer-reviewed journal publication processes. 

Current data analysis and internal reporting processes, combined with often lengthy peer review and publication lead times, make it almost impossible to secure primary publication of clinical trial results prior to the obligation to post within the 12-month deadline. If the industry and medical journals want to see clinical trial results first published in peer-reviewed publications, they need to reduce cycle times so that primary publication might precede registry posting. 

Concerns over the "non-promotional" public summaries 

As early as September 2010, FDAAA will require trial sponsors to post a "non-promotional summary" of each trial and its results expressed for both technical and lay audiences as part of the disclosure requirements. But compliance is fraught with challenges. After all, is it considered promotional if a company states that the trial met its endpoint and confirmed that the intervention exceeded response by the comparator? Most stakeholders would prefer to see the first disclosure of new clinical findings in a report that has been rigorously peer-reviewed, rather than one that is simply a synopsis of data.

In this confusing environment, how can companies develop a robust yet flexible approach to this compliance challenge? The best strategy seems to combine process, people, and platform. 

Now more than ever, companies must ensure that their standard operating processes are up-to-date, and that they can accommodate the anticipated growth in clinical trial registries throughout the world. Acceptable process cycle and response times must be clearly articulated, with escalation paths to manage delays. Implicit in this is a thorough examination of the cycle times to prepare data for publication or disclosure, including time to database lock and final clinical study report. 

In response to the challenge of facilitating global compliance, many leading biopharma companies are adopting a combined centralized/decentralized approach that maps to the realities of this business process. It will be challenging to keep pace with evolving US and global requirements. As a result, many companies have elected to form a small internal team of "process" experts that are charged with keeping current with emerging requirements. These process experts will work closely with globally dispersed "content" experts who are familiar with the status of each clinical trial and the emerging data. 

The ever-increasing scope and complexity of this compliance process has led most companies to the realization that a manual process—relying on e-mail and spreadsheets rather than a workflow and project management system—is simply unsustainable. Companies looking for a platform to support a high quality trial registration process that is transparent, auditable, secure, and robust typically require at least the following capabilities:  

A secure Web-based system to facilitate global access 

Configurable workflow capabilities that support role-based, managed-approval chains

Integration with a range of internal systems, including clinical trial management system (CTMS) and results repositories

Integrated reporting, both status and process metrics

Automated e-mail notifications, driven by both workflow and escalation triggers

It's evident that most companies are looking to buy—rather than build—these systems, as they consider the evolving regulations too fluid to risk internal or custom development. If that's the case, organizations should look for a partner with internal process expertise to ensure that requirements evolve at pace with the environment, managed hosting, and strong implementation capabilities. 

However you plan to respond to the ever-changing requirements for clinical trial information, it is vital that you move quickly to formulate and implement an effective compliance strategy. After all, it's fairly certain that companies can never return to the "Once upon a time" days when clinical trials remained a secret until the company decided it release the results. Indeed, the rules and regs governing clinical trial mostly like will become all the more complex in the future. 

 is president and CEO of PeerView and a founding member the International Society for Medical Publication Professionals. He can be reached at 

 is vice president of compliance and program management for PeerView. She can be reached at 

FDAAA means that you need to register clinical trials-and not only for publication planning

Publish or Perish

A frequent pharma headline these days carries the news that a large cap is restructuring its internal manufacturing operations to generate cost savings. Often, such articles quote executives describing the manufacturing function as "non-core," while reaffirming the centrality of R&D and marketing functions. Take AstraZeneca's dramatic announcement last fall that it would outsource all manufacturing within 10 years. Said David Smith AstraZeneca executive vice president of operations, "Manufacturing for AstraZeneca is not a core activity. AstraZeneca is about innovation and brand-building. ... There are lots of people and organizations that can manufacture better than we can."  

The fact that the announcement was partly retracted by the public relations staff indicates the level of confusion and anxiety that an outsourcing decision generates. But with a little effort, even a distracted pharma exec can get up to speed on the mystery of manufacturing, and figure out a rationale to use in determining the best course of action. 

It is not common for the head of manufacturing to have a seat on the top-level management committee at large pharmaceutical companies. Manufacturing issues are rarely discussed unless they have to be—most often as a result of such painful events as product stock-outs, large capital expenditures, or regulatory compliance issues. Periodically, strategic reviews identify manufacturing as a potential cost-savings opportunity because of the large asset and employment base. The all-too-easy executive decision is "Just outsource it."  

In part, manufacturing is a victim of its own success. Products are generally available where and when they're needed, and there's little recognition of what it took to make that happen. Marketing and R&D are notoriously poor at forecasting product approvals and commercial success, so manufacturing has to be prepared for wide-ranging demand scenarios (See "Wide-Ranging Results"). As a result, substantial capital is invested to support drugs that may not be approved, or that may have underwhelming sales. On the flip side, demand often far exceeds forecasts, leaving manufacturing chiefs scrambling to keep up.  

Immunex's Enbrel is a case in point. Launched in 1998, Enbrel (etanercept) sales quickly approached $800 million annually before manufacturing capacity for the recombinant-DNA arthritis drug became a constraint in 2001. Revenue growth was severely limited as patients were added to a waiting list. Not until Amgen's purchase of Immunex and the rushed construction of a Rhode Island factory did supply meet demand. 

Also on the list of nasty surprises is the issuance of an FDA Warning Letter, which always seems to appear out of the blue, threatening a company's ability to ship existing products or gain approval for new ones. In the aftermath of a consent decree, companies can spend billions on remediation simply to get back to their prior position, with new product launches suspended until sufficient progress is made in addressing deficiencies.  

The overall result is a limited understanding of the value manufacturing brings to the company as a whole. From the executive suite, manufacturing looks like a black hole that absorbs significant resources. Although it generally produces the required products, it does so at high cost and with periodic dramatic failures. The temptation to simply turn this over to an external organization and focus on the "core" areas of R&D and brand building is absolutely unsurprising. 

But before jettisoning manufacturing, companies would be wise to understand its strategic contributions, including the ability to respond to rapid increases in demand, thereby avoiding costly stock-outs; opportunities for close partnerships with product development to ensure smooth, rapid product launches and create barriers to entry for generics firms; and the generation of substantial tax benefits due to operating in tax-advantaged locations. Strategic use of third parties can provide access to advanced technologies, improve flexibility, and reduce cost. While it is an easy decision, outsourcing is no easy answer. 

Predicting approval and commercial demand for a new product is particularly difficult. Unlike in other industries, pharma R&D efforts can look extremely promising for years only to uncover late-stage side effects or be hit with an FDA "approvable letter" requiring additional years-long studies. Vanlev (omapatrilat) is an unfortunate example of how negative safety signals can ruin the best laid plans. Bristol-Myers Squibb spent $500 million on a chemical plant in Ireland before FDA's concerns about the cardio drug led to the program's cancellation in 2002. 

On the other hand, a product can become an unexpected success. Lipitor (atorvastatin) is the ultimate example of a drug selling beyond anyone's wildest expectations. Launched in 1997 as a "me too" drug, the fifth entrant into the statin category, first year sales of Lipitor were expected to be less than $100 million. So Warner-Lambert's manufacturing executives were taken completely off-guard when what they thought would be a three-month supply vanished within days. They rushed to purchase a plant in Ireland to keep up with demand as sales zoomed to nearly $1 billion in the first year and over $2 billion in 1998. Sales reached a high of nearly $13 billion in 2006—30 percent more than analysts had predicted two years after launch. 

Compounding the problem of inaccurate forecasting is the significant lead time required to add new capacity. It can take anywhere from two years (for a formulation facility) to five years (for a biologics manufacturing shop) to come online. Starting production of a drug in an existing facility also takes time—a year or more to make saleable product, including the time for qualification and stability batches. Maintaining excess capacity is one way to ensure against escalating demand.  

Naturally, third party outsourcers are loath to maintain spare capacity without significant up-front payments. Even for specialized capacity, it is often more economical to have a third party custom-build capacity rather than building internally.  

One advantage of internal manufacturing is the ability to work closely with R&D on product and technology development. There is an opportunity to develop common technology platforms so that new products can fit seamlessly into existing capabilities. In that way, one product failure does not render a manufacturing asset unusable. 

GlaxoSmithKline has adopted this approach at its Cork, Ireland, shop with an R&D pilot facility and a manufacturing facility on the same site. Similar technologies are used at both facilities, supporting rapid scale-up and launch. Technical staffs are rotated frequently between R&D and manufacturing, enabling rapid transfer of know-how. Another example is Merck's construction of a development-and-launch platform for product formulation at its Ballydine, Ireland, facility. During the development stage, formulation scientists use a standard technology, such as roller compaction, which allows smooth transfer to manufacturing.  

Achieving these benefits with third party manufacturers is difficult. Contract manufacturers work with many customers, making it difficult to synchronize technology with any one. In addition, they may not be at or even near the cutting-edge of technology. For example, few contract manufacturers have invested in Process Analytical Technology (PAT), which can cause delays and additional costs in product transfer.  

For US-based pharmaceutical companies, one of the largest factors keeping manufacturing in-house is the ability to realize significant tax savings by locating production in tax-advantaged locations. Firms aren't building plants in Puerto Rico, Ireland, Switzerland, or Singapore because of the weather. The main motivation to choose these comparatively high-cost locations is reduction in taxes—from the US federal statutory 35 percent rate to 2 to 10 percent in other countries. Companies like Pfizer have sliced their tax bill in half thanks to Puerto Rican and Irish operations. (See "The Tax Man Cometh"). 

Some firms are looking to reap similar benefits by setting up contractual arrangements with third party manufacturers instead of owning bricks and mortar. In general, however, these deals are more complex and less time-tested than direct ownership. Smaller, virtual pharmas may be better positioned to leverage these structures given that the full benefits available from ownership are less possible. 

Although there are many benefits of having internal manufacturing operations, strategic use of third party manufacturers and packagers also can be beneficial. One key benefit is access to technologies that a company does not currently possess, such as hard-gel liquid capsules, or challenging product requirements such as highly potent drugs needing high-containment operations. Instead of building the internal capability to handle such products, pharmas can rely on a contract manufacturer. Then, should the product fail, a company will have avoided the significant expense of building and validating a specialized capability only to have it sit idle.  

Flexibility to meet changing volume requirements is another reason companies outsource. Contract manufacturers make investments for more than one client, which spreads risk. These arrangements help companies handle surges in capacity requirements without tying up assets during slower periods. In some instances, a pharmaceutical company will turn a plant over completely to a supplier, eliminating the need to absorb the overhead of idle facilities and staff. Should the plant close, the supplier, rather than the pharma, carries the onus of layoffs or a shutdown. This is especially useful in European countries that have tied pricing and approvals to in-country employment. 

Cost reductions are another reason to consider outsourcing. The recent drought of new drugs means that firms must look closely at cost and asset utilization. As in other industries, the value of vertical integration is increasingly in question, as best-of-breed companies show they can outmaneuver their larger, more fully integrated competitors. Therefore, the cost of maintaining all of one's own production and packaging facilities compared to outsourcing some operations to focused companies may not be supportable to the investment community. The challenge is for companies to compare the true cost of making their own products on an apples-to-apples basis with third party alternatives, and strike the right balance between internal and third party manufacturing. (See "The Whole Cost") 

A framework for performing this analysis includes the dimensions of product life cycle, product technologies, tax situation, availability of third party capabilities, and the existing internal manufacturing footprint. Applying this framework will enable a firm to identify the best approach, whether fully insourced, fully outsourced, or somewhere in between. 

 Demand requirements are least certain early in the product lifecycle. The choice is whether to build internal capacity to handle optimistic forecast levels, or to utilize a combination of internal and external capacity. This is where utilizing platform technologies pays off. The law of large numbers will result in more predictable levels of demand across a wide range of products. In addition, contract manufacturers can provide a backup option for products that utilize readily available technologies. 

 Products that utilize unique technologies pose difficult choices. External capacity is unlikely to be available, or may require up-front capital. In these situations, manufacturing leadership needs to engage even more extensively to ensure that marketing forecasts are realistic in light of competitive offerings. Nothing illustrates that better than Pfizer's recent experience with Exubera. The company wrote off $2.8 billion after withdrawing the inhalable insulin, which achieved peak sales of only $12 million. A portion of this write-off was for the unique injection-molding capacity Pfizer had built for Exubera at third party injection molders. A real-options analysis can model the potential outcomes more broadly and identify ways to address optimistic peak forecasts while hedging against the possibility of a bad outcome.  

 Each company should develop a tax strategy in concert with its supply chain strategy. Some Big Pharmas focus on realizing tax savings at the API (active pharmaceutical ingredient) stage, and construct bulk drug plants in a tax-advantaged location. Others choose to realize tax savings in their formulation facilities. The increasing percentage of in-licensed products is prompting companies to rethink their strategies because in-licensed products may not provide Big Pharma with API manufacturing rights, rather requiring them to purchase API from the compound innovator. 

Emerging firms must pay particular attention to their tax strategy when they launch products. Many such firms have a tax-loss carry-forward from years of minimal revenue and high development costs. A common mistake is to ignore the supply chain tax strategy until a product is already established. At that point the tax-savings opportunity will be diminished. 

 Over the past ten years, the capabilities of third party contract manufacturing and packaging suppliers has grown significantly. Recognizing this, some leading drugmakers have announced their intention to source "non-core" technologies externally when possible.  

One issue internal manufacturing groups have cited as a reason not to outsource is the higher quality standards of internal manufacturing operations. The record does not support this bias. Third party facilities are inspected much more frequently than internal facilities, by both customers and regulatory agencies. While an internal facility that receives an FDA 483 Warning Letter, or even a consent decree, tends to be rewarded with new capital and resources to address the issues, one wrong move can put a contract manufacturer out of business. 

The one area some contract manufacturers have been struggling with is maintaining healthy profits. The irony is that they are often accused by pharma executives of charging high prices and achieving excessive profits. This perception stems from the misunderstanding of cost—and the hidden subsidies that internal manufacturing receives in terms of capital access and transfer costs. 

The emergence of Indian, and more recently Chinese, suppliers is also having a profound effect on the outsourcing market. Major pharmas are sourcing significant portions of their key intermediates and APIs from Asian suppliers. This trend is expected to accelerate, with India now boasting over 75 FDA-approved plants and Indian sources representing over one-third of all new-drug master-file submissions. However, in the near term, Asian suppliers are less likely to focus on formulation and packaging for branded products. As a global head of contract manufacturing for a European pharma put it, "Formulation and packaging represent less than half the cost of a tablet, and with competitive pricing available in Europe, it's not worth the additional savings to deal with the complexity and cost of managing an Indian supplier."  

Baxter's recent recall of contaminated heparin, made at a Changzhou plant, is giving large-cap management pause to review how it monitors its supply chain, especially in China. 

A final consideration in evaluating contract manufacturers is assessing financial stability. It's no secret that some of the larger contract service providers like Patheon and Catalent (formerly Cardinal) have had their share of financial upsets. The future for Catalent is particularly cloudy, as Blackstone, its new private equity owner, looks to squeeze profits from a business whose growth has been stuck in the low single digits.  

 Pharma companies have plowed billions into constructing their own network of plants. The key is to identify a handful of core competencies—specific physical assets, such as sterile lyophilized filling, or a business process, such as technical transfer from R&D to manufacturing—that benefit from having an internal capability. Genentech, for example, sees one of its core competencies as protein manufacturing, and consistently invests hundreds of millions in its facilities. Meanwhile, the firm is comfortable going outside its four walls for services such as vial filling and packaging, and has developed a core competency in the effective management of its contract management supply base.  

One pitfall to avoid is using an internal capability because no "incremental" staff or equipment is needed. This fallacy leads to a creeping investment where an a priori decision informed by full costing would have led to a better long term decision. 

As with so many other pharma problems, there's no one-size-fits-all solution to the problem of manufacturing. Each company needs to find the right balance of internal and external functions through a detailed and comprehensive analysis. It also requires manufacturing executives to engage in a more transparent discussion about how keeping manufacturing in-house generates value for shareholders and why that value cannot be better captured externally. In the end, most companies are likely to find that jumping off the manufacturing ship entirely in concert with the trend of day is not the best, or even the cheapest, innovation. 

Outsourcing saves money-except when it doesn't. Here's how to decide what to do.

How Do You Solve a Problem Like Manufacturing?

The heparin debacle and other food and drug import scandals have generated considerable skepticism about industry reliance on imported drug ingredients—and on the FDA's ability to adequately monitor foreign drug manufacturing. Policymakers are blasting FDA for going after US tomato growers while Mexican peppers were the real culprit in this summer's salmonella outbreak. Allegations of  manufacturing violations and fraud by Indian drugmaker Ranbaxy prompted the House Energy & Commerce Committee to question whether FDA took appropriate action to keep adulterated Ranbaxy drugs out of the United States. Moreover, the case has generated murmurs about another generic drug scandal—20 years after fraudulent activity rocked FDA and the then-nascent generic drug industry. 

The good news from the foreign enforcement front is that Congress finally is giving FDA some additional resources to expand overseas inspections and oversight. The agency received a $150 million budget supplemental in June to boost food and drug inspections and enhance drug safety, and there's support on Capitol Hill for further increases in FDA's 2009 budget.   

Legislators are also crafting laws to strengthen FDA's ability to block suspect imports and crack down on fraudulent operators. FDA agrees on the need for subpoena power, as well as authority to destroy unsafe products at the border, impose stiffer penalties for criminal acts and counterfeiting, and block imports from plants that refuse access to FDA inspectors. Congress might even give FDA a more realistic four-year cycle for inspecting manufacturing plants, instead of retaining the two-year requirement that it seldom meets.  

But any FDA legislation moving through Congress next year is likely to go beyond a few agreed-upon improvements. Even though FDA is just barely digesting last year's massive FDA Amendments Act, another hefty reform bill may emerge that also curbs drug advertising and reorganizes how the agency evaluates and monitors drug safety; follow-on biologics could join the party. E&C chairman Rep. John Dingell (D-MI) and Sen. Edward Kennedy (D-MA), chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, have been crafting food and drug import legislation this year, while Sen. Chuck Grassley (R-IA) still wants to split FDA operations for approving new drugs from postmarket surveillance. One bone of contention is whether to levy new user fees on importers to finance expanded foreign inspections. Dingell wants the fees, but FDA fears an administrative nightmare. 

Meanwhile, pharma companies are under the gun to better monitor foreign contractors and ensure the safety and quality of imported ingredients and products. Sen. Sherrod Brown (D-OH) wants to know whether drugmakers are expanding outsourcing largely to obtain cheaper, less stringently regulated imports at the expense of lost jobs and additional health risks for Americans. Brown has asked FDA to address this issue, and has queried Pfizer and Merck on the ramifications of their outsourcing programs. And if overseas operations do save money, Brown expects those cost reductions to translate into savings for US consumers. 

Everyone agrees that FDA's current system for monitoring foreign drug manufacturing—to say nothing of food imports—cannot cope with the surge in active ingredients and drug products imported from overseas. (See "Global Enterprise") Janet Woodcock, director of the Center for Drug Evaluation and Research (CDER), told the E&C Committee in May that inspections alone cannot fully evaluate if manufacturing facilities can produce safe, high-quality products. And we can no longer "inspect out" bad products at the border, said FDA deputy commissioner Murray Lumpkin at the Drug Information Association (DIA) annual meeting in June.  

FDA commissioner Andrew von Eschenbach's solution is the high profile "Beyond our Borders Initiative," which is establishing on-the-ground regulatory offices in critical parts of the world. The first in-country operation will be in China, with offices in Beijing, Shanghai, and Guangzhou by year's end. A relatively small staff of 13 will conduct some site inspections, but they will work primarily with Chinese regulatory authorities to better track local enforcement activities, become more informed of legal and political issues affecting drug regulation, and further acquaint Chinese regulators and manufacturers with US drug quality standards and clinical research requirements. An additional $20 million from the June supplemental appropriation will enable FDA to establish the Chinese offices, plus operations in India, Europe, and Latin America by the end of next year; a Middle East office in Amman, Jordan may follow.  

Establishing official foreign operations takes time and patience. In December 2007, FDA signed a Memoranda of Agreement (MOA) with the Chinese to improve the safety of drugs and medical devices. It calls for registration of Chinese firms exporting to the US, enhanced drug tracking by Chinese authorities, and FDA notification of inspection failures involving plants that export to the US. The State Department approved the assignment of FDA staffers to Chinese offices in March, but a final agreement was delayed by a request from the Chinese for a similar presence in the US, which the State Department has yet to approve. 

In addition, FDA will be sending more inspectors to foreign plants and research sites in the coming year. FDA conducted 322 foreign inspections in fiscal year 2007—a big jump up from 212 in FY 2006, and 260 in 2004. The plan is to carry out 500 foreign inspections in 2009. Most of these visits involve pre-approval inspections that are required for every new plant listed on market applications or supplements before a new product can be distributed in the US. 

FDA also aims to boost routine inspections of overseas manufacturers, implementing a risk-based approach for scheduling site visits:  At the top of the list will be facilities producing higher risk dosage forms, without an inspection in the last three years, with high shipping volumes, and with a history of past compliance issues with either FDA or local regulators. The agency is establishing an international cadre of inspectors to conduct site visits around the world, and to be ready to conduct "for cause" inspections when problems emerge about the safety of a regulated product.   

Internal IT modernization may further help FDA cope with the globalization of the pharmaceutical supply chain with its ever-growing number of brokers, traders, distributors, repackagers, and manufacturers. A top priority is to build an interoperable electronic data system for facility registration and product listing that can identify more accurately who manufactures which products, and what is being distributed in the US.  

Because FDA will never have enough resources to inspect all facilities frequently enough to catch all safety and quality problems, FDA officials seek to leverage resources and reduce redundant oversight activities through collaborative initiatives with other regulators:  

 FDA has more than 70 cooperative arrangements with foreign counterparts that permit mutual access to certain manufacturing information. Some 30 confidentiality agreements allow FDA to share actual inspection reports, which provide information on foreign facilities that can help target foreign inspection activities. 

 FDA is teaming up with the European Medicines Agency (EMEA) and Australia's Therapeutic Goods Administration to consult on inspection schedules and reports, initially for API manufacturers in China and India. The aim is to avoid redundant site visits and to cover more facilities. The three agencies will review which facilities are on each other's lists and agree on which agency should go in first. In some important cases, all three regulators may visit a certain plant together. If successful, the program could expand from APIs to drug products.  

 FDA wants to accredit more government and independent entities as capable of verifying company or product compliance with US safety standards. Drug import legislation could support these efforts, but there is skepticism on Capitol Hill about this approach because such programs for medical devices have not been very successful.  

Even with more information sharing and joint inspections, neither FDA, EMEA, nor other regulatory authorities are ceding the right to evaluate and make independent enforcement decisions regarding any drug product or facility. The hope is that these collaborations will breed confidence in the approaches and decisions of colleagues, explained EMEA head of inspections Emer Cooke at the DIA meeting. Cooke anticipates that such joint efforts eventually will lead to increased reliance on each other's decisions.  

's Washington correspondent. She can be reached at 

Washington Report

FDA missteps and global outsourcing are drawing Congressional scrutiny and prompting new oversight approaches

Foreign Affairs

Each year, scores of books are published on the subject of leadership. They're written by academic giants like Noel Tichy and Warren Bennis, great CEOs such as A.G. Lafley, and by sports legends like Duke University basketball coach Mike Krzyzewski. I wrote a bestseller called 

The 100 Mile Walk...A Father and Son on a Quest to Find the Essence of Leadership

. Those of us who aspire to be better can learn something from any of these books. But there's one thing that's so simple it's often overlooked in even the best leadership tomes.  

The one defining characteristic I've seen in all great leaders is that they strive to do the right thing. For instance, Sir Harry Evans, editor-at-large of 

 and his wife Tina Brown, former editor of 

 to host a benefit for the American Institute of Stuttering. Some famous stutterers were invited, including Jack Welch of GE, John Stossel of 20/20, singer Carly Simon, and Kenyon Martin of the Denver Nuggets. For months, Evans and Brown worked tirelessly to make certain the event was a success. Together they raised $1 million for the study and treatment of stuttering. 

As time marches on, chances to do the right thing come and go. We cross paths with people who are down and out; we see strangers who need directions; we encounter family, friends, and employees seeking our help. Leaders come across these moments as often as everyone else; it's what they make of these quotidian opportunities that shapes leadership.   

For illustration, compare two recent instances of philanthropy. In July, 

 reported that the late hotel heiress Leona Helmsley not only left millions more to her dog than to her grandchildren, she also left the bulk of her fortune—estimated at $5 billion to $8 billion—to dog care. Such an arrangement doesn't fit the definition of "Leaders do the right thing." Money can be used to do great things (see above). But merely giving money is not a hallmark of greatness. Allowing a vast estate to "go to the dogs" (literally) is not especially admirable. 

On the other hand, Bill Gates, once the world's richest man, has given more than half of his net worth to the Bill and Melinda Gates Foundation, which is working to wipe out polio, HIV, and other devastating illnesses around the globe. (By the way, that's $29 billion given, and still counting.) Investor Warren Buffett followed suit, donating $37 billion to the Gates Foundation—the single largest charitable donation in history.  

"Mr. Gates said it was Mr. Buffett's support for philanthropy which had persuaded him to set up the foundation in the first place," reported the BBC. Not only did these two men—two of the richest in the world—inspire each other to the greatest levels of personal benevolence ever seen, they also have an ongoing interest in how the Foundation's work will be carried forward. 

My mom was a wonderful mentor and role model for me. She taught me a lot about doing the right thing; there are ways that each of us can tap the fount of integrity within us, and channel it toward others with far-reaching results. The lessons I learned from Rose Flaum were many, but the one that seems to stick in my mind throughout the years is "try and do something good every day."  

I also learned something about doing the right thing from Bill Steere, former CEO of Pfizer. He often spoke about the "Performance Review." Most managers typically spend one minute or so telling a subordinate about the good things they've done, and the next 30 on what they need to improve. Steere, however, focuses on building up the positive attributes of his people, which is a lot more motivating than focusing on the weaknesses.   

Extend this philosophy to the "real world," and watch what happens—not just around you, but to you. The next time someone on the street asks for help, choose to see the potential for good and do the right thing, not the so-called correct thing or the easiest thing. 

As far as leadership is concerned, there is only the doing from moment to moment, for leadership is about action, not words. Do the right thing; it will make you a better person, and certainly a better leader. 

 is managing partner of Flaum Partners and chairman, Fordham Graduate School of Business, Leadership Forum. He can be reached at 

Leadership

Leaders don't always manage to do the right thing, but they constantly strive to access the wellspring of integrity within them

Tapping the Fount

M&As have become as essential as R&D to pharma's future, and this year is no exception. According to life-science investment bank Young & Partners (Y&P), 19 major deals have been inked so far, worth a total of $22.7 billion, indicating that 2008 is on track to match 2007's in volume (44 M&As), though not its dollar value ($79.5 billion). 

Dollar Value of Worldwide Pharma Acquisitions 

Only six deals have hit blockbuster status—the biggest by far Takeda's $8.8 billion grab of Millennium. In fact, '08 is shaping up as the year the Japanese drug industry makes its move into the global market. Five of the top 10 deals were made by Japanese firms, shoring up shop at home or placing stakes in the US.  

For the rest of '08, Y&P predicts a slight drop-off in M&As, given a teetering global economy and the unknowns about healthcare policies with the Presidential election looming. Expect the year's volume to come in under the five-year average of $66.5 billion. 

Dollar Value of Worldwide Biotechnology Acquisition  

If cash-rich drug giants are unbothered by the financial climate, the same cannot be said for high-risk, low-revenue biotechs. While debt financing ($223 million) is on a par with last year's total ($363 million), equity has tanked, down from $5.8 billion in '07 to $1.1 billion,  with only one IPO this year.  

But biotech M&A action remains hot, as Big Pharma prowls for new drugs to plug holes in pipelines. With 10 deals adding up to $3.1 billion so far, '08 looks likely to match '07 in volume (21) and beat it in value ($4.3 billion). Yet none has hit the billion-dollar mark. According to Y&P, many of the mature biotechs were picked off in '06, when  there were 25 deals totalling $9.8 billion. 

Of course, the entire M&A story could be rewritten by a speedy meeting of minds between Roche and Genentech. That deal would boost the year's final tally by as much as $55 billion. But at that price, an agreement is not likely to come easy. 

Back Page

Young & Partners crunches pharma's filings for, the first half of '08. The results? Ask the Japanese

The M&A Numbers

You can't teach an old dog new tricks. But when the dog in question is your customer relationship management (CRM) system, you've got a serious problem. 

In the past year or two, pharma has come under immense pressure from balky pipelines, slowed approvals, safety concerns, and pushback from doctors. One thing has become clear: To remain competitive, pharmaceutical companies need a more cost-efficient, consumer-type sales and marketing model that includes multiple avenues for customer interaction. Like so many other highly competitive US industries, pharma needs to provide customers—all of them—with more ways to get critical information. 

This sort of change is possible, of course. The insurance industry, which faced similarly unsettling climate changes, has responded with a new model, new technology, and new ways to get information. Aon Corporation, Fidelity National, Phoenix Companies, Delta Dental, and many others have implemented systems that give customers the ability to call, click, or visit. Geiko customers and others can call customer service, click to the Web site, or visit an office for a quote or claims support. The same phenomenon is happening in retail, high tech, financial services, and many other industries.  

Some pharmaceutical executives have, in fact, started implementing new strategies, tapping into the revenue-generating potential of previously ancillary commercial sales "subgroups" such as hospital sales teams, managed markets, and key opinion leader managers. Many are testing new tactics such as video- and e-detailing, closed-loop marketing, call center–based detailing, account-based selling, and alternative sampling. It's a start, but it's nowhere near enough.  

These companies face a huge obstacle. The sales-force automation systems they implemented a decade ago are not flexible enough to handle modern-day demands. These systems were built on legacy client/server technology that is now widely recognized as clunky, expensive, and grossly inflexible. They are simply not adaptable enough to allow pharmaceutical companies to adequately test new initiatives, nor are they flexible enough to give customers the ability to choose how they get information. Client/server systems do not allow for change—at least not without spending thousands of dollars to reprogram the servers, which may take many weeks, if not months, to accomplish. 

Why so long? In most cases, it's less about the difficulties of changing the software (though these are sometimes considerable) and more about deployment.  

Let's say you want to make a simple change to your CRM system, for example, adding a field to record the doctor's favorite hobby. To accomplish that in an older CRM system, you'd need to go through a number of steps: extend the database, define the field, position it, add it to the interface, set who has rights to update it, and so forth. In some systems it's easy, in others not so easy—but you can get it done in anywhere from a few hours to a few months. 

Where you lose time is in deployment. Remember, we're talking about client/server software. Think of something like Outlook for e-mail, which requires each user to have a program installed on his or her computer, as opposed to something like Gmail, which is totally Web-based. Installing updated software on 5,000 laptops for a large sales force can take 12 to 18 months. It's a process that companies want to avoid for good reason. 

Companies today want to make much more complex changes to their CRMs than just adding fields. For example, if you want to use video detailing, you may have users in a call center. They will need a new way to record the time of a call or the nature of an interaction. Follow-up will be different than in an office detail. The process involves more steps—extending the data model, creating new rules, creating follow-up items, and integrating with the sample disbursement company. Because of the complexity of change, many companies are launching new pilot programs with stand-alone data systems, creating multiple silos of data—a death-sentence in a world so dependent upon shared best practices.  

Despite the need to retool business processes, many pharmaceutical companies have no desire to spend more money to retool the existing CRM system that they have already sunk millions of dollars into over the last decade. Who can blame them? In spite of the incredible financial outlay required, more than 80 percent of traditional CRM software deployments either fail to add value, encounter significant adoption issues among end users, or fail outright, according to an AMR Research study.  

In other industries, as companies have faced the challenges pharma is currently undergoing, many have responded not by upgrading their CRM software, but by moving to a different software model: shifting from client-server programs to "software as a service" or SaaS. SaaS applications are built on a shared infrastructure, where all servers, networks, and functionality are managed centrally. The application is accessible through any Web browser—think Google for business. The host handles all maintenance and upgrades to the system, while SaaS applications are delivered to the customer as a reliable service over the Internet.  

SaaS technology enables the development of sales force automation or CRM applications that can scale up or down and that are flexible enough to conduct trials of new strategies across the entire enterprise. New functionality, new users, new fields can all be added or modified "on the fly," without calling in outside resources. Specialized functionality for managed market teams, specialty pharmaceutical reps, or key opinion leader managers can be developed quickly, easily, and economically. The SaaS platform is available as a mobile application, too, for those still-requisite face-to-face physician visits. 

The net result of operating a SaaS CRM application over a traditional client/server CRM application comes down to vastly increased effectiveness of the sales force as well as vastly decreased IT financial drain—both up front and over time. Based on ROI analyses from Gartner, Forrester, Yankee Group, and Verticals onDemand, a traditional client/server CRM application to support 1,000 sales reps can cost a pharmaceutical company $5,800,000 in the first year versus only $2,075,000 for a SaaS application. Ongoing, the SaaS application will also be much less costly than the client/server application. (See table for details.) 

is the vice president of sales and marketing for Verticals onDemand, Inc. He can be reached at 

Columns

The Salesforce Software Shift

On page 46 of this issue, consultant Zhu Shen describes the explosion of pharmaceutical activity in China, especially the burgeoning entrepreneurism of the "sea turtles"—Chinese who have lived and worked in the West before returning to start businesses in China. It's an impressive story, but one that ought to give the US industry pause. 

We've tended to think of China (and India, and other emerging parts of the world) as little more than a source of cheap labor and R&D, and as potential markets for Western products. I think the reality is likely to be more complex and a far greater challenge for US companies. Chinese pharma may not look like much today, but it's well positioned to give US giants a run for their money, maybe even topple them. 

How could a scrambling, inexperienced drug industry gain the upper hand on established companies? The answer's a bit counterintuitive: China can potentially succeed by not doing as good a job as the US does. 

Drugs sold in the United States and Europe met the highest standards of approval in the world. That makes them, by definition, the best. It also makes them outlandishly expensive to develop. As Chinese companies get rolling, they probably won't be able to gain approvals in the US for any except their biggest, most significant products. They won't have the expertise, and they won't necessarily have the capital to risk a billion dollars or more on a single drug. 

What they will do is learn to develop drugs that work at Chinese price points. Those will rise as their economy grows, but in the short to middle run, they'll be low enough that US companies will have a hard time making money in China. 

This won't be effected by low labor costs only; it will also be caused by the lower standards in the Chinese market  than the US and Europe. And I don't mean this as an insult to China. Standards of safety and documentation reflect need. The US is clearly in a phase when a great many people think there are enough drugs, and they don't want to take many risks on new ones. In China, with 1.3 billion people (many of whom have been deprived of what we'd think of as decent healthcare) and a rising standard of living—and with all the heart disease, diabetes, and other chronic diseases that entails—it's easy to imagine people reaching a different conclusion. 

The outcome? Within a decade or so, I'd expect to see the rise of a Chinese pharma industry (and an Indian, and maybe others) that may not be able to get products approved in the US or the EU, but can create new products at a fraction of the cost. They may not be the kind of medicines the US public is demanding today in terms of safety and documentation, but they'll work, and they'll be cheap. 

What happens then will be interesting. Will the United States stick to its guns, or will it allow a flood of these new products into the country? Will US companies be able (or even willing) to adjust to new standards? Will overall healthcare be hurt, or perhaps even improved by cheap, "bad" drugs. And, of course, what will happen to the US industry?  

I remember as a kid seeing a photo of one of the first Toyotas to be imported to the US. I asked my Dad, who worked in the auto industry, about it. "They're junk," he said. "The brakes don't work. They fall apart." Well, we all know how that story turned out. A similar tale is beginning for pharma. We need to make this one turn out better.  

From the Editor

The United States makes the best medicines in the world. In days to come, that could be a problem.

Attack of the Junk

If last month's Olympics marked China's "coming out" in the global media, last year saw a similar (if less extravagant) emergence of China's pharmaceutical industry. Insiders took note of two signal developments: WuXi Pharmatech's IPO on the New York Stock Exchange in September, and the R&D collaboration deal between Hutchinson Medipharma in Shanghai and Eli Lilly. The largest China-based contract research organization (CRO), WuXi has seen its stock value climb as high as $40-plus per share since its IPO at $14. Hutchinson Medipharma's partnership with Lilly, focusing on oncology and inflammation, is the first "rich deal" between a Big Pharma and a China-based drug R&D shop.   

In fact, with its explosive economic growth and increasing influence on world affairs, China has emerged as one of the last remaining superpowers, and experts predict that China will surpass the United States as the top pharmaceutical market worldwide in the next two decades. Accordingly, the Chinese government has designated the life sciences as one of its "pillar industries" to fuel growth. Various incentive programs were created to attract overseas commercial entities to establish Chinese operations and entice "sea turtles" to return to the homeland as entrepreneurs. (Why "sea turtles"? "Overseas returnees" and "sea turtles" are pronounced the same in Mandarin Chinese: hai gui.) Increasingly, US and European venture capital (VC) funds are looking to China for new life-sciences investment opportunities.  

According to a May 2008 Citigroup report, the global CRO market is estimated to be US$15 billion, and growing 15 to 16 percent annually. China's share is growing well above that rate. Despite fears about quality control—mainly in manufacturing—Big Pharma's outsourcing of R&D is only accelerating. Chemistry and small-molecule compounds lead the way, with biology and protein-based work gaining fast. And preclinical safety research is just starting, with initiatives from Charles River and Covance/WuXi Pharmatech.  

Big Pharma has understandably tended to take a one-toe-at-a-time approach to sourcing in China, especially when it comes to cherished R&D activities. Roche Research China went at it more ambitiously, working with a wide range of partners—academic groups, biotechs, and CROs—and integrating them as much as possible into Roche's own drug discovery teams. "We are seeking the optimal balance of how much we do in-house and [what we do] with external partners," says Li Chen, head of research at Roche China R&D Center. "We expect to approach a 50/50 ratio by the time we run a full portfolio, from lead generation to Phase IIa clinical trials." The Swiss giant is now collaborating with its Chinese partners on translational research and looking into the clinical trial design for new medicines discovered in China. 

The recent heparin panic—the likely result of a sophisticated contamination upstream from the plant processing the anticoagulant for Baxter—has apparently not dampened Big Pharma's enthusiasm for outsourcing to China. "I don't see much of a difference between running an operation with internal staff and external staff," says Roche's Chen. "It's all about leadership. If you look at the quality of the science itself, Chinese chemistry is always good. DMPK [drug metabolism and pharmacokinetics] and safety operations can be standardized in China just as in any other part of the world. Research biology and pharmacology require knowledge and expertise, and they are still evolving. The redistribution of talent is now happening—from Big Pharma to CROs/biotech, and from West to East. The challenge is to translate individual excellence to an institutional and industrywide practice in China." 

If anything, the heparin contamination revealed failures of oversight and accountability on the part of both the US's Food and Drug Administration (FDA) and China's equivalent agency, the State Food and Drug Administration (SFDA). After a congressional comeuppance, FDA is scheduled to open foreign drug-inspection offices to improve safety monitoring in this new age of outsourcing; the first three are planned for China, in Shanghai, Beijing, and Guangzhou, and will be staffed by eight FDA employees and five Chinese nationals. As for SFDA, agency officials have retreated from their longstanding refusal of even nominal oversight of drugs being manufactured for foreign companies or foreign consumption.  

For James Cai, vice president of healthcare policy and former head of R&D China at AstraZeneca, R&D outsourcing is a no-brainer for most big pharmas. "We outsource wherever we determine the work can be done at faster speed, lower cost, and similar or better quality than in-house," he says. "Our internal audit shows that the quality of Chinese CROs we have used is comparable to that of our internal-generated data. That is why AstraZeneca is growing its China outsourcing significantly in all areas." Cai says he has heard a similar assessment from his Big Pharma colleagues.  

"Besides shortage of experienced leaders and mid-level managers, the top challenge in China has to do with the regulatory hurdle in terms of capability and capacity," Cai says. "At the SFDA, up to 20,000 new applications a year are reviewed by only 120 staff. Innovative products that have not been approved by the US FDA or European EMEA may face additional challenges in the review process, as the SFDA may find it hard to set the standard for safety and efficacy, not having prior experience with these novel products."  

Concerns over quality? It's not stopping Big Pharma outsourcing and venture capital.

Pharmaceutical Executive-09-01-2008

Industry Audit + Company of the Year 2008

The New Code

Publish or Perish

How Do You Solve a Problem Like Manufacturing?

Foreign Affairs

Tapping the Fount

The M&A Numbers

The Salesforce Software Shift

Attack of the Junk

Unleash the Dragon 2

Place Your Bets

The Orphan Opportunity

Considering Consumer Change: Q&A with Jim Joseph, Saatchi & Saatchi

Doing More With Less