At ‘CRO’ssroads

Nilesh Nayak, Global Head – Business Development, VerGo Pharma Research, says CROs can no longer sustain only on the service model and need to have a relook at their strategies

Contract Research Organisations’ (CROs) have always been the back stage boys in the Indian pharmaceutical industry. The silent operators have been away from the limelight but their contribution to the growth of the industry can never be underestimated. Being majorly privately owned, the total size and reach of this integral part of the pharma world is very difficult to estimate. But going by the number of new units and service providers mushrooming in the country we have all the reasons to believe that this sector is doing well and has reached the critical mass from where it can and will jump and leap frog into the next orbit of growth. The regulatory clogs and business uncertainties in the growing economies of the world have made the growth story a bit difficult for these companies. It’s an industry which is easy to enter but to grow and to sustain is a different ball game all together. Too many service providers in the same area juggling for limited space have forced the companies to rethink their strategies. It’s time for these innovation focused companies to reinvent themselves and have a closer look on the road ahead. They are at crossroads of growth and sustainability and it’s a tough decision to make.

CRO: Explaining the term

The abbreviation CRO is used for both ‘Clinical Research Organisation’ and ‘Contract Research Organisation.’ The former includes only the clinical research companies which can be subdivided into two categories:

• Clinical research organisations offering phase I to phase IV clinical trials
• Bioequivalence centres offering BA/ BE studies

For the sake of this article, we will be focusing on only the latter, ‘Contract Research Organisations’ which includes product development and custom organic synthesis companies assisting the big pharma innovator and global generic companies in formulation development, chemistry processes and other areas like stability studies and scale ups. The Contract Manufacturing Organisations (CMOs) have been kept out of the gamut of discussion here.

CRO business in India

Historically, India was always considered as a powerhouse for chemistry-based research. Our expertise in reverse engineering for synthesis of active pharmaceutical ingredients, process optimisation for bringing down the cost of synthesis, solvent recovery, synthesis of different salts and later different isomers gave India an unprecedented identity as a partner for chemistry research. As the companies started getting a foothold in the API market, the focus slowly started to move towards the next step in the value chain — formulations. Within no time the formulations market started growing and along with it, India’s expertise in the formulation research also started to take shape. The earlier patent regime giving Indian producers the liberty of not aligning towards product patents and only respecting process patents made us experts in process research and we found innovative ways for circumventing patents and bringing the latest products out in Indian markets. This helped the collective innovative thinking in the country to grow and our scientists became experts in generic product development, thereby gaining a grip on the generic industry.

The outsourcing or contract research industry is an off shoot of this development and many scientists with global development expertise started becoming technocrats and set up small chemistry and formulation development laboratories to service the global pharma industry. Indian CROs became extended arms for global generic companies and were seen as a reliable and cheaper source of development compared to in-house development in the bigger pharma companies. More and more companies started outsourcing their chemistry and formulation requirements to India and the market which was not existent till the late 90’s now suddenly became very attractive. The main factors which drew the global companies for outsourcing to India were:

• Scientific acumen and understanding
• Low cost for research
• IP understanding
• Respect for confidentiality
• Documentation skills because of language proficiency
• Professional approach and adherence to regulatory requirements

What started as a trickle in the 90’s with only a few companies providing these services soon became a steady flow of new companies entering this arena because of less entry barrier in form of investments needed and a big gap between outsourcing needs (demand) of pharma companies and the capacity of CROs (supply) to meet these needs.

CRO business model: Evolving with time

The CROs operated in multiple business models and the most common amongst those were:

• FTE-based model: Full Time Equivalent or FTE as its popularly called was one of the first models chosen by sponsor companies outsourcing their chemistry programmes to Indian CROs. This was a simple risk free model wherein the sponsor pays the CRO a fixed amount of money for a fixed amount of period depending on the number of scientists they engage for the project. This was very popular with the innovator and drug discovery companies who used to engage a fixed amount of scientists for their research work and CRO was paid a fixed amount of money per scientist engaged. In some cases there was a success-based incentive for the CRO in case of positive outcome to the research work. This model was similar to the working of the BPOs but because of the knowledge quotient involved the industry was also referred to as the KPO (Knowledge Process Outsourcing) Industry. The FTE model was generally favored for long-term engagements between the sponsor and CROs and relationships spread across multiple projects and assignments.
• Fee for service model: The FTE model was not suitable for the outsourcing of smaller projects particularly in the areas of formulation development wherein the projects were distributed by the sponsor across multiple CROs and the sponsors didn’t want to get tied up to one CRO for all their projects. The fee for service model worked on milestone- based payments to the CRO which were pre decided and time bound. Various factors like API availability / CMO availability / bio study failure etc throws the project out of time lines and both the sponsor and CRO are adversely affected with the CROs cash flows getting affected and the sponsors’ projects getting stuck and not moving ahead. The risks associated with the fee for service model are high and there is practically nothing that both the sponsor and CRO can do to mitigate the risks. The carrot and stick approach in form of success fees and penalties respectively are not known to have any positive outcome on the timelines and project deliverables.
• Co-development/ Outlicensing model: As the CROs began to mature and started having a surplus cash flow they started investing in their own in house developments. The strategy was simple. Select products that would be attractive to generic sellers and with minimum players in market, develop the products till proof of concept (positive stability and pilot biostudy) and then scout for partners for investing in the manufacturing of the exhibit batches and pivotal biostudy which make up for substantial part of the development cost. The CROs can aim for better revenues in this model as they share the risk of development with the sponsor and can offer more definite timelines thereby improving their time to market for the products. The co-development model is becoming very common even in custom chemistry synthesis areas.

Bottlenecks for growth

As the CRO industry progressed from one business model to another, the more competent and ambitious one’s graduated to different levels of services and entered into the next areas in the value chain by offering manufacturing services and sometimes also offering complete dossiers with market authorisations.

The investments of the CRO have increased considerably with now private investors and venture capitalists entering into the fray. The mom-and-pop shops have metamorphosed into professionally run corporate houses with management coming from the bigger generic and innovator companies. Most of the CROs are still privately-owned and stand alone businesses making them vulnerable to changing market dynamics. The slowdown in the EU markets and stiff price wars in the US generic industry had an adverse effect on the CRO’s with flow of projects slowing down and sponsors negotiating heavily on pricing of the projects. The increase in competition and smaller players entering the fray further worsened things and many of the CRO’s are fighting for survival.

The stage is set for the industry to try something new to grow and sustain the business in future. CROs can no longer sustain only on the service model and need to have a re-look at their strategies. With the flow of projects not guaranteed and limited investment possibilities in own projects the CROs are at crossroads and need to take a decision of whether to remain independent and continue to provide services or to align themselves with their sponsors by providing the sponsors a stake in the company and becoming their integral part. This will provide the sponsor better control over the CRO and they could get their projects prioritised and for the CRO there will be better sustainability with a bigger sponsor acting as their guardian angel. The BA/ BE industry had seen this kind of alignment happening in the past and it’s a model which has worked for them. Whether the contract research companies will also take this plunge and join hands with bigger companies is an inevitability waiting to happen?