Pharma September 4, 2008, 5:00PM EST

Outsourcing the Drug Industry

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Kamath and Balaji joined Jubilant Biosys after long stints with U.S. companies Michael Rubenstein/Redux

Piramal's Mumbai-based company has ventures with Merck and Eli Lilly Brad Harris

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Over time, the partnerships evolved into co-development arrangements. The turning point was a 2003 collaboration between GlaxoSmithKline (GSK) and Ranbaxy. Glaxo handed over novel compounds thought to have medicinal value and offered its Indian partner a share of the intellectual-property rights and millions in royalties if it could help develop a commercial drug. Western drug companies have announced about $400 million worth of such deals so far, but the total value is probably much higher. BristolMyersSquibb, for example, has expanded a research partnership with Bangalore-based Biocon. It includes a state-of-the-art research facility that will house 400 scientists—the cost of which has not been announced.

For the Western partners, the first objective in these alliances is to cut costs. In the U.S., specialized research outsourcing firms will charge a drug company $250,000 and up for the full-time services of a PhD chemist. With an Indian partner, the same work can be done for roughly one-fifth the cost. But what Western companies long for, more than anything, is to replenish their drug development pipelines. It can cost as much as $100 million to nurture a potential drug from a germ of an idea to the point where it is tested in people. After all that, the odds of any drug winning Food & Drug Administration approval are just 1 in 8. By conducting many experiments in low-cost Asia, the drug companies believe they can run more projects while keeping R&D budgets flat. In other words, they gain "more shots on goal"—a phrase that gets repeated so frequently you'd think it's a quote from a sacred Indian text.

The other catchphrase that comes up constantly is "fail fast, fail cheap." When scientists study potential drugs in the test tube and then in animals, they detect many problems that ultimately cause drugs to fail, such as toxic side effects or inadequate absorption in the body. Killing projects at that stage is essential, because most of the cost to develop a drug—a few hundred million dollars, typically—comes later, during human clinical trials. In effect, Western drugmakers want to front-load the failures through early-stage screening in India, says C.S.N. Murthy, CEO of Bangalore-based Aurigene. "Here, you can get four failures for the price of one."

In the early days, Western executives were suspicious of their Indian partners with their history drug knockoffs. Yet they were also powerfully attracted. Mervyn Turner, a senior research vice-president at Merck, says his first trip to India in November 2007 was "mind-blowing." He was impressed by the local companies' yearning to do world-class research and by their passionate, charismatic leaders. In Mumbai, he met Piramal, the Harvard-educated daughter of a textile mogul, who explained that she chose medicine to find a cure for polio. She's "a force of nature," he says.

A look inside Forest Lab's partnership with Aurigene shows both the strengths of the new research model and the hurdles it faces. Forest has given Aurigene some prized, proprietary data on how novel drugs might attack metabolic disorders such as diabetes. Aurigene's job is to screen a library of therapeutic chemicals and come up with a drug. Each company has assigned three senior staff to a "joint research council," and parallel teams of chemists and biologists keep in constant touch via teleconferences. Murthy says speed is of the essence. While large U.S. labs struggle with bureaucracy, "in a place like this, a scientist makes some computations in the morning, and by the afternoon he has all the data. He doesn't call a meeting. He walks up to a colleague and stands over him until he gets what he needs." Forest and Aurigene recently designed a drug and started animal tests in just three months—a quick kick-off by U.S. and European standards.

Western drug companies are giving Asian partners more responsibilities than they ever imagined. Suven Life Sciences, an Indian startup in Hyderabad, is co-developing drugs for brain diseases with Lilly. As part of the deal, Suven can work on its own drugs for Alzheimer's, obesity, and Parkinson's disease, provided they don't compete with jointly developed products. Early on, Lilly sought to impose restrictions on Suven's own research. "We didn't have any flexibility," says CEO Venkat Jasti. But as the relationship evolved, Jasti prevailed on his U.S. partners to toss that paperwork in the trash. "We can't do it the Lilly way," Jasti says. "Innovation comes from freedom."

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Taming the Drug Research Monster

In the May 2008 issue of Harvard Business Review, retired GlaxoSmithKline (GSK) CEO Jean-Pierre Garnier says drug companies should bust up their research models. Many still operate under a "pyramid" setup, with scientists cubbyholed in their areas of expertise. "Something happened on the way to the new century," Garnier writes. "Employment multiplied by 20. The pyramid became a monster, and everything suffered." Instead of resorting to radical outsourcing, Garnier suggests building "constellations" of small, independent research units. Glaxo now has 12 research centers focused on disease areas, each with its own CEO, and there are no more than three management layers between the chief and key scientists.

Business Exchange related topics:
Global Outsourcing
Pharmaceutical Industry
India Business
China Business

Engardio is an international senior writer for BusinessWeek. Weintraub is a senior writer for BusinessWeek's science and technology department.

With Nandini Lakshman in Mumbai

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