Global Paradigm Shift in Pharma is CRAMS still the right model for India?

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Simon Conley
6 years ago
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1 Global Paradigm Shift in Pharma is CRAMS still the right model for India? My own reflections, influenced by Lonza's 30 year life as a contract manufacturer with many ups and downs and still weathering the storm to stay reasonably on track. CONTENT: Changes currently going on Eight hypothesis for discussion A certainly wrong prediction on "Who will win?" Paradigm Shift in the global Pharmaceutical Industry Western markets are growth limited: o prices come under pressure o regulators have become very careful o development cost have skyrocketed while risk also has soared o some protectionism: triggered by bad economic situation and with some regulatory and quality scandals as an excuse: innovation becomes harder more risky and much more expensive New illnesses require new solutions: o effective treatments for old-age illnesses (Alzheimer, Parkinson, many cancers) have yet to be found o many diseases for genetic profiles in developing markets have not been properly researched, solutions not developed o more than 6000 orphan illnesses with increasing trend New technologies are emerging; their use is not fully explored: o conjugated antibodies o cellular therapeutics o gene therapy o virus as treatment o a new age of vaccination o scientific use of traditional medicines o implants of high-tech devices

2 Markets are under transformation: o population aging in western markets challenges funding o fast growing new middle class in BRICS countries has new demands o "wealthier" governments in BRICS countries are focusing on healthcare for poorer population o Race to enter Emerging Markets o competition for "brands" or "brand companies" (e.g. Abbott buying Primal Healthcare) o patent cliff will make many drugs available to the world o IPR situation globally becomes increasingly complex as not only laws differ but mostly its implementation Supply Chains are globalizing or are they? o Big pharma's business center is starting to shift from western markets to BRICS o Indian domestically centric pharma markets (API, Dosage) become export driven o Cost and size of product portfolio becomes a driver for: consolidation which is fully under way and competition from other LLC has started particularly from China o Race among emerging markets as supply platform: India has a pole position o new trend to protectionism by national and local governments link drug pricing to jobs created The burning questions in our industry s boardrooms: What do these changes mean for us? How can we help our customers? Will our customers put all the pressure on us and remain in short term action mode or will we develop true strategic relationships, create win-win deals and thus come back to sustainable profitability? Industry Definition: Active Substance Production for Life Science Applications = FINE MOLECULES (small and large molecules as well as other exotic drug ingredients)

3 Hypothesis for Discussion: 1. Cost pressure will increase on the entire supply chain How can cost reduction expectations of life science customers be fulfilled? Balance between flexibility (quality, local proximity, short communication, variability of quantity of supply, reservation of capacity, IP protection, environmental protection etc.) and price of intermediates, APIs or drugs? New technologies could bring solutions, but they require often times significant investments and only deliver pay back after years or even later? Who will do this? How should we design the supply chain of the future in light of large number of new patients and customers in developing countries? Where to produce? How decentralized? How centralized? How close to our customers? How do we deal with tax and price optimization incentives by many governments (increasing protectionism) that have a much bigger effect than manufacturing economics? How do we deal with hundreds of inefficient, stand alone plants having been built in the 70ies, 80ies and 90ies that need to be closed? Buying them many Indian companies have painfully experienced this only shifts the problem from the buyer to the seller. (Buying western plants by Indian companies?) How will consolidation develop: most FINE MOLECULES business do not return their cost of capital since years, if they are profitable at all. Lonza as the world largest CMO has less than 5% global market share: following the lesson of any industry - consolidation must be the consequence. When will happen and how? Where will future value-add come from if everybody is focusing on price per KG only? Will the FINE MOLECULES industry fully commoditize? Should we be in this business? 2. Less innovation by the drug inventors and less growth from innovation overall in the next 10 years Growth rate from 15-20% in the 90ies declined to 6-8% today

4 o The push into science is trying to turn the trend, but the end of innovation through traditional small molecules really seems to be there. So we are waiting for the next category of treatments. o Start-up companies and increasingly universities deliver research, large players deliver development o Contributions of the emerging countries will accelerate (India, China, Singapore, Dubai, Russia, etc). Which one of these new emerging powers will be the first in innovating medicines? My bet right now is on China and perhaps Russia, whereas India would have fantastic preconditions but is not getting itself organized (sorry for being so blunt to you, my dear hosts). My feeling is companies in India, China, and Russia will innovate drug molecules and take it to the stage of proof of concept. Beyond that they will require sponsors to take it to market 3. More careful drug approval by Western authorities So far, mainly a US problem a. Data hunger of regulators b. Public anger about side effects c. litigation arising from safety concerns not only against companies but also against regulators European regulators seem to take some advantage of this situation, but are fundamentally following the same trend. it s not going to get easier there live with it Look for break-through treatments and for competition for US/EU from emerging markets. 4. Global expansion of the patient population Hundreds of millions of new patients poorer a first - will expand quantitative requirements while increasing cost pressure even more Many of these new patients have other illnesses, so there will be room for new inventions targeted at those groups. Production capacities must continue to grow the right ones

5 Business model must continue to change the industry can not afford to loose money in these markets Generics alone will not suffice for very long The supply chain will require specialist solutions for each piece (intermediates, APIs, drugs, packages, devices, etc.) and integrators who can compose tailored solutions by individually assembling these specialist modules. One size does not fit all and a one-stop-solution is only as strong as the weakest stop. 5. Basic value difference for the protection of intellectual property will remain in place for some years Different in different cultures Different between innovators and generic companies Different in countries with varying living standards Influenced by aggressive lobbyism from patient groups and NGO s for supplying cheap drugs to certain groups or regions Working together with authorities around the globe Relentlessly fight for the IP granted 6. New science (especially coming from the biological revolution) questions the established pharma blockbuster model. and therewith the linked API manufacturing structures a. The statistical drug approval model gets replaced by drugs approved for specific patient groups with defined common genetic traits b. Older, large volume oriented assets must be replaced by smaller assets dealing with a multitude of technologies c. The manufacturing flexibility is as important as scale effects Flexibility of production must increase significantly We don't know today if a new technology platform will replace small molecules or if we will just see many different technologies emerging each taking a share. Chemical molecules are not the same either: from Aspirin in 1899 to penicillin in 1942 to flat chemicals to 3-dimensional chiral molecules to chemicallysynthesised peptides and oligonucleotides to highly potent and toxic APIs.

6 Now chemistry marries biology in antibody drug conjugates and small molecules replace large molecules again due to easier patient dosage. 7. Global production overcapacities will remain in place for at least 5 years, probably longer and prevent "orderly competition" In house pharma assets are aging and not appropriate for technologies or cost challenges CMO industry is fragmented (the top 40 competitors making up ~30% of the market for API manufacturing, overall >1000 companies) and continue to expand (China and India) Biologics capacities are following the same sinful path than chemical API s in the 80ies Cost reduction will continue, returns will be at or below cost of capital for some more time 8. No global agreement on the importance of substance quality not in the regulations and not at all in the implementation It is unfortunate to read news reports of APIs from low-cost markets that have resulted in serious health and safety issues for the patient (Heparin, oncology drugs and antibiotics are the recent ones). To make it very clear: this is very bad for the entire industry, customer and suppliers alike, because outsourcing gets questioned in general. We all have to move-up the bar and not fight regulators. The mission for FDA to inspect 600 Chinese sites, given the current rate of visits per year is a difficult task ahead. This can only be changed from within the industry but do we have the willingness and endurance to do this? From my perspective we can not (and Lonza will rather exit the business) trade patient s safety with lower cost of goods.

7 Who will win in this competitive environment? My personal prediction: those Who Reinvent Themselves Will Win Neither east nor west but the one who becomes global Neither small nor big but the one who is fast Neither backward integrated or specialized but the one who integrates with customers and partners Neither high quality nor low cost - but the one who can optimize both aspects and still increase flexibility Neither innovator focused nor generics hunted but the one who develops a compelling total offering Neither Western market focus not BRIC focus - but the one who can adapt the supply chain models to both and make money in both. Neither subservient to customer demands not take-it-or leave-it offering - but the one who can overcome adversarial short sighted behaviour Technology development must continue to be aggressive e.g. the relatively recent advances in recombinant technology, such as Lonza s GS system: unprecedented access to larger quantities of antibody and protein material with dramatic cost benefits for product in the market:: from $1000/g at the end of the 90ies to less than $50/g in the middle of this decade to single digits thereafter Consolidation must continue also via M&A activities within and across all regions and many plants must be closed. India is a part of the glob al market, especially in our industry. But some additional elements could help the local players here: o regulations must become clearer, simpler o more importantly implementation must become flawless o simplified tax structures o VC funding culture for innovators to take advantage of this country's fantastic brain power o strong universities o predictable & reliable government bureaucracy: well paid and well respected state employees who fight corruption. Focusing on CRAMs activities alone may not any longer be enough:

8 o Generic drug contract mfg. for innovator drugs may only prove successful for deliveries into BRICS o Growth in Clinical Research, Contract R&D and Drug Discovery Services (DDS) offers more potential o The "golden nugget" lies in true innovation for BRICS-typical diseases, new western diseases and orphan diseases Don t be surprised any longer to be surprised

Jefferies 2015 Global Healthcare Conference June 3, 2015

Jefferies 2015 Global Healthcare Conference June 3, 2015 Forward-Looking Statements This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act