BIOTECHNOLOGY AND PHARMACEUTICALS

Outsourcing in the pharmaceutical industry: 2011 and beyond

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Table of Contents
Corporate process outsourcing R&D processes outsourcing
RDO drivers and benefits RDO risk and mitigation

2 3
4 4

Regulatory affairs and operations processes outsourcing

Regulatory process outsourcing benefits Regulatory outsourcing issues and hurdles

5
5 7

Pharmacovigilance outsourcing
Pharmacovigilance service providers

8
8

Looking ahead: The next 18 months Conclusion

9 9

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

Outsourcing in the pharmaceutical industry: 2011 and beyond | 1

dangers. Recurring threats of litigation over real or perceived drug side effects. Shifting demographic trends in both western and emerging markets, driving the demand for more and better pharmaceuticals. Growing threats to intellectual property. Weak pipelines for new drugs in many large firms. Skyrocketing expenses. These are just some of the challenges the global pharmaceutical industry is facing today. To address these issues and minimize their negative impact to the extent possible, pharmaceutical firms are proactively and significantly changing their business models. They are consolidating via mergers, acquisitions, and joint ventures to leverage economies of scale, capitalize on synergies, and expand their pipeline (or other lacking areas), into new markets and new product categories such as pharma plus biotech. They are also increasing partnerships in areas previously considered proprietary, redefining corporate strategy via diversification versus specialization, and deliberately focusing on improving collaborations. They are continuing to implement across the board cost reduction programs to grow profit and offset slowing sales growth by restructuring research and development (R&D) without impacting drug development programs, reducing clinical phase and early stage R&D costs, decreasing their sales forces and conducting internal audits when using a contract research organization (CRO). And, they are increasingly leveraging outsourcing to enable focused excellence on the core business of pharmaceuticals while abating the above issues.

n anticipated loss of approximately $78 billion in 2009 - 2014 resulting from patent cliffs. Shrinking profit margins and increasingly heavy competition. Growing regulatory pressure due to highly publicized drug

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

2 | Outsourcing in the pharmaceutical industry: 2011 and beyond

Corporate processes outsourcing

With its long R&D cycle and an acute need for speed to market, the global pharmaceutical industry was one of the earliest adopters of information technology outsourcing (ITO) and backoffice business process outsourcing (BPO). Indeed, for years pharma companies have been outsourcing almost everything in IT, from mainframes and servers to networks, call centers and applications development and maintenance (ADM), and most are in their second, third or fourth iteration of their outsourcing agreements in these functions. These organizations have also been progressive when it comes to outsourcing other processes such as Human Resources (HR), Finance and Accounting (F&A), and Procurement. Additionally, functions like Real Estate and Facilities Management (REFM), have risen in importance when it comes to outsourcing alternatives. For example, GlaxoSmithKline, Novartis and Schering took the lead in outsourcing REFM processes in 1999. AstraZeneca and Astellas began outsourcing their IT infrastructure in 2001. In 2002, Johnson & Johnson was the first pharma company to outsource its ADM; it was also the first to engage in legal process outsourcing (LPO) in 2006. 2006 also marked the year in which GlaxoSmithKline and Pfizer embraced finance and accounting outsourcing (FAO). And Bristol-Myers Squibb was the pioneer in outsourcing Order-to-Cash (OTC) and HR, in 2007 and 2008, respectively.

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

R&D processes outsourcing

The macro trends driving R&D outsourcing (RDO), which are similar to those driving other types of pharma outsourcing, are spurring most major global pharma firms to consider more aggressive RDO uptake. However, given that most global Pharma firms have grown via extensive M&A efforts, both the level of and philosophy toward RDO varies across the organizations. For example, per polling of a representative sample of RDO decision makers and secondary research conducted in late 2010, KPMG has not found many pharma firms with a single unified RDO strategy, much less an operational plan of action and timeline, which is in stark contrast to more traditional and established BPO and ITO efforts within these firms. As a result, there is much RDO dabbling among pharma firms in the market today. They are engaging tactically, while simultaneously defining a strategic direction. Clearer visions than strategies typically exist due to competing priorities, numerous decision makers, and uncertainties or disagreements over the expected maturation and adoption pace of RDO. Thus, RDO is not progressing monolithically across organizations, and different areas have different agendas, goals and risk profiles. In terms of outsourced RDO processes, KPMGs research in late 2010 found that while pharma companies are mature in areas such as preclinical and clinical trials work, most are still exploring other areas such as drug research and registration work (see Figure 1).

Figure 1: Pharma R&D outsourcing

Opportunity Analysis Extent of Outsourcing Drug Research Discovery Development Registration Launch/ Marketing

Activities Offshored

Competitive Intelligence Pipeline analysis Clinical trial mapping Business Intelligence Product/performance tracking Market Research Survey design Therapy area research

Functional Genomcs Specialized chemistry Bioinformatics support Lead identication

Discovery chemistry Lead verication Lead optimization Chemical synthesis Hit/lead optimization

Preclinical Bioanalytics Pharmacokinetics Toxicology studies Clinical Trails Programming/ scheduling Data management Site management Clinical statistics

Material Preparation Dossier production CD production

Analytics Commercial analytics Sales force analytics Brand modeling and forecasting

Operating Model

Captive + Outsourced

Only Captive

Captive + Outsourced

Captive + Outsourced

Captive

Outsourced

REGULATION Most outsourced

REGULATION Least outsourced

REGULATION

REGULATION

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

4 | Outsourcing in the pharmaceutical industry: 2011 and beyond

RDO drivers and benefits While KPMGs above-mentioned polling of RDO decision makers did not confirm a clear set of common RDO drivers across major pharma firms, it did help identify some directional trending. For example, the three most cited RDO drivers were: Gain cost savings to fund R&D transformation Shift internal R&D focus to more strategic activities Improve R&D performance Interestingly, the benefits sought by firms are mixed, and sometimes inconsistent, with identified RDO drivers, and most of the decision makers KPMG polled indicated it was too early to fully assess whether their firms are consistently achieving the RDO desired benefits. Per their responses, straightforward goals such as cutting costs are being more frequently achieved, while more complex ones, such as shifting the retained R&D organization to more strategic activities, are so far proving more elusive. RDO risk and mitigation Many buyers understandably feel that the risks associated with RDO are higher than with in-house R&D because getting a drug to market in the most cost effective and timely manner is a major contributor to the success and growth of any pharmaceutical company, and clearly a strategic core competency. However, the siloed manner in which many pharma firms approach RDO allows each functional area to have visibility into and control of only its own scope. While this strategy feels safer, from an overall corporate benefit standpoint the

organization is leaving significant dollars on the table, and failing to leverage potential process improvement and end-to-end performance enhancements. There are four major risk categories for which pharma firms must account when undertaking RDO. Following are some of the ways to mitigate the risks: Execution Ensure appropriate control, ongoing monitoring and communication Start with small projects and expand base on success and lessons learned Leverage SG&A outsourcing experience, teams, and models and, where practical, consider expanding work in existing serviceprovider relationships Contractual Develop strong business terms focusing on intellectual property protection, privacy, compliance and indemnity clauses Employee Communicate strategy and plansclearly Focus on change management requirements, especially related to the transition process Provider Test a few providers, geographies and service models (onshore, offshore, nearshore) Monitor dynamics of large players expanding into RDO markets Monitor dynamics of smaller, specialized provider growth and market consolidation

Since many pharma companies have already started with multiple small projects, almost all of which are distinct and separate from the other RDO initiatives, it is time to deploy a more overarching and integrated RDOstrategy. There are several benefits to this approach: Better potential maximization of cost savings Employment of a select group of providers with consistent, measurable and tracked metrics to maximize accountability Development of partnerships with providers with demonstrated successes both onsite and offsite Establishment of a service provider landscape that provides for collaboration with the client and among the service providers Words of caution: successful outsourcing of any kind requires ongoing communication between stakeholders and providers, as well as well-defined governance structures and processes. Additionally, there is certainly no room for a one size fits all strategy within RDO. A more orchestrated sourcing strategy will provide benefits that many pharma firms are not achieving. Finally, pharma buyers must recall and leverage all their learnings from other outsourcing efforts. From involving key senior management to getting all stakeholders on board early to striving to maintain a transparent and factbased process, these practices are as critical to RDO as to any other type of Pharma outsourcing.

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

Outsourcing in the pharmaceutical industry: 2011 and beyond | 5

Regulatory affairs and operations processes outsourcing

Traditionally, outsourced regulatory services were linked directly to the effort necessary to support clinical trials. For CROs, this ran the gamut from a per-trial basis for under-resourced pharma/biotech organizations to a virtual regulatory affairs department. In the new economic reality of drug development, the leveraged outsourcing model that has been successfully used to support clinical trials is now being seriously tested for regulatory affairs and operations support. Regulatory affairs and operations processes ripe for outsourcing include medical writing, report publishing, submission publishing, submission planning, regulatory data management, regulatory information management, country regulatory affairs, regulatory chemistry, manufacturing, and controls (CMC), labeling, agency liaison, regulatory strategy, translation, administrative documents, dossier conversion and literature searches. Regulatory process outsourcing benefits The benefits pharma companies can realize from outsourcing regulatory affairs and operations processes include: Cost efficiencies Moving from high fixed costs of in-house resources for all regulatoryactivities Fringe benefits Facilities and technology Training Relocation New hires in new geographies New hires with specialized expertise To a blended variable-cost approach Cost of consulting fees versus full-time staffing costs for a defined set of functions, programs and products Saving on staff reductions Savings achieved by refocusing stranded employees on other essential activities Increased asset value by keeping products on the market and expanding market share Implement proactive compliance Prevent revenue loss by staying in the market Gain revenue in new markets Increase speed to new market approvals Increase percent of market share (reimbursement, exclusivity) Extend brand formulations and indications Gain from new product approvals and optimized reimbursement Priority approvals valued, on average, at $448 million* in additional revenue First cycle approvals valued, on average, at $640 million* in additional revenue Increased market share and productadvocacy Proactive risk management Loss from product approval delays or recalls Additional development costs per day Loss of product revenue valued, on average, at $1.08 million* per new molecular entity per day Fines, penalties and loss of reputation Loss of stock price and/or investor funding

* Source: David P. Katz, Ph.D., KPMG, 2010

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

6 | Outsourcing in the pharmaceutical industry: 2011 and beyond

Figure 2 compares current models of regulatory support with the traditional model, which focused solely on the outsourcing of clinical trial applications, primarily to CROs. In the current model, CROs and others are now interested in expanding their services and scope to include all five categories in the lifecycle.

Figure 2: Current modes of outsourced regulatory support

Timeline

Pre-IND

IND/CTA

Ph. I

Ph. IIa

Ph. IIb

Ph. III

NDA/MAA

Lifecycle Management of Products

Key Partnering Offerings

Clinical Trial Applications

Managing regulatory requirements involved in initiating and conducting clinical trials

Pediatric Investigational Plans

Designing and implementing Pediatric Investigational Plans

NDAs/MAA New Regional Maintenance Entry Activities NDA/MAAs

Managing the extensive set of business processes supporting upkeep of marketing applications Extending our clients footprint by managing all regulatory activities associated with registering products in new markets

MAH Transfers
Managing all activities involved in the transfer of product ownership, both for buyers and sellers

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

Outsourcing in the pharmaceutical industry: 2011 and beyond | 7

As depicted in Figure 3, regulatory service delivery models are highly flexible, and sliceable by region, product or function, depending on what strategy best suits the organization.

Figure 3: Global presence and capability can support strategic regulatory outsourcing

1
Benet Dimension Objective
By Region Register in New Regions

2
By Product Maintain a Specic Class of Product

3
By Function Improve and/ or Transfer a Function

Timeline

Pre-IND

IND/CTA

Ph. I

Ph. IIa

Ph. IIb

Ph. III

NDA/MAA

Lifecycle Management of Products

Key Partnering Offerings

Clinical Trial Applications

Managing regulatory requirements involved in initiating and conducting clinical trials

Pediatric Investigational Plans

Designing and implementing Pediatric Investigational Plans

NDAs/MAA New Regional Maintenance Entry Activities NDA/MAAs

Managing the extensive set of business processes supporting upkeep of marketing applications Extending our clients footprint by managing all regulatory activities associated with registering products in new markets

MAH Transfers
Managing all activities involved in the transfer of product ownership, both for buyers and sellers

Regulatory outsourcing issues and hurdles Just as with outsourcing any process or set of processes, potential regulatory process outsourcing buyers have a wide range of concerns. In the regulatory environment, these issues include data security, system access, third party performance, internal change management, increased compliance risk, loss of control, resolving shared internal responsibility, unsustainable savings, internal process codification, and trust. According to the results of a leading service providers query to its client advisory board members, the top three concerns are, not surprisingly: data security, system access and third party performance.

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

8 | Outsourcing in the pharmaceutical industry: 2011 and beyond

Pharmacovigilance outsourcing
Pharmacovigilance work requires highly skilled individuals, from registered nurses to specialist doctors, who perform relatively clerical functions such as sifting through data and probing case reports. Despite the clerical nature of the work, it requires such a high level of expertise that it carries a very high price tag. Additionally, the requirements and the stakes of this kind of work continue to rise. Exacerbated by negative news coverage, each new drug is heavily scrutinized, and the volume of events to be reviewed and addressed is increasing at an incredible rate, driving costs even higher. As a result, pharmacovigilance not only for cost savings but also for process efficiency is growing in popularity as an outsourced function, especially to offshore locations. Further, while pharma companies were traditionally somewhat reluctant to partner with a third-party for pharmacovigilance as the data managed and interpretations made requires such deep medical knowledge, they are becoming more comfortable with outsourcing as many of the service providers have extremely experienced MDs and PhDs working on their teams. Pharmacovigilance service providers There are essentially two classes of providers moving strategically, and quickly, into the pharmacovigilance space. The first is traditional CROs, those companies focused on drug development and managing trials through their various steps and processes. These companies, such as Quintiles, Covance and MDS Pharma Services, are well suited to step up and address pharmacovigilance. From a staffing perspective, they have the right ingredients, with doctors on staff who are focused on the relevant processes. The second is traditional BPO organizations, particularly those based in India or with large Indian operations, such as Capgemini, Tata Consultancy Services (TCS), Infosys and Keane. India is the most obvious choice for offshore pharmacovigilance outsourcing for a number of reasons. India-based operations have employees with excellent language skills and a large number of doctors and other medical professionals who are looking for higher-dollar work in a related field. And although Indias labor arbitrage appeal is decreasing, performing pharmacovigilance work in India is still quite inexpensive by US standards.

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

Outsourcing in the pharmaceutical industry: 2011 and beyond | 9

Looking ahead: The next 18 months

The pharmaceutical industry is looking at emerging market expansion and growth potential of 12 percent year on year, and the biologics market is expected to grow to $41 billion by 2014. There will be continued and accelerated consolidation through M&A activity, including spin-offs to allow increased focus on corporate strategy and core competencies. And because of the volatility of the market, cost reduction programs will become more rigorous and closer to the bone. As a result, we will see: Creative alliances and significant outsourcing relationships evolving in areas including real estate and facilities, regulatory, R&D, legal and government pricing Providers proving greater experience in dealing with multiple regulatory regimes, but recognizing that regulations will continue to evolve Increased emphasis on the role of governance for new and modified existing contracts Outreach for expert assistance on an operational level regarding ways of bringing together or tearing apart existing outsourcing contracts due to anticipated mergers and spin-offs Expanded use of third-party service providers in both operational and strategic process areas such as R&D, sales and marketing Continued review of what is considered core and non-core as these definitions continue to morph Deeper penetration into existing outsourcing areas Greater focus on more immediate cost savings; while desire for transformation and innovation have not disappeared, up-front emphasis will be placed on labor arbitrage to drive nearer-term savings with less risk of achieving benefits Fewer full-bundled deals, more targeted aggregation and multisourcing Smaller deals with, over time, a progressive rollout of increased scope Selling of captives or more hybrid models to manage sustainability risk Greater attention to volume volatility More outsourcing contract renegotiations to reduce pricing Increased due diligence, governance focus and flight to quality Emergence of enterprise-wide sourcing governance and global business services An increasing move toward a diversified global business model to access alternative sources of growth and reduce risk Delivery of more, and more valuable, products to guard against blockbuster dependence and to mitigate pricing pressures, underpinned by cost controls to generate sustainable sales/earnings growth and improve returns to shareholders

Conclusion
Theres no question that todays pharmaceutical companies are facing a multitude of unyielding challenges. But substantial, strategic alterations to their business models will help them tackle the issues and lessen their detriment.

2012 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

Contact us National Bob Jolicoeur National Sector Lead, Biotechnology and Pharmaceuticals T: +1 416 777 3733 E: bjolicoeur@kpmg.ca Paola Cipolla Partner, Sector Lead, Biotechnology T: +1 416 777 8346 E: pcipolla@kpmg.ca Montral Gino Cordi Partner, Audit T: +1 514 840 2315 E: gcordi@kpmg.ca Carl Deslongchamps Partner, Tax T: +1 514 840 2135 E: cdeslongchamps@kpmg.ca Mark Ttreault Partner, Audit T: +1 514 840 2334 E: mtetreault@kpmg.ca Toronto David W Regan Partner, Tax, SR&ED T: +1 416 549 7809 E: dregan@kpmg.ca Doug Varty Partner, Audit T: +1 416 777 8520 E: drvarty@kpmg.ca Vancouver Paul Wilkinson Partner, Audit T: +1 604 646 6391 E: pwilkinson@kpmg.ca

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