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A Project on Contract Research Organiza- tions & It’s Future prospects By Siddhanth Nair Contracted research Drug and medical device companies are increasingly outsourcing clinical trials to commercial and academic contract research organizations (CROs). As 1

well as cutting costs, this could potentially put des- perately needed distance between sponsor and research product. If achieved, such distancing could- n’t come at a better time: a Harris Interactive poll shows that of the top 11 industry sectors, only tobac- co companies had higher negative public opinion rat- ings than drug companies (76% and 52% respective- ly). Although the literature about the biasing effects of industry sponsorship on medical research is rapidly expanding, little is known about whether studies conducted by CROs are subject to similar bi- ases. This raises the question whether research outsourced to CROs is genuinely independent or subject to influence from corporate sponsors. CROs contract with industry or public agencies to perform research activities such as recruiting participants, data collection, study design and analysis, and ghost writing. They reduce costs through economies of scale and by outsourcing to poorer nations. Kevin Schulman, associate director of the academic CRO Duke Clinical Research Institute, says that research conducted by CROs is independent, partly because they are not beholden to any one client. Only by providing high quality research, can they survive in the marketplace and retain credibility. Dr. Schulman says his organization's strategy "is to have a mix of private and public sources of funding, and it’s more important for us to maintain the in- tegrity of the university than our relationship with any individual sponsor." However, CROs face a fundamental conflict of inter- est—if they do not please their commercial clients, they may be less likely to get more work from them. Instances of study bias favoring the sponsor, dis- cussed below, suggest that independence may have its limits. The appearance of independence is so 2

highly prized that some CROs and their sponsors camouflage the commercial nature of their studies by emphasizing the researchers’ academic affilia- tions while de-emphasizing or not reporting institu- tional and individual ties to the study sponsor. Impor- tant and highly cited clinical trials conducted by CROs have been widely reported, and perceived, as independent research conducted by academic sci- entists and clinicians affiliated with prestigious medical schools when in fact they are commercially sponsored. It is hard to know just how serious or widespread these problems are, but the increasing role of CROs in research calls for scrutiny. Jerome Hoffman, pro- fessor of medicine at the University of California, Los Angeles, says, "CROs have become tremendously important players on the scene. It’s hard to imagine that such organizations—even when they are housed at prestigious academic institutions—can be com- pletely independent when they are so fundamentally dependent on industry money for their continued ex- istence." Rise of contract research The dramatic increase in CROs can be tracked back to 1980 when only a handful existed. Now there are over 1000 such organisations in North America. In 1993, drug companies outsourced 28% ($1.6bn) of their research money to CROs, according to Center- Watch, a Boston based publishing company that fo- cuses on the clinical trials industry. By 2003, CROs captured $7.6bn in research money and were involved in 64% of phase 1, 2, and 3 clinical trials. CROs reduce costs partly by their ability to recruit volunteers quickly and partly by recruiting partici- 3

pants from impoverished regions of the world. The savings can be impressive. According to former chief executive of Glaxo Smith Kline, Jean-Paul Gar- nier, a trial conducted in Romania costs only $3000 per participant compared with $30 000 in the United States. He told Fortune magazine in July 2005 that a third of his company’s trials were already being conducted in "low-cost countries"—a portion he hoped to ratchet up to a half within two years. "Glob- alization," he said, "is the ultimate arbitrage for companies like Glaxo Smith Kline." The first CROs to arrive on the research scene were commercial companies like Monarch. As academics saw research money diverted away from universities into commercial organisations, they began to form their own quasi-commercial companies, known as academic research organisations. James Breitmey- er, past president of the Harvard Clinical Research Institute, an academic research organisation, urged his colleagues to "take back" their leadership role, saying, "commercially sponsored research organizations have out-distanced academic medical centres in conducting clinical trials." 4

Asking the right questions The perception that CROs are independent is under- mined by the advertising appeals they use to attract industry contracts. Quintiles Transnational, based in North Carolina and the world’s largest commercial CRO, promises that it can deliver "scientifically valid" research designs that will "help customers 5prove the value of their products to patients, physicians, and regulators." Disproving the value of a product would hardly keep clients coming back. Dick Jones, senior director of corporate communications at Quintiles, responding to a question about the seem- ingly biased nature of their promotional material, says that citing "this one short phrase taken out of context . . . mischaracterises our advertising." Mr Jones said, "Customers come to Quintiles because we are the largest global CRO with the experience and expertise to give customers timely, objective data for use in determining safety, efficacy and value." 5

Industry Focus Broadly defined, the $43.5 billion outsourced pharmaceutical services industry is growing at an 8.9% compound annual growth rate (CAGR), supported by favorable industry and regulatory trends. • The sectors that comprise the outsourced pharmaceutical services industry include contract research organizations (“CROs”), contract manufacturers (“CMs”), and contract sales organizations (“CSOs”). • The value proposition of these service providers is to provide expertise in a specific function enabling the client to focus on its core competency. •CROs offer a wide range of products and services to support drug development across all stages. I.Pre-clinical studies and toxicology II.Clinical trials (early and late stage) 6

III.Pharmaceutical chemistry IV.Bioanalytical services • Key competitive differentiators: I.Firm reputation II.Quality and availability of experienced staff III.Quality and timeliness of reporting data from studies IV. Prior experience in the relevant therapeutic class V. Pathology studies VI. Drug metabolism studies VII. Research model services VIII. Product analysis and manufacturing IX.Quality and availability of physical space and equipment X.Breadth of services XI.Customer service XII. Global/broad geographic presence The CRO market can be segmented as pre-clinical (pre-trials) and clinical (trials), or as “early-stage”, which includes early development and Phase I trials, and “late-stage”, which includes Phase II-IV clinical trials. • The pre-clinical market is the gateway to the drug development process, through which all potential compounds must pass. Activities within this market include: I.Toxicology studies II.Drug metabolism / pharmacology III.Bioanalytical chemistry IV.Product analysis and manufacturing 7

• A significant differentiator between the early and late-stage development sectors is the required investment in capacity among early-stage research organizations. I.Pre-clinical service providers require controlled laboratory and/or animal facilities, as well as highly trained, specialized personnel. II.Requirements serve as both a barrier to entry as well as a significant investment that can constrain growth for poorly capitalized companies. III.In a growing market, pre-clinical service providers generate higher EBITDA margins through operating leverage; however, in a slow growth or contracting market, margins can be compressed as fixed costs must be covered. • Late-stage development companies require significant investment in human capital for trials and trial management. I.Reliance on headcount can cause margin contraction for clinical CROs due to tightened skilled labor supply and increased difficulty sourcing trial participants. II.Innovative companies are adapting technology to drive better utilization of trial participants and improve profitability. 8

The market for outsourced pre-clinical research is expected to grow at an 11% CAGR to $5.1 billion by 2010. Shift towards greater operational efficiency and reduction in overhead among large pharmaceutical companies. • CROs enable pharmaceutical companies to lower fixed costs and eliminate underutilized internal capacity. •CRO expertise increases the speed and flexibility of the drug development process, resulting in saved patent life and reduced development costs. •Outsourced research spend is estimated to be 25% of the total development expenditure for large pharmaceutical companies and is expected to increase to 40-50% within the next five years. Based on Q3 2008 earnings calls, development spending for large pharmaceutical companies may decline due to the current economic climate and potential legislative changes impacting R&D funding, but the long-term value proposition of outsourced service providers remains sound. 9

Increases in the number of compounds under inves- tigation, as well as additional FDA testing requirements, will continue to drive demand for CRO services. • FDA reports that the number of active commercial Investigational New Drugs (“INDs”) increased at a 7% CAGR from 2001 to 2006. I.Increased molecule discovery technology and the evolution of biotech has driven a record number of potential drug candidates. II.CROs offering pre-clinical and early stage services should benefit disproportionately from increased demand for pharmaceutical outsourcing services. • Recent shift at FDA towards more cautious drug approvals and additional testing requirements. I. Drug development is increasingly challenging and requires more pre-clinical and clinical testing in order to gain FDA approval. 10

II.Longer, more complex pre-clinical testing and clinical trials will require more patients and will be more costly. III.CROs with scale will be well-positioned to increase potential market share. 11

Future of CRO Market: Growth is evident Although sometimes categorized as pharmaceutical or independent testing labs, clinical research organizations (CROs) are a distinct market. Despite the mixed growth rate in recent years of both comprehensive and niche CROs, overall, 2000 was a year of growth for the CRO industry as they adjusted to the mergers of major pharmaceutical companies and to consolidation within their own industry. According to the latest survey conducted by the Pharmaceutical Outsourcing Management Association, outsourcing spending by major pharmaceutical companies was up in 2000 compared to 1999. Ninety percent of the survey's participants reported increased outsourcing spending in 2000, and 71% expect spending on CROs to grow by over 10% in 2001. But where do analytical instruments fit into this picture? As CROs grow, so will their demand for analytical instruments. With the pharmaceutical industry's R&D spending at an all-time high, an increasing number of potential drug candidates and a continuing push for faster, more efficient, and higher-volume drug development and testing, the use of CROs for all stages involved in bringing a drug to market is guaranteed (see IBO 8/31/99). This year alone, the US pharmaceutical industry spent approximately $26.4 billion on R&D. Estimates put the worldwide CRO market at $5 billion, with double-digit growth at close to 20%. According to Dorland's Biomedical Medical and Healthcare Mar- ketplace Guide, CROs specializing in research services account for approximately 21% of CRO outsourcing from pharmaceutical companies in 2000. Thus, the use of analytical instruments such as high-performance liquid chromatographs (HPLCs), gas chromatographs (GCs) and mass spectrometers (MSs) by CROs providing laboratory, R&D 25

and validation services will continue to grow. But indications of the future direction of CROs suggest that opportunities for the analytical instrument industry are emerging due to other changes as well. As the CRO market has grown more fragmented and competitive, technology, capacity and speed are key ways in which a CRO can distinguish itself from its competitors. Having the latest in high quality, state-of-the-art instrumentation and a large volume of such instrumentation are two ways of achieving a competitive advantage. The latest in analytical instrumentation is essential for the fast, high-quality and high volume analysis that CROs must provide their clients. This is especially true among CROs providing drug discovery services such as high-throughput screening, combinatorial chemistry and DNA sequencing services. Although still a relatively small fraction of the CRO market, companies specializing in drug discovery services are rapidly growing. Smaller, niche companies can offer highly specialized instrumentation and talent at a cost- savings. In addition, for the many small biotechnology firms utiliz- ing CROs, a smaller CRO is an ideal partner. Although sometimes categorized as pharmaceutical or independent testing labs, clinical research organizations (CROs) are a distinct market. Despite the mixed growth rate in recent years of both comprehensive and niche CROs, overall, 2000 was a year of growth for the CRO industry as they adjusted to the mergers of major pharmaceutical companies and to consolidation within their own industry. According to the latest survey conducted by the Pharmaceutical Outsourcing Management Association, outsourcing spending by major pharmaceutical companies was up in 2000 compared to 1999. Ninety percent of the survey's participants reported increased outsourcing spending in 2000, and 71% expect spending on CROs to grow by over 10% in 2001. But where do analytical instruments fit into this picture? As CROs grow, so will their demand for analytical instruments. With the pharmaceutical industry's R&D spending at an all-time 26

high, an increasing number of potential drug candidates and a continuing push for faster, more efficient, and higher-volume drug development and testing, the use of CROs for all stages involved in bringing a drug to market is guaranteed (see IBO 8/31/99). This year alone, the US pharmaceutical industry spent approximately $26.4 billion on R&D. Estimates put the worldwide CRO market at $5 billion, with double-digit growth at close to 20%. According to Dorland's Biomedical Medical and Healthcare Mar- ketplace Guide, CROs specializing in research services account for approximately 21% of CRO outsourcing from pharmaceutical companies in 2000. Thus, the use of analytical instruments such as high-performance liquid chromatographs (HPLCs), gas chromatographs (GCs) and mass spectrometers (MSs) by CROs providing laboratory, R&D and validation services will continue to grow. But indications of the future direction of CROs suggest that opportunities for the analytical instrument industry are emerging due to other changes as well. As the CRO market has grown more fragmented and competitive, technology, capacity and speed are key ways in which a CRO can distinguish itself from its competitors. Having the latest in high quality, state-of-the-art instrumentation and a large volume of such instrumentation are two ways of achieving a competitive advantage. The latest in analytical instrumentation is essential for the fast, high-quality and high volume analysis that CROs must provide their clients. This is especially true among CROs providing drug discovery services such as high-throughput screening, combinatorial chemistry and DNA sequencing services. Although still a relatively small fraction of the CRO market, companies specializing in drug discovery services are rapidly growing. Smaller, niche companies can offer highly specialized instrumentation and talent at a cost- 27

savings. In addition, for the many small biotechnology firms utiliz- ing CROs, a smaller CRO is an ideal partner. Commonwealth Biotechnologies, which offers DNA sequence analysis, genetic analysis, PCR analysis, DNA synthesis, and mass spectral analysis services, clearly sees the growth of its analytical instrumentation capacity as a significant step in its business plan as it intends to increase the quality and quantity of its services. In the first nine months of 2000, revenues for Com- monwealth rose 79% to $3.3 million. As Commonwealth Biotech- nologies comments in its annual report, "CBI's primary focus continues to be state-of-the-art DNA/RNA and protein/peptide technologies". In 1999, the company received two contracts for the genome sequence determination of different bacteria. Or as Lark Technologies, which specializes in gene discovery, nucleic acid extraction, DNA sequencing and gene expression, puts it, "We feel there is an opportunity for explosive growth as companies outsource a higher percentage of genomics work and the need for these types of analyses expands." In 1999, Lark Technologies spent over $1.7 million on laboratory equipment. And in May of this year, Novartis Research Foundation contracted Lark Technologies to provide high-throughput DNA sequencing services. But niche companies, offering specialized services, are not the only trend in the CRO industry. Another trend is the diversification of larger companies. Diversified, multi-service companies can offer a more integrated approach for major pharmaceutical companies and often have the critical mass and flexibility that such companies need. Part of this diversification includes expansion into the area of development, and part of it includes the expansion of existing functions. The positive outlook for such CROs is exemplified by MDS Inc.'s consolidation of its eight CRO organizations earlier this year to form MDS Pharma Services, one of the largest CROs in the world. Emphasizing capacity and technology, the company's ser- 28

vices range from discovery to clinical research. The company touts 70 LC/MS/MS instruments and an analysis rate of over 100,000 samples a week. In 2000, the company estimates revenues to be $337 million. MDS Sciex also sells mass spectrometers and no doubt benefits from the intra-company knowledge it has of the CRO business to sell to this market. It is also not a surprise that most of its mass spectrometers and triple quads are from Applied Biosystems/MDS- Sciex. Covance is another company that is expanding its capabilities and services. With a new, recently opened preclinical bioanalytical laboratory, and the operation of 30 mass spectrometers, the company is set to take advantage of the increasing demand for bioanalytical services. Their LC/MS instruments are Applied Biosystem/MDS-Sciex API 3000s with Shimadzu HPLCs on the front end. They are driven by Applied Biosystem/MDS-Sciex Ana- lyst software, interfaced with Thermo LabSystems' Nautilus LIMS. In 1999, Covance posted revenues of $829 million, with early development services accounting for a third of it. Both MDS Pharma and Covance highlight their advanced instrumentation in press releases and sales materials. In addition, both companies have made large volume purchases of instruments from a single company: Applied Biosystems/MDS-Sciex. In this way, these companies hope to gain a competitive edge in terms of the marketing, speed and quality of their services. At Caputo, Waters' senior vice president of marketing and sales, told IBO that Waters "has started paying close attention to CROs" as they have increasingly become part of the new wave of drug development and testing that has resulted from combinatorial chemistry and the sequencing of the human genome. He sees particular demand for HPLC in methods development and validation applications, as well as opportunities in the chemistry con- sumables market. He also reports that Micromass is seeing an increase in demand for mass spectrometers from CROs. 29

Mr. Caputo commented about the relationship between drug companies and CROs, stating that some times pharmaceutical companies will ask that CROs use the same company's instruments they used in the drug development process. When CROs order instruments, "[pharmaceutical companies] will actually par- ticipate in the order process." In the case of Shimadzu, the company actually views CROs as part of the pharmaceutical market, according to Bob Classan, product manager for LC/MS. He also clearly sees increased investment by CROs in capital equipment and the growth of CROs as a way for drug companies to do exploratory research. But what appears to be driving the latest procurements from CROs is LC/MS/MS. It is this sector in which Applied Biosystems/ MDS-Sciex has taken the lead when it comes to the CRO market. Thermo Finnigan and Micromass also offer high resolution LC/MS, but seem to be missing a good opportunity when it comes to this market. This is particularly true for Waters because, unlike Applied Biosystems, it has a LC business. Although Waters markets the single-quad mass spectrometer, it is Micro- mass that markets the triple-quad mass spectrometer that is in demand by CROs. Pharmaceutical Outsourcing Strategies Over the last decade outsourcing has become an important strategic issue for pharmaceutical companies. Rising pressure to reduce costs and time-to-market has led to outsourcing not only of traditional non-core functions such as 30

manufacturing and clinical trials, but also increasingly of technically demanding areas such as drug discovery and biotech R&D. 31

•Although Eastern Europe possessed the most established infrastructure for outsourcing in 2005, the local pharmaceutical industries in India and China are growing quickly and over the next five years, are expected to account for a significantly greater portion of both contract research and contract manufacturing work. •In recent years, the portfolio of services offered by CROs has widened dramatically to include R&D enabling technologies (e.g. drug discovery, genomics, high throughput screening, combinatorial chemistry) using proprietary techniques for which they often own the intellectual property rights. Portfo- lios may also include post-commercialization services such as contract sales and marketing. •CROs are now seeking new revenue opportunities by entering into partnering relationships with sponsors in which they share the risk and rewards of developing a particular product. (PPDI case study) •In quickly-changing and highly technology-dependent areas like drug discovery and biotechnology, costs are consider- ably higher for drug developers to establish state-of-the-art facilities in-house, therefore, outsourcing is often less expen- sive. 32

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Pharmaceutical Software from O2I O2I has been a strategic pharmaceutical software development partner for pharmaceutical companies ranging from start-ups to Fortune 1000 companies. Our wide industry expertise in building robust, scalable software for the pharmaceutical industry has helped O2I to build a knowledge repos- itory on pharmaceutical software needs and best practices. O2I has partnered with global pharmaceutical companies and has knowledge of their business models, IT needs and the intense pressure under which they have to perform. Our deep understanding of the industry practices and workflow models help us to create robust, scalable and powerful web-based solutions to meet the needs of these companies. We have worked with small and medium pharmaceutical companies, developing various applications that help to enhance various functionalities within the pharmaceutical sector such as pharmaceutical R&D, sales, CRM and supply chain management. Pharmaceutical Industry: Overview The pharmaceutical industry today is characterized by intense competition from too many new players and too few new drug offerings being made. To stay competitive in this industry, pharmaceutical companies are forced to reduce overheads and manufacturing costs and improve productivi- ty. There is a need for new drug development and shorten- ing time-to-market for these new drugs. The companies that are able to offer customers new product offerings in short- est time-to-market are the winners of the future. Regulatory compliance also plays a very important role in this scenario with companies who slip up on compliance having to face the legal and market implications of this. 34

Pharmaceutical Solutions that Address Departmen- tal Needs in Pharmaceutical Companies A focus on the IT needs of each function is critical for pharmaceutical companies to stay ahead of the intense competition in the field. The very nature of the product entails that pharmaceutical companies should have proactive, real-time response systems to meet customer needs instantaneously. O2I helps in the development of pharmaceutical CRM software and sophisticated supply chain modules to help companies in meeting real-time customer needs and making distribution networks more responsive to market needs. O2I develops systems that enhance R&D processes in pharmaceutical companies. Submission management, research data integration, statistical analysis and reporting are made less time-consuming and chaotic. Our applications for R&D departments of pharmaceutical companies transition them to more systematic and effective R&D practices. From clinical data capture and comprehensive data analysis to detailed reporting, O2I provides solutions that help companies to accelerate their drug development processes in strict compliance. Regulatory requirements in the pharmaceutical industry are complex and frequently changing. O2I develops software applications that help global companies to comply with these requirements in the U.S. and in other countries. O2I's pharmaceutical software solutions have specifically addressed the needs of the following departments: •R&D •CRM •Supply chain management •Compliance •Finance and accounting functions •Sales and marketing 35

Pharmaceutical Software Solutions from O2I O2I has developed pharmaceutical data and document management software to manage the inflow of clinical trial data from remote locations. Pharmaceutical software applications developed by O2I are deployed in various companies to build online stores and product catalogs, automate distributor networks and streamline supply chains. Our solutions to web-enable pharmaceutical systems give companies a better global reach and presence. O2I has developed pharmaceutical software solutions in the following areas: •Applications for regulatory compliance •Submission management applications •Software to collate and analyze data from clinical trials worldwide •Applications for data integration, analysis, and reporting •Pharmaceutical CRM software •Pharmaceutical order management applications •SFA (Sales Force Automation) software for pharmaceutical sales teams •Finance and accounting automation software •Online payment systems •Pharmaceutical ERP software •Pharmaceutical data and document management software •Pharmaceutical inventory software Outsourcing Pharmaceutical Software Develop- ment: Areas of Concerns Despite offshore outsourcing becoming increasingly common among global companies the pharmaceutical industry has been a little slow in taking up the outsourcing model mainly because of concerns on •Proprietary knowledge and IP (Intellectual Property) issues •Reduced control over processes •Software quality •Infrastructure capabilities of offshore vendors However, initial companies that turned to pharmaceutical software outsourcing are now reaping the benefits of high 36

quality software and significant cost reduction. It is becoming clear that many of these concerns are ill-founded. More companies are transitioning to the outsourcing model to meet their pharmaceutical software requirements and to enjoy its significant benefits. Outsourcing helps pharmaceutical companies to address their end-to-end software needs. Offshore vendor companies are providing them with pharmaceutical CRM software, pharmaceutical ERP software and powerful pharmaceutical inventory software to help them stay ahead of the competition. O2I's Pharmaceutical Software Development Services: Ben- efits •High software quality •Significant cost savings •Transparent development processes •Strict protection of IP rights •Clear Communication channels throughout project lifecycle •Accelerated drug development •Faster time-to-market with new drugs •Improve regulatory compliance •Increased global reach through web-enabled applications •Savings by streamlining support functions such as finance and HR •Better R&D data management •Knowledge sharing through multi-access applications •Access to collaborative research tools With our expertise in clinical trials systems, contract research software, LIMS (laboratory information management systems), and regulatory compliance O2I offers a range of software development that include application development, system integration, web-enabling, implementation and e- business consulting to global pharmaceutical companies. Outsource to O2I for solutions that address your end-to-end pharmaceutical software needs. 37

SIPAT – The software heart of PAT SIPAT SIPAT is the software solution from Siemens to support the application of Process Analytical Technology (PAT) in the pharmaceutical industry. SIPAT is scalable and modular and allows a controlled quality growth as the PAT initiative expands. The new software solution serves as a common user-friendly interface for all PAT tools and can be fully integrated into the manufacturing and development architec- tures. The main feature is the ability to interface with an existing manufacturing architecture, allowing full transparency on quality aspects from unit operation level up to ERP, MES and LIMS. With SIPAT, pharmaceutical companies are now able to gather process understanding, strive for continuous process improvement, develop processes based on ‘quality by design’ principles and manufacture ‘right-first-time’. Why PAT? Regulatory, market, scientific and technological forces are pitching pharmaceutical manufacturing towards rapid change in the next decade. Manufacturing efficiency and innovation is high on the change agenda with big gains to be secured by companies that innovate successfully. Process Analytical Technology (PAT) is a major part of this change. It offers the prospect for companies, in bio-API, chemical-API and in secondary manufacturing, to gain better control of their processes, design quality into the production process and move to real-time product release. It brings major benefits in terms of product quality, reduced time to market and more responsive supply chains. 38

What is PAT? Process Analytical Technology (PAT) is the cornerstone of the US Food and Drug Administration’s (FDA) Pharmaceuti- cal cGMPs for the 21st Century initiative. The FDA describes PAT as ‘a system for designing, analyzing and controlling manufacturing processes based on timely measurements (i.e. during processing) of critical quality and performance attributes of raw and in-process materials and processes, with the goal of ensuring final product quality‘ (*). This defi- nition is also supported by the European Medicines Agency (EMEA). PAT allows real-time follow-up of the product quality and im- proves process understanding. PAT enables ’right- first- time’ manufacturing. It reduces or eliminates the need for post- process testing because the product is manufactured by a tightly controlled process with quality ‘designed in’ to the process. Online quality monitoring will reduce ‘off- spec’ production and, therefore, reduce production costs. Delivering major business benefits The gains of PAT for the business objectives of the company can be substantial. The diagram below outlines six possible business benefits. Of course, every company’s situation is different. In some cases, multiple benefits may be realized. In other cases, the focus will be on one specific benefit. PAT offers a high return on investment (ROI) and, dependent on a company’s specific situation, the following business benefits: Significant cost reduction: • reduction of scrap/rework through ‘right-first-time’ production • less raw material, intermediate (Work In Process) and fin- ished product stock needed (Just In Time production) • reduction in quality and batch documentation costs (offline laboratory costs, number of FTE’s involved with batch release) • improved equipment utilization 39

Improved quality: • built-in quality control maintains consistent quality and reduces risk of contamination • shorter time to market • development of operating excel- lence (efficiency improvement, robust process development) • validation optimization – flexible regulatory approach (design space principle) • fast technology transfer or site-to-site transfer • fast scale-up Higher market share: • improved/faster product/process development allowing faster peak sales, taking away market share from competition • process patenting (sustained competitive advantage) Improved company image: •Product(ion) innovation • reduced risk for recall/warning letters/ consent decrees There are also, of course, significant regulatory benefits. To- day, compliance with the PAT guidance is still voluntary but in the near future, the application of PAT will be indispens- able to obtain a license to produce. Companies that apply PAT principles will be rewarded with regulatory relief. 40

Why SIPAT? SIPAT: a common system architecture for PAT Siemens has developed SIPAT to help companies implement a PAT approach. SIPAT has a common interface for all PAT tools and assures user friendliness and ease of operation. With SIPAT, companies can link all their analyzers and PAT tools into one single system architecture. SIPAT integrates: • process analyzers • process control tools • data analysis and mining tools (multivariate data analysis) • data collection, storage and retrieval tools •reporting tools •continuous improvement and knowledge management tools • SIPAT is easy to fit into an existing manufacturing architecture, allowing full transparency on quality aspects from unit operation level up to ERP, MES and LIMS. It enables the capture of analytical and process measurements, model cre- ation and validation, online prediction and analysis, feedback to process control and, finally, real-time product release. 41

Step up and scale up with SIPAT SIPAT gives users scalable PAT roll-out and deployment. It is suitable for applications ranging from offline model building to full online use. It can be integrated into a process control/automation infrastructure, for feed-back and feed-forward controls, batch-to-batch comparison, real-time product release, ongoing process optimization and fine-tuning. This modular approach offers the flexibility to phase implementation and roll-out. Users can commission and validate inde- pendently as SIPAT modules can operate independent- ly. It also offers companies a higher level of availability because changes on one unit have no impact on other units. SIPAT can be interfaced to: • various analyzer types, for data collection • various multivariate (chemometrics) and/or data analysis and mining packages • various process control systems (various process ma- chines) • various process automation systems (batch engines, SCA- DA) Control Key SIPAT modules Configuration module Allows to configure data sources, measurement and method types containing all necessary settings for runtime monitoring. This includes setting up PAT methods, inter- faces, etc. Model builder Gathers historical data to feed the MVDA routines resulting in an MVDA model against which the process will be checked. Besides model building, this module also allows model validation and optimization, typically used offline. 42

Execution module Fulfils the runtime functionalities using an approved configuration: • reads continuously data from process control system and/ or process analyzers and stores it into the SIPAT archive • synchronizes data and sends it to chemometric routines using previously developed chemometric models to predict or analyze data online. Prediction and analysis results can be visualized within SIPAT itself or within SCADA, PCS or MES • stores and visualizes the results from the chemometric routines •passes information to process control system (predictions, alarms, etc.) Data management Stores and retrieves all relevant data from the historical runtime PAT data and from the PAT configuration data. Cap- tured raw data, pre-treated data and predictions are stored in the SIPAT archive together with their batch context (information about the batch being produced, the operation being executed, etc.) Data summaries can also be sent to advanced process his- torians. The process insight gathered during the use of SIPAT is stored in the SIPAT archive from where it can be queried using reporting tools. 43

Solutions for the Pharmaceutical Industry Winning in today’s pharmaceutical marketplace is harder than ever: the Internet and e-business have shortened business cycles, increased the velocity of information, and cre- ated critical new marketing channels; product development cycles and approvals are fraught with risk; the emergence of generic drugs and the biotechnology industry as a growing force has greatly expanded competition; the abundance of new discoveries is accelerating exponentially; influencer mind share is harder than ever to capture; and merger and acquisition activity, corporate administration, and performance measurement a data-rich environment remains elusive. Information Builders helps pharmaceutical companies over- come these challenges by integrating disparate systems throughout the enterprise and value chain – such as Seibel, Dendrite, IMS, and I-many – and making the information in these systems actionable via intuitive reports that enable faster and better decision-making by everyone in the organization. Solutions built using our enterprise business intelligence and application integration technologies streamline business processes and improve responsiveness in critical areas 44

such as sales and marketing, contract management, customer care, operations management, and R&D. Our unpar- alleled access to enterprise data and application sources helps accelerate integration projects, mitigating the risk involved in corporate merger and acquisition activity. Sales and Marketing Management Information Builders provides the critical technology required to help you transform your sales force into the “knowledge force” needed to service key influencers more effectively. Sales management, marketing management, and senior executives in the pharmaceutical industry need to obtain a wide range of information about targeted influencers and their prescribing habits to support direct sales as well as e-detailing and e-education efforts. Executive dashboards make high-level views of corporate performance based on comprehensive enterprise data available to senior management through a company portal. The effective combination of Information Builders’ integration and enterprise business intelligence technologies allows you to easily create and distribute reports that intuitively synthesize product prescription trends based on every relevant data source in the enterprise – including prescriber- level data from sources like IMS Health or NDCHealth. Infor- mation Builders’ technology also gives you a real-time win- dow into your complex data environment to yield the consis- 45

tent, accurate, and usable competitor, market, and influencer information and analysis that marketing staff and sales representatives need to maximize performance. Critical as they may be to your business, CRM/SFA systems like Seibel and Dendrite do not tell the whole story about your customers and your sales efforts. To achieve this, you need Information Builders’ powerful, versatile reporting, which is based on historical and current customer and sales execution activity across the entire pharmaceutical enterprise. Pharmaceutical companies are under increased pressure to rationalize the promotional mix, mapping the right product and message to the right target, touched in the right man- ner, and with the right frequency. With Information Builders’ unmatched data access and flexible reporting, marketing management can use real-time information to effectively segment the market for a particular product, develop appropriate Internet and brick-and-mortar campaigns based on existing relationships and historical data, and measure the effectiveness of those campaigns over time. Information Builders’ technology delivers the following benefits to enable sales and marketing management and individual sales reps to get improved insight into performance of promotional campaigns and sales activity: ■ Sales reps can receive real-time reports detailing performance against plan ■ Marketing managers and sales reps can measure performance in their territories based on campaign participation and get up-to-the minute quota and performance information, while performing their own ad hoc analysis to measure detailing efforts and touches for particular influencers in their territory ■ Key executives can achieve total visibility into overall sales performance using key performance indicators (KPIs) in a dashboard-style format ■ Executives have the ability to drill down from the dashboard to more detailed reports – in real time if necessary – in order to pinpoint the root cause of any variance Manufacturing and Operations Management Product quality and efficiency in the production process have always been critical to success in the pharmaceutical 46

industry. Information Builders’ pharmaceutical solutions improve the reporting function at every stage of the manufacturing and operations process. As a result, companies can track resource deployment and performance against objectives in real time at every stage of the manufacturing process, thereby accelerating time to market, improving quality, optimizing production capacity and raw materials management, and improving distribution processes. Contracts Management and Compliance Delivering within the pricing parameters of multiple man- aged-care contracts is a key risk factor for pharmaceutical companies. Not only does inaccurate pricing have the potential for eroding profit and alienating customers, but companies face stiff fines for not adhering to government- man- dated pricing guidelines. Information Builders helps pharmaceutical companies proactively manage contracts by facili- tating real-time reporting and analysis of contract and pricing data so companies can identify areas of repeated rogue contracting and take the necessary action to reduce pricing errors and protect profit. Information Builders integrates with leading contract management systems like I-many, and the effective application of our business intelligence and integration technology can monitor contract systems for questionable pricing and contracting events with consider- able exposure, while alerting management before a mistake is made. Research and Development 47

Comprehensive real-time data access is the key to prof- itably navigating the extended research and development process. While the industry continues to adopt e-clinical systems, they lack sophisticated reporting capabilities and the ability to provide superior business-related insight based on data that is available before the clinical reports. Informa- tion Builders provides the real-time data access, flexible reporting, and robust information delivery required for management to easily evaluate the development process by ob- taining and analyzing information related to discovery, clinical trial outcomes and regulatory approvals, manufacturing processes, and quality control. In addition to unifying everyone from senior corporate executives to R&D/clinical management in support of a development effort, Information Builders’ pharmaceutical solutions can significantly reduce the time, cost, and risk associated with the entire R&D process. By using Information Builders’ performance management framework, companies can quickly develop and implement a system that tracks research and development via KPIs integrated into a dashboard interface. As a result, companies can more effectively deploy resources and proactively identify problems before they derail an approval process or an entire project. Financial Reporting Today’s fast-paced business environment, combined with increasingly stringent federally mandated financial reporting guidelines, requires an agile finance department. Information Builders enables every professional in your organization to quickly, easily, and cost-effectively get the answers they need to conduct business, comply with regulatory requirements such as those mandated by the Sarbanes-Oxley Act, manage budgets, and forecast financial performance. Information Builders’ financial reporting platform simplifies the financial reporting process, making it faster, more flexible, and more accurate. The platform delivers important features and benefits at every step, from data access and consolidation to automatic generation of financial statements and reports, the ability to manage financial performance via KPIs on a 48

dashboard, robust financial analysis and forecasting, and financial report distribution, management, and archiving. Key features and benefits include: ■ Full integration with Microsoft Excel eliminates tedious, error-prone data entry from disparate financial systems that normally bogs down the reporting process. This includes automatic population of PivotTables with formulas and formats for easy OLAP-style analysis, and allows finance personnel to spend time analyzing data rather than gathering it. Infor- mation Builders provides a unique write-back capability that allows changes made to data in Excel to be propagated back to their corresponding underlying systems when desir- able. ■ Access to over 85 data sources on any platform enterprise-wide – even ERP packages and Hyperion Essbase cubes – ensures accuracy and completeness. ■ Full report transparency promotes complete auditability and accountability of financial statements. ■ Immediate or scheduled distribution of reports and associated documents speeds mandated reporting and encourages collaboration. ■ Ability to audit supplier performance, vendor management, and procurement process. Mergers and Acquisitions In an industry known for large-scale management and integration, the information involved in multiple layers of mergers and acquisitions becomes a major challenge. Informa- tion Builders’ combined business intelligence and integration technologies are ideal for rapidly creating unified business processes and reporting. With access to more than 250 data and application sources and applications using service-oriented standards, our solutions can quickly and seamlessly integrate and make sense of all your data and systems to drive business performance. Nine strategies (standard methods, template structure iden- tification, databases, screening, integration, miniaturization, parallel processing, visualization, automation) consistently appear in MS-based methods for accelerated development [1]. These strategies serve to define the attributes of the analytical methods applied. High- throughput sample-generat- ing technologies such as biomolecular screening and combi- 49

natorial chemistry can create many thousands of samples, each requiring the application of one or more forms of analytical chemistry. Nowadays, the ability to devise, construct, and refine sample-analysis methods, either chromatograph- ic or spectroscopic, have become as equally important as the hardware itself. Today, the need to integrate appropriate method development strategies with MS processing capabilities is a critical factor in the modern industrial laboratory. View of the CRO Market As industry observers report, the contract research market is growing. Indeed, the Tufts Center for the Study of Drug Development predicts this market will continue expanding 16% per year for the next five years.1 Despite this growth, however, there are clues that segments of this market will mature in the near- to mid-term. This has vital implications for managers of contract research organizations (CROs). While terms like "growth phase" and "industry maturation" are commonly used, many people do not fully understand the impact these concepts have on their business. Let us take a moment to review what competitive implications these terms have for CROs. To do this, we must briefly review the concept of "industry lifecycle." 50

The evolution of revenue growth for an entire industry fol- lows a predictable pattern. Figure 1 shows this pattern. In the introductory stage, the industry is new. There are few customers and only a handful of companies selling the service. Thus, industry revenues are low. However, as the market expands, the number of customers grows. So do the number of firms providing the service. Dur- ing this growth stage, increasing customer demand causes revenues to increase rapidly. The CRO industry is currently in this stage. During the maturity stage, the number of customers enters a steady state and supply of service reaches equilibrium with demand. Many companies find they are unable to differentiate themselves from competitors. Customers then search for the lowest price. As a result, industry revenues level off. Finally, services become commoditized as the industry ages, driving prices down. Revenues, in turn, decline -- hence the "decline stage." Each phase has unique challenges and opportunities. Impor- tantly, the transition from one phase to another can be traumatic. Why? Because the challenges and opportunities that managers face will change. Old strategies no longer work and firms must develop new ones. There is a growing body of evidence suggesting the CRO market is approaching just such a transition, and many owners are starting to sense changes in the industry. Firms that 51

anticipate these shifts and prepare themselves accordingly can do very well. Firms that fail to prepare themselves, however, can find themselves out of business. The CRO industry: Still Growing Contract research is a multi-billion dollar industry. With demand for CRO services expected to increase by 16% annu- ally over the next five years, the future appears rosy.1 The rise in foreign studies plus the increasing complexity and size of clinical trials fuels this growth. Figure 2 presents historic revenue growth of the CRO market. The rapidly rising revenues observed characterize an industry in a growth phase. Rapid revenue growth encourages the formation of new CROs. As this trend continues, the market becomes highly fragmented, with hundreds of CROs vying for market share. However, building a fully-functional CRO takes time. Thus, growth of the customer base tends to outstrip CRO capacity. Consequently, incumbents have no difficulty finding new customers. Their biggest challenge, typically, is managing rapid growth and maintaining cash flow needed to sustain capacity development. 52

In 2005, there were 269 CROs in the U.S., and 462 more in Europe. The top five CROs by market share laid claim to 36% of total industry revenues.2 This suggests that a few dominant CROs are arising, which is typical of an industry in the late growth phase. Clues That the CRO Industry Is Maturing There are three indicators suggesting the industry is maturing: 1.Slowing revenue growth 2.Reduction in the number of CROs 3.Fewer new customers Looking back at Figure 2, the rate of revenue growth has slowed. In 2006, industry revenues grew about 15% from the year prior. Although this is still a respectable growth rate, it is very different from the heyday of the mid-1990s, when rates of 50% occurred. This pattern of slowing growth is a classic indicator of an industry in the late growth phase before it undergoes maturation. Turning to the number of CROs, there were 731 companies combined in the U.S. and Europe in 2005.3 This represents a slight downward trend from the peak of 736 in 2003. Moreover, there is geographic variability within this number. Looking at North America, which accounts for 60% of the global CRO market, the number of CROs has decreased by 2% per year since 2001. Although not dramatic, this shows the growth in the number of CROs has at least stopped and is trending downward in some regions. Regarding availability of new customers, no formal study exists to assess this parameter. There is, however, indirect evidence new customers are harder to find. The first is anecdotal. Through conversation with many owners of CROs, we have noticed a change in the challenges they face. Whereas once managing growth was the main difficulty of respondents, now "getting new leads in the door" is becoming their major issue. 53

Secondly, Figure 3 shows the proportion of clinical studies with CRO involvement has reached a plateau. This suggests the drug-development industry is outsourcing as many of its clinical projects as it intends to. These findings hide differences between various segments of the CRO market. Some areas are still in an early growth phase, others have already matured. Taken together, though, it suggests the industry as a whole is approaching a period of transition. This, in turn, has a profound effect on the competitive landscape of the CRO market. What Will Maturation Mean to CROs? Shifting from a growth stage to maturation is especially traumatic. Growth in the customer base slows and capacity of CRO services finally catches up with demand. As a result, pricing power shifts from the CRO to customers. To compound this, the experience customers have gained working with CROs in the past gives them greater savvy when negotiating contracts. This, in turn, puts further pressure on CROs' pricing. Thus, rivalry between CROs intensifies as firms compete for market share. Increasingly, CROs gain new customers by taking them from competitors. Inevitably, some CROs start slashing prices to win new customers and retain old ones. Consequently, less competitive companies exit the industry and the number of companies declines. 54

The large players become larger by buying smaller firms and claiming the market share left by exiting companies. In fully mature industries, it is common for the top five companies to claim more than 50% of industry revenues. Surviving niche players split the remaining market share amongst themselves. Now is the time for prudent managers to take action to prepare their companies for this transition. Surviving & Thriving in the Near- to Mid-Term As the industry matures, price competition intensifies. Com- peting on price is a valid competitive strategy. Thus, the goal of management is not necessarily to avoid price competition. Rather, it is to avoid competing on price because the competition forced you to. We shall explore both the overarching strategies and operational tactics executives and managers can use to position their companies to avoid the trap of price competition. Survival Strategies There are a few broad survival strategies in a maturing industry. These include: •Sell the business •Gain scale •Find a niche •Enter new growth markets •Appropriate combinations thereof Sell the business 55

The late growth phase of an industry's life cycle is an excel- lent time to find a buyer for the business. Revenue growth is still robust, and many companies are looking to grow through acquisitions. Strong revenues plus a large pool of buyers puts owners in a strong negotiating position when selling a CRO. If owners plan to sell, then waiting until the industry fully matures is not a good idea. By then, industry revenues have slowed. This makes the company look less marketable and limits the capital buyers can draw on to make acquisitions. This, in turn, weakens the owner's negotiating position. Gain scale The natural evolution of many markets as they mature is to move to an oligopoly. That is, a few companies emerge that dominate the industry with a number of smaller, niche firms. The CRO industry is trending this way. Therefore, quickly growing in size to become one of these dominant firms is a viable strategy. Gaining size provides companies with the capacity to capture larger shares of the market. In addition, they benefit from economies of scale, allowing them to lower their cost structure. Moreover, in the CRO industry, bigger companies have a larger geographic footprint. This allows them to offer valu- able, global access to larger drug companies seeking to enter multiple countries. However, planning to gain this scale through organic growth is generally not a viable option. Op- portunities to capture markets evaporate quickly. Therefore, owners should expect to acquire or merge with other companies to capture the market share needed to become a major player. This is a capital-intensive strategy, so companies will likely require investor or debt financing to pursue it. 56

Find a niche As stated above, the CRO industry is trending towards a market with a few dominant companies and a number of smaller niche firms. Another viable option as the industry matures, then, is to position the company to become one of these niche firms. To do this, managers must evaluate their company's abilities and the marketplace to identify a profitable niche they can fill. Niches can be geographic (i.e. many services in a local area), operational (i.e. few services in many geographical areas), or both (i.e. few services in a local area). Once managers have selected their niche, they must design and implement marketing programs targeting the selected niche. Moreover, managers must modify operations to deliver services these niche customers value. Enter new growth markets A CRO can maintain revenue growth by entering into rapidly growing markets. Although the CRO industry as a whole is maturing, growth segments exist. These opportunities fall into two categories: geographic and new markets. Geographically, there are regions experiencing rapid growth in pharmaceutical sales, including South & East Asia, India and Latin America. This is driving growth in clinical trials in these regions and subsequent demand for CROs. Geography aside, technological, procedural and regulatory advances in the clinical-trial process create new markets for enterprising CROs. Such opportunities include microdosing trials, electronic data capture (EDC) and electronic patient recorded outcomes (EPRO). Additionally, the battle waging between generic and pharmaceutical companies is creating great opportunities in the bioequivalence sector. Appropriate combinations thereof 57

Naturally, CROs can combine the above strategies. Man- agers should not limit themselves to choosing one strategy, but rather combining applicable strategies when developing their plans. Survival Tactics Tactically, managers need to find new sources of sales, demonstrate the CRO's distinct value to customers and brace for price competition. Firms can do this by focusing on three areas. These areas include: •Marketing •Differentiation •Operations Marketing During the growth phase, managers focus marketing activities on attracting new customers and creating a distinct brand. As the industry matures, however, new customers will increasingly come by luring them from competitors. Marketing managers, therefore, need to prepare defensive and offensive action plans. Defensively, CROs should develop programs to foster customer loyalty. Such programs will protect the company from competitors raiding your pool of clients. Offensively, CROs should look to creating compelling value propositions to attract competitors' customers. Because many CROs will be working hard to retain their current customers, the cost of winning new clients will increase. This, in turn, can erode profit margins and decrease the return on the marketing budget. It will be more profitable, therefore, to increase sales to existing customers. In response, prescient marketing managers focus on increasing sales to current clients. There are two ways to do this. First, managers can focus on gaining a larger share of 58

their current customers' purchases. Second, they can develop additional services or add-ons sold to current clients. Differentiate If a CRO wants to avoid competing on price, it must be able to differentiate itself from the competition. That is, the CRO must be able to state how its services differ from those of its competitors and convince customers this difference is worth paying for. To be effective, a CRO's basis of differentiation must meet two criteria. First, it must add value to customers in a way that competitors cannot easily match. If it does not add value, customers will not pay for it. If competitors can easily match it, then it is not truly a differentiator. Either way, the company is back to price competition. Second, the company must be able to deliver on the differentiated service. The CRO must align its operations with the promised differentiator. For example, firms should back a promise of exemplary customer service with programs im- plemented in house to deliver on that promise. If managers do not consciously align operations with what salespeople are telling prospects, customers will quickly dis- cover you are only paying lip service to your promises. This, in turn, undermines the firm's credibility and brings the company back to competing on price. 59

Operations During the growth stage, CROs should focus on establishing quality and reliability. Once the industry starts to mature, price competition becomes common. Ideally, managers strive to avoid having to compete on price alone. However, customers will become used to seeing CROs lower their prices. As a result, their expectations of what activities cost will change. Thus, even CROs with clearly differentiated services may face pressure to keep costs down. This can be extremely disruptive to unprepared companies. Operations managers, therefore, should focus on reducing costs to give them the flexibility to operate in an environment of falling prices. Managers can do this by standardizing and automating functions where possible. When appropriate, CROs can consider outsourcing commoditized functions to low-cost providers. Some CROs have started to do this by, for example, offshoring data management activities to lower-cost In- dian CROs. Looking Ahead of the Curve The CRO industry has experienced many years of growth. History has shown, however, that all industries eventually 60

mature. For companies caught off guard, this change can be traumatic -- if not terminal. There are hints the CRO industry is approaching maturity. Some firms are already noticing changes in the air. There are concrete activities managers and owners of CROs can take to prosper as the industry matures. The time to act is now. To conclude However, as the last two years have demonstrated, the CRO industry is one of ups-and-downs. The past two years have been years of adjustment for CROs as companies con- solidated and refocused. Even industry giants such as Quin- tiles and Omnicare were hit with revenue declines. Mergers among the major pharmaceutical companies also affect the future outlook as the pool of companies providing major contracts shrinks. In fact, CROs are in a vulnerable position since they are dependent on other companies for their business. But an increasing number of long-term contracts, more business from the biotech sector and the quality service that CROs provide have contributed to their growing business. In order to gain an edge over their competition, some CROs have begun developing their own technologies. Common- wealth Biotechnologies, for example, is developing genomic sequence analysis technologies. Another example is Phar- maKinetics Laboratories which has made a substantial R&D investment to develop methods related to LC/MS/MS. 61

Despite strategy and demand changes in the pharmaceutical industry, CROs are none the less well positioned to play a significant role in the drug development and clinical pipelines. CROs also know the importance of analytical instrumentation in the drug development and testing process, and with growing business from pharmaceutical and biotechnology companies, CROs' demand for both traditional and life science instrumentation is expected to rise. 62

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