The Hindu Business Line : Buzzing labs in a back-office land

Globalisation and increasing speed to market are causing many manufacturing-based industries to review all aspects of their business processes including R&D and regulatory testing, writes G. Sudesh Kumar in Outsourcing Laboratory-based Services. is a rising trend, as D. Murali discovers in his perusal of the book.

TO MANY in the developed world, outsourcing is a bitter word. It is a topic politicians dread to espouse, even as compulsions of business economics embrace outsourcing to boost sagging bottom lines.

And the medicine is getting even more unpalatable for the richer nations, with research and development (R&D) and testing moving newer shores such as India and China, driven again by the `economic underpinning of the outsourcing philosophy' of relocating value creation activities to where there is a comparative advantage.

"Globalisation and increasing speed to market are causing many manufacturing-based industries to review all aspects of their business processes including R&D and regulatory testing," writes G. Sudesh Kumar in "Outsourcing Laboratory-based Services," from Tata McGraw-Hill (www.tatamcgrawhill.com).

A happening thing, because a November 23 press release from Frost & Sullivan research (http://healthcare.frost.com) posted on www.prnewswire.com reads `Pharmaceutical and Biotechnology Companies Adopt Outsourcing Practices to Combat Rising Costs'. It speaks of lengthy drug discovery times and the soaring costs of drug development, estimated at approximately $800 million. "Intensifying the financial strain are increasingly complex clinical trial requirements and high drug failure rates with only 15 per cent of new drugs entering development expected to reach the market."

Other interesting statistics are that "the European drug discovery outsourcing market is forecast to expand from $3.2 billion in 2004 to 5.1 billion by 2011"; and that "by 2010, more than 40 per cent of R&D is projected to be outsourced." The `global growth consulting company' has released a report titled `Drug Discovery Outsourcing Market in India and China', priced at $6,500, which talks of industry challenges, share market engineering research, offer recommendations and decision support databases, and announces `awards'.

A whole range of contract research organisations (CROs) have sprung up to cater to drug companies, writes Kumar. Every 1 per cent move into outsourcing by global pharma majors produces $200 million in extra business for CROs, he informs. After BPO (business process outsourcing) and KPO (where K is for knowledge), it is the turn of RPO to hog attention, with a focus on research.

Drug discovery targets

A discussion of the `drug discovery path' explains how drug molecule ends up in the bloodstream for being transported to the target organ, or is delivered to the target organ locally, where receptors recognise the drug. "These receptors are large protein molecules to which the drug binds tightly and precisely with a high degree of specificity," reads a simple 101 on the medicine trail. While molecular biologists try to figure out the molecular structure of the receptors, chemists design `newer molecules which fit more and more precisely with known receptors'.

What does an innovative company aim at? "To discover new receptor targets that offer a novel approach to the treatment of a particular disease." It seems "all contemporary drug therapies are based on a total of 500 targets." With the knowledge of human genome, it is possible to identify a wide range of new targets, writes Kumar. The discovery chain has further stages such as screening, funding, trial phases, and registration.

So much so, for every approved drug that comes out of a pipeline, about 10,000 molecules would have gone in and got lost somewhere along the way, points out the author. "On an average, for every 100 promising drug candidates discovered in the research laboratory, only 10 will get as far as being assessed on human subjects. And only one of these will become a registered new medicine... Less than half of the new medicines will make a profit for the company."

A chapter is devoted to measurement; for, globalisation of R&D banks on metrology (the science of measurement). "The measurement systems must be managed with a scientific and robust approach to ascertain parameters which are critical-to-quality (CTQ) and fulfil those CTQs on a consistent basis," insists Kumar. Also important are GLPs or good laboratory practices, which define "managerial concepts covering the organisation of test facilities and conditions under which pre-clinical safety studies should be planned, conducted, monitored, and reported."

The ISO (International Standards Organisation) has developed ISO/IEC 17025, a special purpose standard for laboratories. There is the ILAC or the International Lab Accreditation Cooperation, working towards MRAs or mutual recognition agreements, so that one test/ accreditation is accepted the world over, rather than being re-tested by the importing country.

Innovation Capability Index

On the same theme is a whole section in "World Investment Report 2005" from UNCTAD (United Nations Conference on Trade and Development) published by the UN through Academic Foundation (www.academicfoundation.com). Part one of the report is on FDI (foreign direct investment), running to about 90 pages, while the second part is devoted to `R&D internationalisation and development', over the next 150 pages. "Traditionally, when R&D internationalisation took place, both home and host countries were found in the developed world. To the extent that TNCs (transnational corporations) undertook R&D in developing countries, they did so almost exclusively to adapt products and processes to local conditions," notes the report about old-time `stylised facts'. A certain basis level of innovative capabilities is needed for countries to connect with global networks of knowledge creation, and to benefit from R&D by TNCs, states the report, and introduces `a new measure' called `the UNCTAD Innovation Capability Index or UNICI'. This measures two critical dimensions, viz. innovative activity through TAI or Technological Activity Index, and skills availability for such activity through HCI or Human Capital Index.

World Bank uses Knowledge Index encompassing 14 dimensions of knowledge capacities, while UNICI's plus point is the inclusion of only quantitative variables. In TAI, the components are R&D personnel, US patents granted, and scientific publications (all per million population). HCI incorporates percentages of literacy rate, secondary school enrolment, and tertiary enrolment. India ranks the 81st in 1995 after Tunisia, and 83rd in 2001 after Viet Nam, among the 117 countries listed in the report. Top two slots belong to Sweden and Finland.

However, a chart showing percentage of `current foreign locations of R&D' has India in the sixth place, after the US, the UK, China, France and Japan. "In India, over three-quarters of affiliates' R&D expenditure ($61 million) were in non-manufacturing industries in 2002, compared to only about 20 per cent in 1999, probably reflecting a focus on software development," notes the report. A remarkable new trend is `the emergence and fast growth of foreign R&D activities by TNCs from developing countries', such as Tata investing in Uruguay, and Aditya Birla Group's ACB plant in Egypt.

Open innovation in chip design

R&D outsourcing has benefited largely due to the shift from closed to open innovation, explains the report, citing the IBM case. The company realised the weaknesses of the closed system when for the first time since 1946, it suffered declining revenues in 1991-93. "In response, IBM transformed itself from a hardware producer to a supplier of integrated solutions, with the objective of leveraging its broad portfolio of intellectual property."

Last week, Saritha Rai reported on www.nytimes.com about HCL Technologies, Chennai, as "the first design centre outside IBM's own walls for its Power Architecture chips." The deal highlighted India's growing role in the design of high-end chips, she said and added, "The country is better known as a hub for outsourcing of software development and comparatively low-end back-office work." That outsourcing chip-design to a low-cost centre such as India with a large talent pool is a trend of the future, is a quote of Jagdish Rebello, iSuppli's principal analyst for communication systems, cited by Rai. A case of buzzing labs in a back office land!

World Investment Report observes that the expansion of chip design in Asia has been the result of the synergistic effects of: pull factors (such as low costs and high demand), policy factors (as for example incentives and regulations), push factors (such as changing skill requirements and methodologies), and enabling factors (in the form of ICT-enabled information management).

R&D-related FDI can help overcome the absence of an innovative enterprise sector, which is a common weakness of developing countries, suggests the report. "Texas Instruments, the first TNC to be allowed to establish a wholly-owned software affiliate in India in 1986, not only inspired other TNCs to set up operations in India but also spurred the growth of the indigenous software and business services industry."

The report offers recommendations on how the national policies and international framework can enhance the internationalisation of R&D.

Ideal reading list, therefore, for a weekend of research.

Economics@TheHindu.co.in

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