In the March 2001 issue of this magazine, Anthony DeStefano from Procter &Gamble raised some important issues around outsourcing early stage discovery and development activities (Contract Pharma, March 2001, "Early Phase Outsourcing," pp. 20-26; www.contractpharma.com/ mar011.htm). The selection of partners that outsourcing necessitates is a demanding activity and, as Mr. DeStefano related, a successful development team will most probably include not just a single partner but rather a group of specialist companies, individuals and even institutes.
Despite the difficulties and new challenges this approach to R&D presents, data suggests that more and more companies—large and small—are implementing outsourcing programs as part of a strategy to accelerate the discovery process, control development costs, exploit profitable niche markets and minimize time to market.
This article discusses the move towards outsourcing at this early stage, presents an outline of some recently introduced Resources to aid partner selection, and discusses the emergence of a new class of ‘intermediary’ company that works between the client and sponsor organisations.
The Trend Towards Outsourcing
"Contracting out" or "outsourcing" of chemical scaleup and, more particularly, bulk manufacturing has always been an integral part of pharmaceutical industry activities, but outsourcing of biology is a more recent phenomenon. This is because the more mature industrial chemical industry was already using contract providers, a service that then became available for the younger pharmaceutical industry. The expense of investing in and maintaining chemical plant means that it must be fully utilized in order to maintain profitability; its use by a number of clients has obvious cost-saving elements. In the past, there existed neither the requirement nor the services necessary to consider outsourcing biological studies.
This changed in 1955, when the tragedy of thalidomide revealed the importance of adverse toxicology and transformed the public policy surrounding drug safety, and was furthered by the introduction in 1975 of Good Laboratory Practice (GLP). Since these two events, the pharmaceutical industry has accepted outsourcing preclinical safety studies as an integral and essential part of their overall strategy. This can be similarly applied to the clinical work that is performed to supply proof of safety and efficacy of new medicines.
Outsourcing is now an essential element in the strategy of pharmaceutical companies. Far from being solely the province of large company strategy, outsourcing is used intensively by small companies aiming to adopt modern techniques in a flexible and competitive environment. Outsourcing can be taken to mean more than just contractual R&D, and can involve university and industrial collaborations. In the widest sense, outsourcing can range from contract R&D to acquisition, with a spectrum of joint ventures and research collaborations in between. Arrangements between parties can stretch from preferred provider contractual relationships, through to equity investments alongside research collaborations. For the purposes of this article, we’ll narrow our definition of outsourcing to the contractual relationship between technology provider and client. This may involve a research or a development contract, however, the intellectual property in this definition remains with the sponsor, with payment based on completion of the sponsored work and not related to the ultimate success of the project.
The archetypical technology provider in this regard is the contract research organisation (CRO), with some reporters differentiating the services provided by such organisations—predominantly in the toxicological and clinical areas of pharmaceutical R&D—from the services of the contract pharmaceutical manufacturers (CPMs) or contract manufacturing organizations (CMOs). Within the scope of this article, the definition of CRO shall be taken to include the role of the CPM or CMO.
In a recent report, outsourcing in the pharmaceutical industry was estimated as running at about 30% of overall R&D spend, and rising (figures from Deutsche Banc Alex. Brown, Equity Research, Pharmaceutical Outsourcing 1999). Given that pharmaceutical R&D is estimated to run at more than $50 billion for the year 2000-1, this amounts to some $15 billion of expenditure annually. The overall outsourcing market is expected to grow significantly over time to perhaps 50% of pharmaceutical R&D (Source: Deutsche Banc). In some areas such as outsourcing of chemistry-related functions the figure has recently been rising at a compound annual rate of 40-50%. Given the huge amounts of money spent on outsourcing it is perhaps surprising that more attention is not given to the procedures of selection.
The market outsourcing of toxicology and clinical functions is divided between a relatively small group of major players, as shown in Figure 1.
|Figure 1: Service providers and market share for toxicology and clinical R&D (data from Deutsche Banc Alex. Brown, Equity Research, Pharmaceutical Outsourcing 1999)|
This rather oligopolistic market representation should not disguise the fact that there is huge diversity amongst the smaller organisations not shown on the chart, and indeed, in the somewhat older manufacturing function, the split is much wider among a larger number of companies (Figure 2).
|Figure 2: Service providers and market share for pharmaceutical manufacture (data from Deutsche Banc Alex. Brown, Equity Research, Pharmaceutical Outsourcing 1999)|
In clinical and toxicological evaluation, many (though not all) of the tasks have similar skill requirements, and the generic nature of the processes involved tends to favor the agglomeration into larger business units. In chemical manufacture, there is a greater degree of specialization and a greater importance of specialized machinery and plant required to operate in different synthetic routes or in the manufacture of different formulations. Where chemical synthesis is less intensive in machinery and plant, in earlier stages of the development process (and even in research), the market is again split amongst a smaller number of players (Figure 3). However, it is also true that this segment of the outsourcing market is less mature than chemical manufacturing; this may also be a factor in the number of companies represented.
|Figure 3 Contract chemical synthesis organizations (data from Deutsche Banc Alex. Brown, Equity Research, Pharmaceutical Outsourcing 1999)|
The Buying of R&D
Management of outsourcing is a much more complex process than that of internal R&D. While the selling of R&D is a well-advanced process, the buying is not. Many companies incorrectly regard this as a normal extension of their in-house efforts with little training being given to the R&D people who manage it. Alternatively, they consider outsourcing as part of the purchasing function. The process of ‘buying’ R&D can be divided into the following segments:
• The identification of potential partners
• Selection of a preferred partner
• Negotiation of a contract
• Management of the work
• Reporting of results
Identification of potential partners is itself a complex process, with more than 1,000 companies in the business of offering contract pharmaceutical services.
Reflecting the complexity involved, certain of the larger CROs are increasingly offering a wider menu of services, in an effort to capture ‘one-stop-shop’ outsourcing. However, the risk for the buyer in choosing such supermarket offerings is that the quality and value for money is not always equally high across all areas. The discerning buyer is better served by selecting different companies with expertise particular to the service sought.
Selecting, planning and budgeting for the use of a CRO are critical to project success. CRO use continues to increase in the U.S. and Europe and yet sponsors continue to encounter difficulties in these areas. Typical problems include:
• Insufficient knowledge of specialist providers of the service required
• Finding the time and resources for evaluating and selecting a high-quality, experienced CRO
• Unrealistic bid expectations
• Poor bid specification leading to poor CRO performance
• Difficulty comparing competing bids
• An inability to specify add-on work at rates and terms comparable to the initial contract.
Sources of Information on CROs
A number of companies work at the interface between provider and client. These intermediaries provide a range of services, from information databases to consultancy, and in some cases even run studies themselves, acting as a sort of meta-CRO.
Each company offers more extensive information on CROs than pharma or biopharma companies tend to have in house, which allows savings on time and contract costs by facilitating charge comparison and negotiation of better unit rates over initial competitive bids. Better information permits better CRO selections, thereby reducing the risk of selecting poorly qualified CROs. Mistakes in selection can be very costly both in terms of increased project costs and poor performance, particularly where there may become a need for additional studies to make up for poorly conducted contracts.
DataEdge (www.dataedge.com) has collaborated with 30 pharmaceutical companies to define benchmarks and divide unit costs into 20 common budget categories, ranging from pre-trial regulatory filing to manuscript preparation. They prepared a unified process for CRO selection, which the company claims makes the preparation and evaluation of requirements for proposals a much faster job. The CRO responds to a proposal involving detailed tasks described in familiar terminology. This all-inclusive proposal reduces initial and add-on costs by eliminating double-charges. Preferred-provider rates can be readily compared to industry rates found in the database. DataEdge’s database lists CROs in terms of project experience and includes details on financial qualifications. The benchmark capability allows for better comparisons between preferred provider rates against preferred provider rates paid by other companies, and comparisons with other means of carrying out the work, such as using internal resources.
Arachnova (www.arachnova.com) is a relatively new company on the scene, offering services in project leadership and outsourced project management, and providing a database (the Technology Web) with more than 1,000 companies specifically in the CRO industry. Limited searching of the database is freely available via the BioPortfolio web portal at www.bioportfolio.com, but a CD-ROM version is available at a commercial rate. A full-scale online version of the database is expected to be available with multiple search capabilities in October 2001.
The consultancy services include instigation and implementation of early-stage development projects for a range of companies, particularly for small biotechnology sector companies needful of flexible management skills. Such companies use outsourced relationships extensively for their development programs, and often need professional development help to complement their discovery focus and take their projects forward to a point from which they can be outlicensed. In addition to consultancy on project leadership and management, Arachnova works in other areas, including the preparation of expert reports, the completion of due diligence projects and acting as expert witnesses.
A rather different model is employed by Inceutica (www.inceutica.com), founded in October 1999 to deliver web-enabled solutions for pharmaceutical/biotech R&D. Inceutica’s technology platform aims to connect pharma and biopharma companies to service providers with the particular therapeutic expertise sought, regardless of geographical or organizational boundaries. The client company will post the request for proposal (RFP) form on the website, making it available for review by service vendors, allowing them to submit and revise project bids, monitor project status and conduct ongoing dialogue directly with the client company, who then reviews all bids and selects the vendor that best fits their needs. Inceutica has no direct involvement in the two parties’ communications.
Technomark (www.technomark.com) has provided a register of CROs since its conception in 1988. Initially focussed on toxicology and clinical outsourcing, an addendum has recently been published which identifies contract pharmaceutical manufacturers and chemical synthesis companies. The information provided by the Technomark registers has also recently been enhanced by an on-line version of the database. As well as basic contact information, there are details on the finances and the number of staff in the CRO. This information is not provided for all CROs, and is particularly lacking from the small, often private entities, which make up the bulk (in number) of the service providers. While it is often said that it is the small private provider that is more financially exposed, the recent failure of Oread exemplifies the wide range of this business risk. (It is interesting to compare the failed strategy of Oread which was to become a fully fledged multi-disciplinary development service provider with that of Albany Molecular Research, which, while expanding its offerings, has nevertheless remained focussed on chemical service provision.)
A smaller version of the Technomark database is provided by InPharm (www. inpharm.com) in the FlexiPages part of the website. The information, which is given more in a directory format than a database, provides contact details for a wide range of agencies and suppliers serving the pharmaceutical and healthcare industries. The information is accessible for free on the web, and can be searched by keyword or browsed by category. There is little information on many of the featured companies, but some have a profile with more information. Although the total number of companies is around 1,000, few are specifically in the contract pharmaceutical R&D field. From a business perspective, this data is funded by organizations paying for a profile to be included on the website. This has the advantage of being free to the user, but the disadvantages of being partial in scope and biased towards those that do pay for a profile.
The Middle Tier
The merger trends of a few years ago in pharmaceutical outsourcing posited a future with ever fewer, ever larger providers. While there was still room for niche CROs, the trend was to provide a wide range of pharmaceutical development services in one organization. The real business challenge from this reorganization was to use this very large development resource to optimize the drug development process for the benefit of the pharmaceutical industry. As in any industry sector, integrating the activities of a large CRO organization, particularly one that has recently merged, is a substantial internal challenge.
This trend has now been countered by the emergence of a new tier of company between the sponsor and the CRO, and has parallels in the outsourced management of clinical trials through site management organizations (SMOs). SMOs provide CROs with physicians and coordinators to enable clinical research coordination and monitoring of Phase II, III, and IV clinical trials. The SMO often has a number of therapeutic specialties and access to a large and diverse patient population for inclusion in the proposed research. In addition, SMOs usually employ full-time certified clinical research personnel for trial documentation and case report form completion. SMOs are judged by their ability to enroll patients in studies and start and complete a clinical drug trial in a timely manner. In essence, therefore, SMOs aim to streamline the functions of CROs and operate between the CRO and the investigator.
Unless and until the cost-savings and efficiencies promised by the recent round of CRO mergers can be realized, there is room for such intermediaries, which can operate in a highly flexible sense to add value to the outsourcing process in pharmaceutical R&D.
The CRO business is highly competitive and in this respect it is similar to the product-based industry it serves. However, there is a major difference in the way the two industries compete for business. The pharmaceutical industry can hope to very clearly differentiate its products based on hard data obtained from efficacy safety and pharmacoeconomic studies. Even in today’s new healthcare environment the market place is less price sensitive when clear clinical evidence for product advantage can be shown. This is in marked contrast to the CRO industry, which has an ever-shrinking number of large well-founded mature customers and a significant number of young small and venture capital hungry customers. Differentiating and selling technical services to senior R&D management is very different from marketing products to doctors and healthcare providers. Claims that studies can be completed faster, error free and reported to agreed timelines are simply not credible to customers: all CROs make these claims.
The real added value that an individual company might bring in its service offerings needs to be more carefully considered. Given that the facilities, GLP status and technical competence and the like are mostly undifferentiated for the successful CRO, the simple answer has to be knowledge and experience, that is, the technical and scientific complexity of the pharmaceutical development process. CROs that can capture this knowledge by employing professionally experienced leaders who can then cultivate the scientific culture of pharmaceutical development into their organization will be the winners of the fight to capture increased market share in a generally mature or shrinking market. Such people-based elements last only as long as these individuals are employed by the organization. Know-ing the good and bad elements comes from experience of working relationships; expertise in one area does not imply talent in all areas. In some cases, specific technologies might add a further element of uniqueness, for example inhalation technology, continuous infusion technology, telemetry and transgenics.
There is increasing recognition that specialist companies can add value to the outsourcing process and many now see the role of an intermediary organization as beneficial to serving the research-based pharmaceutical sector. Indeed we should not be surprised. The word ‘entrepreneur’ literally means ‘to take between’: in all industries, as they mature and become more integrated, companies often become more specialist in their offerings and opportunities can open up for new commercial intermediaries. A useful comparator here is the computer manufacture industry, which is highly fragmented and based on outsourced networks. A final validation of this tenet comes from the large CROs themselves, which, in order to offer the one-stop shop from which they can benefit substantially as a provider, often resort themselves to sub-contracting. It will be interesting to see how this trend develops in the next few years, in an age when the business of pharmaceutical development is still growing, becoming ever more international in scope, more competitive and more complex.
Outsourcing is no doubt a trend that will increase and, in order to improve its efficiency, the ways in which it is managed are likely to see dramatic change.