Outsourcing drug discovery work was a new and uncertain concept three years ago when Kalorama Information published its first report on the topic. Now, it’s not only common practice, it’s a necessity for many in the industry. Certainly, outsourcing of development work like clinical trials management has been going on for years; contract manufacturing, too, has proved vital to the industry; and now outsourcing early stage discovery work is also becoming the norm.
Access to innovative technology, flexibility in approach, the conservation of capital, and the potential time- and cost savings of contract work are generally all major drivers of discovery outsourcing as they are in other development areas. In addition, the growing number of smaller biotechs and virtual pharmaceutical companies that have little or no in-house discovery capabilities will continue to drive demand for contract research.
While Pharma companies have been relatively quick to rush ahead with outsourcing discovery functions such as biology and lead optimization, they have shown more reluctance to turn over core functions such as chemistry.
Why is that? First of all, Big Pharma was reluctant to outsource chemistry because it was seen as a core function. Compound chemistry is basic to the drug discovery process and Big Pharma had the chemists. Second, compound chemistry is where some of the company’s most sensitive intellectual property resides, and firms were loath to share it with outsiders. Third, in chemistry, quality is absolutely key to success. It is not to just create lots of compounds; they must be the right compounds of proper purity. Early perceptions of the contract research industry were that they could provide fast, cheap, and voluminous work, but that precision was best left to the professionals.
These notions are changing, though, and the chemistry services market is starting to expand at an increasing rate. One reason is the scarcity of chemists. Because of high-throughput techniques, the demand for new compounds exceeds the supply. Companies simply can’t hire enough chemists to get the job done, so they have to look outside. On the supplier side, CROs have become increasingly responsive to clients’ quality and security demands, from dedicated lab space to contractually set compound types, structures, and characteristics.
And finally, clients have come to realize that there is inherent value in tapping into a diversity of outside expertise, including enhancing their compound collection with variety of products from different suppliers, expanding their core library, creating smaller focused libraries, and establishing new synthesis methods.
There are four major chemistry service categories that CROs provide:
• Building Blocks
• Compound Synthesis
• Process Research
• Library Design
Less frequently requested services include evaluation of competitor’s compounds and medicinal chemistry, which are still predominantly done in-house. Many CROs offer scaffolds, templates, building blocks, and side-chain synthesis. Few offer final compound R&D, high-throughput synthesis, purification, or formulation solutions. Very few provide design strategies or knowledge integration.
Chemistry service pro-viders generally fall into two broad categories: the big full-service CROs and the smaller specialized suppliers. The full-service CROs have some advantages based on their capabilities and their business models. They are able to provide a broad range of technical capabilities, including skills that the client may lack entirely with their organization. Especially when it comes to servicing smaller biotech firms, the breadth of expertise in biology and lead optimization, as well as chemistry, allows integration among multiple disciplines and virtual turn-key operations for clients who need it. From a business perspective, this continuum of service is also arguably an excellent model for keeping clients and compounds through multiple development stages.
The small specialized CROs can provide a sharper focus for clients who know exactly what they want and require in-depth knowledge in one special area. Larger clients with in-house researchers often benefit most from these suppliers, as they can provide close interaction with the client’s own chemists, and the client can cherry pick sophisticated niche expertise from a variety of small CROs without committing an entire project (and its process IP) to one partner.
A variety of criteria come into play when a client is looking to evaluate a potential chemistry service provider. There are the usual suspects—cost, capabilities, and reliability—but equally important are the compatibility of relationships, sensitivity to intellectual property concerns, scale-up ability, and, of course, the number of chemists and their skills and experience.
The formula for vendor selection is vendor = Q4C. That is, first comes Quality, then Capabilities, company Culture, Contract terms, and finally Cost. However, this formula is not set in stone; in our research, the most often stated reason for going to an outside supplier was time, even if it meant higher costs.
Sometimes, what a client is looking for can be a moving target. Certainly discovery chemistry outsourcing is very different from API sourcing. But even within discovery chemistry, different skill sets and requirements are sought at different stages. For example, Pfizer breaks down its chemistry discovery work into three areas, each with different supplier criteria. For hit follow up, there are few optimization cycles, a low IP risk, and more chemistry skills are needed from the CRO (much more than an API supplier); in candidate seeking, there are many optimization cycles, the IP risk is high, and fast knowledge transfer is required from the CRO; and finally in lead development, CROs are almost never considered because they deem this best done internally.
GlaxoSmithKline (GSK) uses several suppliers for its chemistry services. The company needs more than one and sees a benefit in diversifying its partners, but it is intent on limiting the number; GSK doesn’t want too many to manage. Only when one drops off the list does it give a chance to the new kid on the block. GSK expects a certain base level of competence, including the following “givens”: staff quality, good management structure, availability and level of equipment capacity, safety, and quality of results. In the selection process, GSK looks for a contract that the supplier can be comfortable with, past performance metrics (both internal and external), and a level of resiliency such that the supplier can solve problems on its own without too much reliance on the sponsor.
Yet another approach is the one we see from TAP Pharmaceuticals (Abbott and Takeda’s joint venture). TAP relies on partners to stock its pipeline and is heavily focused on outsourcing. They pick the compounds they like, design the programs, outsource the chemistry, and then evaluate results. TAP outsources for capacity, not competency, which the company feels it has in house—a set of criteria which changes the dynamics of selection quite a bit.
Our research indicates that there are three often overlooked essentials in a discovery outsourcing relationship. First, senior management involvement is absolutely crucial for setting the direction. The message must be clear, cohesive, and consistent. When senior management is involved, it transforms the contractual fee-for-service project into a comprehensive strategic outsourcing relationship and avoids the pitfalls of short-term approaches.
Second, communicating effectively and comprehensively with the supplier about the project is vital. The client must trust the supplier enough to provide all the information relevant to the project at hand, including structures and synthetic schemes, procedures and analytical information. The client should inform the supplier about sources of raw materials and routes that didn’t work in the past, so as to avoid costly overruns. And the client has to be specific about all contract requests, such as timelines, data requirements, desired purity, etc.
Although it seems like it comes after the fact, a third essential to success is the establishment of CRO performance metrics. Setting appropriate expectations is easier if the mechanisms and methodology for evaluating those performance expectations are clear from the beginning.
Clearly one of the biggest hot-button issues in pharmaceutical outsourcing is off-shoring. Although in the past Kalorama has focused its research on outsourcing to domestic suppliers, emerging “economy” CROs in China, India, Russia, and elsewhere are increasingly becoming the face of contract work and cannot be ignored. It must be noted, though, that just because many of these regions’ suppliers are new to U.S. and European pharmaceutical firms, doesn’t mean that they are new.
For example, Russia has a long tradition of synthetic chemistry, going back over 100 years, and outsourcing in this area is a mature business. There is still a glut of qualified chemists looking for work resulting from the collapse of the Soviet Union. Moscow itself is a major center for drug discovery chemistry, with a dynamic environment. And since scientific English is taught in most advanced universities, the management, if not the chemists, speak English. According to our research, Russian CROs are particularly good at making building blocks and creating libraries. The top three CROs in the business (ChemBridge, ChemDiv, Asinex) are integrated Russian-U.S. operations and together employ more than 500 chemists.
Clearly, China is booming. In the filed of chemistry, China has benefited from an influx of qualified returnees (U.S.- and European-trained chemists), a solid entrepreneurial spirit, and a good deal of government support ranging from direct funding to the creation of “science centers.” While IP protection remains a concern for many potential clients, China’s WTO accession and new IP protection laws are signaling a more reliable environment. Also emerging in China are Western standards of management and a plan to integrate all elements of drug discovery and development work, with the strategic goal of creating a domestic pharmaceutical industry by using skills and technologies learned and acquired from Big Pharmas abroad.
CROs in India are experiencing exciting growth. They offer a multitude of advantages over their counterparts in China. The offer solid chemistry skills with tens of thousands of new graduates entering the workforce each year, all of whom are English-speakers, low labor costs, familiarity with Western business practices, and lots of experience in making compounds and chemistry processing. India now boasts 75 FDA-approved manufacturing sites. India, too, has dealt with many of the IP problems of the past with the signing of the WTO agreement, and its domestic pharmaceutical business (with big names like Cirra, Dr. Reddy, Matrix Lab, Jubilant, Biocon, Glenmark, Ranbaxy, and AuroBio—some of which offer CRO services as well) clearly marks India as a place where Pharma can do business. The transparency of the economy (required disclosure of company info, on-line business periodicals) and free-market orientation also make it more attractive than some of the alternatives.
Even if Russia, China, and India are “hot” right now, there are still huge advantages to using a domestic CROs over those off-shore. Travel to Asia is difficult, expensive, and inconvenient. Sourcing materials domestically is also easier and more accountable. Given that communication and management involvement are keys to success, the distance can be a big barrier. Teleconferencing to Asia is no substitute for visits to CRO, and language and cultural differences make communication challenging. There are also few remedies if Asian CROs fails to deliver, and perhaps still weighing heavily on clients’ minds are the nagging IP issues exacerbated by the fact that Asian CROs (such as those in India) are also pharmaceutical companies and potential competitors.
However, we do not feel that this Either/Or choice is the future of the market. There are Both/And options in the offshoring/onshoring debate. Some U.S.-based CROs are subcontracting to Asian CROs or setting up their own operations in Asia, offering customers a choice of where they want work done or even where they want specific parts of the work done to maximize efficiencies and minimize risks. It is likely that an amalgam of business relationships will eventually fill in the gulf that currently separates the two choices.
According to Kalorama’s soon-to-be published 2nd edition of Outsourcing in Drug Discovery, the future for discovery chemistry suppliers is bright. Discovery phase outsourcing generally represented only about 10% of research spending but will climb to nearly 25% by 2008. While not yet as mature as the drug development outsourcing sector, which garnered approximately 42% of development spending, discovery is quickly becoming a standard practice and a viable industry.
The truth is outsourcing of discovery phase work may still be just an important luxury for Big Pharma, but it is an absolute necessity for biotechs. The issue is no longer whether to outsource or not, it’s what to outsource, and the critical determination is how much speed is gained by outsourcing a project. Costs remain secondary to the amount of time saved by employing a strategic outsourcing program.
Big Pharmas are developing metrics to assess track records of their CROs. Cost, speed, quality, results all factor into these metrics.
In dollar terms, chemistry is the largest discovery outsourcing segment, representing more than $1.6 billion in 2004. It has been a slower mover, when compared to the exploding biology, screening, and lead optimization segments, but steady growth in the 10% range will push the chemistry services market past $2.3 billion in the next three years (see Figure 1). We’ve seen some accounts that put the growth in the 20% to 25% range, but Kalorama believes that these are overly optimistic and fail to take into account factors like the price pressures that overseas suppliers will exert on the market.
The bottom line is that double-digit growth is nothing to sneeze at, and with the market as fragmented and ferocious as it is, there are opportunities all over the place. The top three suppliers worldwide hold only 15% of the market combined, according to our research, so there is a potential for firms to acquire share at a rate faster than the market is growing and boost their growth to the optimistic 25% range and beyond.
Steven Heffner is the publisher of Kalorama Information, a NY-based publisher of market research in the life sciences. Kalorama’s Outsourcing in Drug Discovery, 2nd Edition, is due out November 15, 2005. For more information visit www.kaloramainformation.com.