In 2008 there were very few global contract research organizations (CROs) and their expertise was not on par with the in-house research and development (R&D) capabilities of pharma companies, which led to less outsourcing adoption in pharma R&D. But over the past five to eight years, CROs have scaled up their expertise, which has led to pharma firms re-strategizing R&D outsourcing in strategic ways with increased focus on full time equivalent (FTE) type engagement for cost savings. Major CROs like Quintiles, PPD, Covance and Charles River, among others, are forming strategic partnerships with pharma due to the decline in R&D productivity and longer drug development times. Pharma companies are looking for more R&D externalization for cost savings with volume-based outsourcing through FTE engagement.

In today’s competitive environment, pharma companies need to focus on their core competencies in R&D. Pharma companies are focusing increasingly on outsourcing R&D activities to CROs as a way to boost R&D pipelines productivity. The global drug discovery market for outsourcing was up 15% from last year. Pharma is engaging with CROs on a long-term basis strategically and looking for outsourcing high volume of work throughout drug discovery and development. In 2013 the global spend on R&D was approximately $137 billion and is expected to reach $150 billion by 2018. The annual growth rate of R&D from 2013 to 2018 would be a mere average of 1.5%. The Global CRO market is estimated at $27 billion in 2014 and is expected to grow at a CAGR of 6.6% to reach $25.5 billion by 2017. This is due to increased outsourcing (>50%) seen from Pharmaceutical and Biotechnology companies. Between 2010 and 2012, rising development costs and greater regulatory scrutiny led to more strategic partnerships between sponsors and CROs to combine their scientific and operational knowledge.

Companies may use several engagement models for service delivery. A new approach to this type of relationship between the pharma company and the CRO is the FTE agreement, where a pricing model offers an attractive economic plan for pharma clients looking to consolidate R&D spending in the future. Selecting this outsourcing alternative is generally based on a long-term commitment where the risk and rewards are shared by both the sponsor and contract service provider. In the FTE contract model, a CRO will provide a client with a project team dedicated to their studies for a specified period of time at fixed rate per unit. The FTE engagement covers all required aspects of service such as quality, procedures, training, supervision, specialized task, etc. for completing the client tasks in the decided timelines, wherein a single document for multiple studies is sufficient for this partnership between pharma and CRO.

Efforts to advance drug development have greatly increased the frequency and value of strategic partnerships tied to globalization and collaborative research. The majority of R&D strategic partnerships are happening between large/mid-sized CROs and pharma companies. For example, a large pharma company partnering with ICON for clinical trial program initiation, site management, data management, trial setup, drug logistics, medical writing and quality assurance. This is a strategic partnership that illustrates how R&D strategy can align with the structure of CRO relationships. Pharma companies are looking for CROs that provide integrated R&D services throughout drug development, leading to an increase in M&A activity among CROs to become a preferred or sole service provider in for R&D outsourcing. Most of the mega mergers of late are mid-sized CROs joining forces to offer broader services on par with global CROs, for example, PRA’s merger with RPS last year, forming the new entity PRA International, which is among the top five CRO’s globally, having presence in 50 countries and offering a broad array of services.

The FTE Trend is Growing
The increase in strategic partnerships between pharma and CROs is also increasing FTE adoption because of the following market dynamics:

• The on-going expansion of CRO capabilities in various areas of the drug development process
• Pharma looking for long-term relationship with a CRO to resolve project goals
• R&D program including various technical activities with large scope and volume of work
• Full service CRO capabilities for multiple compounds at various stages of R&D
• Projects having different types of requirements, expertise and instrumentation that’s not available at the sponsor site

Stages Of development
In the discovery state, outsourcing of chemistry services is high. Several pharma sponsors are adopting in-sourcing FTE models for chemistry services. In the future, biology services will be outsourced less (~20%) and with an increase in outsourcing penetration, there will be a shift to the FTE model.

At the preclinical stage, large CROs are providing end-to-end preclinical services with sponsor dedicated resources under strategic partnerships, such as Eli Lilly & Covance. In the future there will be an increase in in-vivo toxicology outsourcing especially for long term partnerships, which will result in higher adoption of FTE. 

At the clinical stage, bioanalytical and analytical testing volume of sample outsourcing is high, and pharma is engaging in-sourcing and offshoring dedicated FTEs. The e-clinical bundled services outsourcing to offshore locations like India is also high, with dedicated resources for long-term engagement. In the future, product development services will be increasingly outsourced as pharma looks for time and cost efficiency. Services such as formulation development and drug delivery technologies are likely to become FTE because of intellectual property related criticality. Also, adaptive clinical trials can see FTE adoption due to complexity in operation and implementation.

Entering the regulatory stage, CROs provide support to pharma for multiple filing deficiencies or compliance issues regarding complex and challenging synthetic or manufacturing processes. In the future, regulatory delivery services like RIMS (regulatory information management system), pharmacovigilance and regulatory writing will shift more towards FTE adoption.

Case Study
In a FTE pricing model for a long-term analytical testing program with a team and multiple commercial products, a cost saving of up to 20-38% can be achieved mostly in the form of indirect cost savings as the bio/pharmaceutical companies would be charged only for the resources and time used during the outsourcing program.

One client was able to realize cost savings up to 25% annually through 12 FTE engagements divided into in-sourcing and off-shoring. The savings came from lighter administrative and management costs that the client was handling earlier indirectly in a fee for service engagement model.

More long-term partnerships between large pharma companies and CROs in India having dedicated FTE for clinical supply manufacturing, packaging, and labeling services are developing. The CRO will assemble the appropriate employees and the sponsor will decide the work order, which will have details about product type, batch volume, formulation strength, condition, etc. Following this, the sponsor will negotiate on the number of hours required for the completion of the order.

Drivers of FTE Adoption
Goal Alignment
Sponsor work flows are consistent and volume is sufficient to completely utilize the FTE staff. It will allow sponsor internal staff to focus on unforeseen and changing priorities for future planning.

Contract Flexibility
The CRO will maintain dedicated resources for the sponsor, which allows their internal staff to focus on unforeseen and changing priorities without tapping into the FTE team, which allows for revised planning to reflect change.

Management & Staff Cost
The dedicated resources can be simply managed and their activities efficiently scheduled to meet the short- and long-term project requirements. It’s a cost effective alternative over the long term by taking advantage of flexibility in labor and capital needed to support internal resources.

Increased Productivity
The recruiting, training and supervision is being handled by the CRO. Also the familiarity with project details and expectations of the sponsor provides added flexibility in instances where budgeted internal headcounts are restricted.

Constraints of FTE Adoption
Low Volume /Short Term Contract
If the volume is not constant, this would result in a waste of resources for the sponsor. It’s not efficient for small numbers of FTE’s; regular involvement is needed from the sponsor to co-manage the collaboration and also to get involved in the manufacturing and development schedules.

Insufficient Expertise Level
The dedicated FTE member(s) may not have the skills needed to tackle a particular project, which can lead to delays until other CRO staff can be brought into the project.

Premature Contract Cancellation
The upfront CRO investment in people and equipment is typically six to eight months for setting up an FTE program, so premature cancellation of contracts presents a financial risk.

High Employee Turnover
The new staff has to be trained by the CRO and made available quickly so that output is not affected by employee departures, which leads to investment from CROs.

Inaccurate Project Cost Assessment
Output per person / per level is often more important than number of FTE, and can lead to inaccurate assessment of true cost when basing efficiency purely on FTE headcount.

The FTE pricing model is a very attractive economic plan for pharma clients looking to consolidate R&D outsourcing, as it allows organizations to use only the resources they need at any given time and hire experts that they might not employ in-house. With pharmaceutical companies narrowing their list of CROs to a select few in pharma R&D outsourcing, it’s expected that the FTE program will increasingly become the contractual agreement of choice in the future. The pressure for pharmaceutical companies to increase the number of new drugs in their pipeline continues to escalate, and having strategic partnerships with CROs are going to play integral part in overall pharma growth, providing consistent service quality and timeliness in long term engagements.

Numerous long-term partnerships are already being solidified in pharmaceutical outsourcing, and further integration of R&D services in the future will lead to increases in strategic partnerships between CRO and sponsor through increased adoption of FTE. 


References

1. www.contractpharma.com/issues/2000-04/view_features/full-time-equivalent-agreements
2. www.ncbi.nlm.nih.gov/pmc/articles/PMC3148616/
3. www.strategyand.pwc.com/media/file/Strategyand-Partnerships-Pharma-Industry-CRO.pdf
4. www.ppdi.com/~/media/Files/PPDI%20Files/Expert%20Community/Articles/Contract-Pharma-2013-June-CRO.ashx

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Sarabjeet Singh Sharad is lead analyst with Beroe Inc., a global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. He specializes in tracking various areas of drug development and has worked on multiple projects for many pharma clients in different categories such as clinical, preclinical and product development services.