Opportunities Beyond Cost Savings

Maximizing the Strategic Value of Global R&D Outsourcing

By Partha Ghosh and Kimberlee Luce

With the globalization of the pharmaceutical industry, most of the arguments for research and development (R&D) outsourcing have focused on the cost-saving benefits that U.S.-based pharmaceutical firms can enjoy if they outsource their R&D. Much less discussed are the more strategic, value-enhancing benefits of global R&D outsourcing — new drug discoveries, patient recruitment, new market opportunities unique to local environments and even potential new sources of funding. Indeed, in an industry where R&D expenses comprise roughly one-third of total costs, we have reached a point of inflection where R&D management has to be viewed with a fresh perspective.

The trend towards greater global outsourcing of the R&D function within pharmaceutical companies is well-documented. In just the past few months, several large multinational pharmaceutical companies have announced plans to double if not triple the percentage of the work that they currently outsource. For example:

• Pfizer, which currently outsources 15% percent of its R&D to other countries, announced in late November that it plans to double that amount.
• AstraZeneca and GlaxoSmithKline have recently announced plans to dramatically increase their R&D outsourcing activities.
• Merck has announced a partnership with India’s Piramal to conduct preclinical research.
• Eli Lily has entered into an agreement with China’s Hutchinson Medipharma to conduct R&D activities in the area of oncology.

The market for overseas R&D outsourcing is believed to be close to $12 billion. At the current annual growth rate of nearly 15%, the market for overseas R&D outsourcing in 2014 could be as much as $33 billion.

The primary reason for this increase is the desire to reduce costs. Estimates of cost savings range from 30% to 70% depending on whether one is talking about drug discovery or clinical trials. Shorter product life cycles and the increasingly tight regulations surrounding drug development in the U.S. have also contributed to this growth in outsourcing.

The primary countries to which this business is being outsourced are India and China, as well as Singapore, South Korea, Brazil, Mexico and Israel. All these countries have scientific expertise, a cost advantage (due to lower wages and in some cases significant tax incentives) and the infrastructure needed to successfully perform pharmaceutical R&D activities. Of these countries, the most dramatic growth has been in India and China, particularly in the area of clinical trials. For example, the number of clinical trials conducted by non-Indian pharmaceutical companies in India has surged from 40 in 2002 to 200 in 2005, a 500% increase in just three years. The CRO market in India overall is believed to be expanding at more than a 22% CAGR.

Uncovering Strategic Benefits

As pharmaceutical companies begin to shift more and more of their R&D work to other countries, they have begun to appreciate the other benefits that can be realized in addition to the cost savings. For example, in several cases, significant new research processes as well as new drugs have been discovered just by virtue of the fact that the R&D facilities have been located in other countries. In Panama, a new test for the identification of anti-malarial compounds was developed when investigators used fresh plant extracts from Panama’s biologically diverse natural environment to develop the screening test. Without access to Panama’s wide array of plants, the test might otherwise have not been developed. Similarly, clinical trials in India for a drug to treat visceral leishmaniasis led to a new treatment protocol when certain local Indian patient populations were found to be resistant to sodium stibogluconate, a common treatment for that condition.

In addition, by conducting clinical trials in other countries, pharmaceutical companies often have greater access to the patient populations they are trying to serve, as well as the doctors and treatment facilities that deal with these diseases on a regular basis. For instance, the incidence rate for many type of cancers, such as stomach cancer, are much higher in developing countries than in developed countries. Thus, it can be much easier to recruit and enroll the number of patients needed to conduct clinical trials in a developing country rather than in the country where the pharmaceutical company is located, assuming it is in a developed nation. Moreover, pharmaceutical companies have greater access to the doctors and hospitals that treat these diseases day-in and day-out and thus possess a wealth of information, some of which is undocumented, about the success and failure of different protocols.

When outsourcing the R&D function to other countries, pharmaceutical companies also can gain greater access to laboratory animals used for preclinical studies that may not be common or readily available in the U.S. For example, rhesus monkeys — which have contributed to the discovery of vaccines for polio and yellow fevers and are the most widely used subject for AIDS research — until recently were only found in South and Southeast Asia. Furthermore, when a shortage of rhesus monkeys developed in India due in part to government restrictions on their use in preclinical trials, a nearly genetically identical group was found by researchers in neighboring Nepal in order to supplement India’s declining available population.

By outsourcing the R&D function to other countries, pharmaceutical companies may also gain access to indigenous plants known to have medicinal properties for centuries, but which have never been fully developed, tested and commercialized due to lack of a local partner or restrictions imposed by national treaties. Well-known examples include the neem tree in India and Chinese skullcap in China and Russia, both known for their numerous therapeutic properties.

Finally, outsourcing R&D to other countries can provide a pharmaceutical company with access to funds that would otherwise be unavailable to it. These funds can come from local, national or regional governments, international and local non-governmental organizations (INGOs and NGOs) and foundations. Such partnerships are commonly known as public-private partnerships (PPPs) and are currently on the rise, particularly when it comes to the R&D of new drugs to treat populations and diseases otherwise neglected, such as malaria, leishmaniasis and trypanosomiasis. Without these funds, the estimated ROI in drugs to treat these diseases is considered too small to warrant a commercial investment.

As of May 2006, the Initiative on Public-Private Partnerships for Health reported that 92 PPPs have been formed since 1974 to deal with various neglected as well as long researched diseases. Seven active drug discovery projects are currently underway via PPPs thanks to The Medicines for Malaria Venture, a non-profit foundation that facilitates the formation of PPPs for neglected diseases.

Novartis has entered into several drug discovery partnerships with the WHO and others. For example, the company recently formed a partnership with the Singapore Economic Development Board in order to support research into dengue fever and tuberculosis. Using funds they both contributed, Novartis built the Novartis Institute for Tropical Diseases, which describes its mission as a “small-molecule drug discovery research institute dedicated to neglected diseases.”

Embracing Opportunities — and Challenges

In order to capitalize on these opportunities, the conversation surrounding the benefits of R&D outsourcing must broaden and focus on value-enhancement as well as the cost-cutting benefits of such initiatives. These largely unexplored benefits of global R&D outsourcing, if effectively managed, can not only speed up the R&D pipeline in a significant fashion but also uncover new paths of value creation. In short, they can have a dramatic effect on pharmaceutical companies’ pipelines, processes and, of course, outcomes for specific patient populations.

This is not to say that these opportunities are free of any challenges. Indeed, they bring a unique set of obstacles that pharmaceutical companies must be prepared to face. For example, outsourcing one’s R&D function to an overseas firm can raise concerns over whether or not the ethical guidelines that are typically followed in developed countries are as stringently adhered to and enforced in countries that lack the regulatory oversight.

Pharmaceutical firms also must be sensitive to national sentiments surrounding the use of indigenous biological resources and accusations of biopiracy. The neem tree is a prominent example. This tree is considered part of the national heritage of India and many in the country question whether it should be commercialized at all, never mind developed and commercialized for a non-Indian firm.

Outsourced R&D also raises issues about intellectual property protection when it comes to jointly developed assets. Pharmaceutical companies also worry about losing an opportunity to build the in-house skills and knowledge they need to maintain a healthy sustainable and competitive position in the marketplace.

Such challenges can be mitigated, however, with the right business model, adequate legal protection, a robust knowledge management system and an appreciation for the many value-enhancing opportunities that R&D outsourcing can provide. By embracing a broader, more strategic approach, pharmaceutical companies stand to gain much more than cost savings from their investment in R&D outsourcing.

Partha S. Ghosh is chairman of Boston Analytics, a custom knowledge services company specializing in business research and analytics. Kimberlee Luce is a vice president and co-leader of the healthcare practice at Boston Analytics. This article draws upon research sourced from a recent Boston Analytics report on the Indian pharmaceutical market, a PDF of which can be read in its entirety here.