Trends in pharmaceutical R&D outsourcing

Articles

As pressure to cut costs in the pharma industry continues, Adwait Bhagwat discusses the increasing trend to outsource R&D. R&D outsourcing involves pharmaceutical companies subcontracting parts of their R&D efforts to third-party service providers... As pressure to cut costs in the pharma industry continues, Adwait Bhagwat discusses the increasing trend to outsource R&D. R&D outsourcing involves pharmaceutical companies subcontracting parts of their R&D efforts to third-party service providers... Adwait Bhagwat

A.T. Kearney

R&,D outsourcing involves pharmaceutical companies subcontracting parts of their R&,D efforts to third-party service providers. Small or mid-sized pharmaceutical or biotech houses may use outsourcing for a number of reasons, some pharmaceutical companies want to build scale, others want to increase geographic coverage, and some want to add specific skills and capabilities. The majors – Big Pharma, often outsource parts of their R&,D value chain to improve productivity of their R&,D efforts. The overall idea is always to increase the pace of drug development, reduce cost and maintain standards.

There are two primary operating models for R&,D outsourcing. These can be categorized as (1) programmatic and (2) functional. Programmatic or ‘full service’ outsourcing involves outsourcing all of the R&,D activities related to a given study or programme to a third party. In functional outsourcing, specific R&,D functions, such as site monitoring are outsourced to a chosen service provider across multiple studies. The choice of outsourcing operating model(s) and the executive governance to implement the model(s) of choice are critical decisions for R&,D leadership teams in Big Pharma companies. Factors influencing the choice of the operating model include alignment with overall strategy, level of in-house expertise and resource availability, R&,D function’s sophistication in managing complex supplier (CRO) relationships and the maturity of the supply market for the R&,D activities under consideration.

Moving upstream

Traditionally, pharmaceutical companies have chosen to outsource non-core processes, activities or entire research programmes relating to a certain molecule or therapeutic area. Common areas of focus for R&,D outsourcing include central laboratory services, development functions such as data management, clinical supplies and clinical site monitoring.

As the market for R&,D outsourcing has matured, so the service providers have grown in terms of capabilities and scale. Simultaneously, Big Pharma is under tremendous pressure to reduce costs and become leaner. These twin factors are driving the growth in pharma R&,D outsourcing upstream in the value chain. Now, it is fairly typical for large pharmaceutical companies to outsource part of their basic chemistry research or preclinical animal studies or clinical pharmacology studies to external service providers.

 

"Big Pharma is under tremendous pressure to reduce costs and become leaner."

 

On or offshore?

Pharmaceutical companies are being increasingly global in their commercial aspirations as well as their operating footprints. Growth in US and European markets has slowed and competitive and pricing pressures have increased in the mature markets. Emerging markets are being seen as a prominent driver of top-line growth by the pharma majors. It is in this environment that R&,D activities too are becoming increasingly global. This trend has been seen not just for outsourced activities but also for work being conducted in-house by pharmaceutical companies. It is a trend seen across the pharma R&,D value chain. Consider basic research, clinical trial conduct and clinical data management as three areas to further illustrate this trend.

Several aspects of basic research and drug discovery that have traditionally been outsourced to US or Western European CROs are now being conducted in lower-cost developing countries such as China and India. This is in part attributable to significant investments in infrastructure and scientific expertise that have been made by the emerging market players. Success of initial pilot projects and good collaboration between the sponsor and offshore CRO organizations has led to increased confidence and acceptance of the global model. The business case for the judicious adoption of this outsourcing trend for basic research services has been very compelling as well.

A recent 2010 A.T. Kearney study encompassing 30 countries confirms that clinical trial conduct continues to become increasingly global. While established countries like the US and Germany continue to be highly sought after destinations for conducting clinical trials, several developing countries, especially in Asia and Eastern Europe, are catching up fast. Big Pharma as well as full-service CROs are expanding their clinical trial footprint beyond the US and Western Europe. Growing commercial interests in developing countries, better access to naïve populations, improving relationships with key opinion leaders in these countries, along with improving infrastructure and lower costs are all contributing to this trend of increasingly global clinical trials.

 

"…clinical trial conduct continues to become increasingly global."

 

As a third example along the R&,D value chain let’s consider IT enabled services such as clinical data management and programming. These R&,D services are often the first ones to be outsourced offshore. Even several established CROs have moved much of their data management activities into offshore centers of excellence (COEs). There is also increased competition from non-traditional players for these services. CROs are facing growing competition for these IT enabled services from global and developing market IT outsourcing (ITO) and business process outsourcing (BPO) service providers. These IT enabled R&,D services are a logical service offering extension for the ITO and BPO companies. Their expertise in systems, data management, analytics and programming along with sophisticated lean process discipline, proven global operating model are all capabilities that have gotten the attention of Big Pharma sponsors.

Conclusions

So what’s in store for 2010 and beyond?

Well, pharmaceutical companies are likely to continue to increase the percentage of their R&,D work that is outsourced. This trend will continue to be driven by the pursuit of improving R&,D cost efficiency as well as effectiveness. Beyond generating one-off savings, the emphasis will move to streamlining the outsourcing operating model, risk management, complexity management and lean process improvement. Doing more R&,D with less, and smartly.

Given the potential for impact of outsourcing and offshoring on pharma R&,D and the aggressive progress being made by some competitors, this topic is increasingly being coordinated and driven at the highest levels of the R&,D organizations in Big Pharma. The alternative – uncoordinated and fragmented implementation of R&,D outsourcing results in proliferation of operating models, sub-optimal supplier (CRO) relationships, inefficient processes, slow decision making and below benchmark cost savings. Sub-optimal pharma R&,D outsourcing strategy and implementation can and will lead to loss of competitive advantage.

About the author:

Adwait Bhagwat is a principal at A.T. Kearney, the global strategy consulting firm www.atkearney.co.uk.

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