Drug Discovery Services

Re-Engineering R&D

By Mark Sawicki, Ph.D.

Current trends in pharmaceutical and biotechnology business practices indicate that they are facing the same reality that many other industries have already embraced; they must utilize outsourcing partners as an integral aspect of their R&D engine. Pharmaceutical leaders are coming to the realization that outsourcing has the potential to deliver excellent business value beyond simple cost savings and operational flexibility.

An observable outcome of this shift in ideology is the major realignment of even the largest pharmaceutical companies. This now-commonplace occurrence is an inevitable effect of the changes in strategic implementation of the re-engineering of their R&D pipelines.

The outsourcing paradigm supporting R&D continues to transform rapidly to support industry needs, a pattern seen in other industries such as IT, banking, and manufacturing. Early outsourcing decisions were made on a tactical level, primarily to leverage cost out of low risk, large scale functions. In the pharmaceutical industry this included clinical support, manufacturing, as well as large scale screening library synthesis. This tactical approach was easy to measure and proved to be a low risk means of removing fixed expenditure from the drug discovery process. These early approaches have matured to include capacity management, flexibility, and the externalization of non-core functionality, which still have a focus on cost containment.

The pharmaceutical industry is now realizing that, as in other industries, “the traditional view of outsourcing as a tactical, cost takeout solution can spell failure in today’s intensely competitive, dynamic business climate.”¹ This is apparent in the pharma industry as key decision makers have indicated the need for more strategic, value-creation approaches to support their pipelines. “Presently there is intense competition within the CRO industry for outsourcing and drug discovery services, and the expectation is that they will deliver problem solving skills and innovation in both chemistry and biology,” said Robert A. Goodnow, Jr., Ph.D., head of Global Medicinal Chemistry Outsourcing at Hoffmann-La Roche Inc. It appears that the industry is looking more toward outsourcing partners not only for the cost containment and flexibility they afford the organization, but for opportunities for collaborative innovation, new ideas, and fresh perspectives. In fact, dozens of fully integrated drug discovery relationships between pharmaceutical and contract research industries have been announced in recent years.

Said Youssef Bennani, Ph.D., vice president, Drug Innovation at Vertex Pharmaceuticals, “R&D fragmentation is real, and is here to stay.No company can/will survive on internal R&D, operating in the old fashioned way. This is primarily driven by cost, but also by infusion/access to external talent. As such, deals should evolve into collaborative, cost-sharing and revenue-sharing models as incentives to get the ‘enablers’ to contribute fully.”

Such fundamental changes in the approach to outsourcing within the pharmaceutical industry create new and difficult issues in determining the value of such relationships. Success in these circumstances cannot only be measured by specific performance metrics, but now must contain consideration for innovation and value creation, factors that take years, not months, to measure. In addition, such support is increasingly required to be conducted on a truly global stage. It now seems that the pendulum is swinging from centralized outsourcing strategies that are Asia-centric to a more balanced regional strategy that balances outlay, speed, location, talent availability and capability. An outsourcing partner must be able to provide various price competitive engagement models by both geography and capability; moreover, they need to perform seamlessly from the client’s perspective. This includes not only the integration of multiple cost centers located in different geographies, but increasingly the ability to conduct all aspects of the drug discovery pipeline, including chemistry, biology, and ADMET/PK services with proficiencies comparable to the partner themselves. In order to succeed at this, outsourcing providers must have a level of global maturity that is in alignment with their clients’ expectations. They must have expertise and demonstrated success at delivering comprehensive drug discovery services on a global level.

The change toward an all-inclusive global outsourcing model has created an unexpected burden on the companies soliciting such support infrastructure. Support of external programs requires stakeholders to be able to adequately manage and direct the overall relationship, especially if the outsourcing partner has to grow and develop certain assets or competencies to effectively execute and deliver on all aspects of the stated objectives, or if multiple partners are used to complete certain objectives. In particular, for global operations, both technical and logistical considerations must be well managed and understood by all parties. The contract partner must be able to effectively manage technical workflow as well as logistical considerations including available talent, training, governmental regulations, import/export limitations and training, to name a few.

The competing demands of such situations have created conflicting interests for internal and external pipelines within many companies. Often times, external programs have competed for resources with internal priorities (both material and manpower), creating the need for alternative management and support structures. Many pharmaceutical and biotechnology companies have now created entire divisions dedicated to supporting external programs, and have allocated an ever-increasing percentage of their operating budgets to support external relationships, in some cases approaching 50% of their research budgets. This trend can only continue as the scope and complexity of the external workflow continues to increase. In addition, many of the programs that these external divisions manage are transitioning from tactical to strategic partnerships, and the contract partners supporting such relationships are starting to become a key part of the workflow and decision-making process. In these situations, it is absolutely critical for the contract partner to demonstrate “value creation,” which is increasingly measured as the ability to demonstrate a tangible probability of being able to contribute to — or have a track record of success in contributing to — the clinical pipeline.

It is relatively easy to obtain a lucid picture of the current state of utilization of contract research by the industry. What is more interesting, however, is trying to predict how these resources will be utilized by the industry. Clearly, a number of trends are starting to emerge. Pharmaceutical companies are looking to become more nimble through the divestiture of fixed assets, and in certain instances, entire segments of their drug discovery engine. Reduction of fixed costs seems to be a recurring theme. A few recent examples of this are the divestiture of Eli Lilly’s drug development service group to Covance in which Covance purchased Lilly’s early drug development campus in Greenfield, IN, and the Peakdale agreement with Pfizer in which Peakdale supplies custom synthetic chemistry services to Pfizer on-site at the company’s laboratories in Sandwich, UK. These two examples demonstrate that pharmaceutical companies are using the strategy of outsourcing to improve cash flow, and with the expansion in external support budgets, using the capital to generate a larger number of revenue creation opportunities. It could also reflect a trend observed in other industries in which “instead of waiting for mergers and acquisitions to help make gains, companies are turning to outsourcing to reshape themselves.”¹

In instances where pharmaceutical companies divest entire aspects of the discovery pipeline to others, or utilize contract partners to augment or accommodate capacity needs in a strategic manner, it is clear that the contract partner that steps in to fill the gap must be able to act as a “Translational Integration Partner.” In other words, the outsourcing partner’s capabilities and skill sets need to be commensurate with the talent and facilities that the pharmaceutical company could have placed on the program if it hadn’t been outsourced, and they must be able to integrate with the partner’s remaining infrastructure in a seamless manner. Many CROs are very familiar with such a concept, having done this for the biotechnology industry for years.

Another important trend that seems to be emerging is the trending of outsourcing patterns to companies that have facilities in locations that provide significant research or tax credits through government sponsorship programs. Such incentive programs have created a demand for R&D infrastructure in Singapore, Canada, and certain areas of the EU, as well as China. Decisions regarding outsourcing placement are increasingly taking governmental support into account. It is likely that government involvement in the industry will increase in coming years, particularly as a result of new regulations and managed care policies emerging in the U.S. One could envision drug discovery programs one day soliciting buy-in from government and insurance industries long before taking a product to market; in fact, one could even envision the insurance industry supporting certain drug discovery activities in return for cost containment on the eventual marketed product.

Regardless of the eventualities of the various drivers related to outsourcing trends in the industry, the demand on the contract research industry will likely only continue to increase. Contract research companies must be able to proactively respond to this demand, those unable to do so could be potentially subject to dissolution or acquisition. Many companies are already reacting to this demand by aggressively expanding their offerings to support a broader footprint of the R&D pipeline under one roof. This trend seems to be supported by an increase in the complexity of programs supported by contract partners.

Besides being able to provide a comprehensive platform of services, contractors must be able to provide such services on a global level, supporting a wide diversity of need profiles. Successful execution of such a platform includes the need for assets in the U.S., EU, and Asia, and the ability to provide the quality and speed required balanced with costing efficiencies. Due to the variability of available talent globally, particularly within supporting biology, the only solution to be able to provide such assets is having a global footprint. It is likely inevitable that contraction of the industry will occur in response to these needs. In the near future, one can expect an increase in acquisitions similar to those listed below as contract research partners become increasingly able to provide a comprehensive suite of global services and are able to truly work as a Translational Integration Partner with their pharmaceutical client base. Recent acquisition activity in this space includes:

• Ricerca acquisition of MDS Pharma Services
• Galapagos acquisition of Argenta
• AMRI acquisition of Excelsyn Inc.
• PPD acquisition of BioDuro

One thing is certain in the pharmaceutical industry: change is inevitable and will continue. The contract research industry must adapt to this change if it is to continue to grow and provide a global, reliable asset that has the ability to create value for its partners. Value creation can be defined by the ability to increase assets that their partners have to generate commercial value, or the direct ability to demonstrate value creation through the utilization of a contract partner to facilitate pipeline growth while managing cost. Contract partners that can adapt and provide these assets on a global level, with their pharmaceutical partners that are able to effectively evaluate and incorporate such assets into their R&D pipeline, will be those that will lead the way into the future.

References

1. The outsourcing decision for a globally integrated enterprise: from commodity outsourcing to value creation. IBM white paper 2008

Mark Sawicki, Ph.D., is senior director, Business Development – Discovery at AMRI. He can be reached at mark.sawicki@amriglobal.com.