Biopharmaceutical companies are under immense pressure to improve their R&D productivity. In response, they have increased their portion of outsourced R&D spending on contract research services — in such areas as drug discovery, preclinical and clinical — in recent years. Cost and time improvements are the key benefits companies have tried to achieve by outsourcing preclinical research to CROs. 

GBI Research found five major reasons behind the outsourcing of preclinical studies and development activities:

• Achieve lower costs
• Improve speed and flexibility
• Minimize risks
• Focus on core competencies
• Access technology, facilities, equipment and/or expertise

The relative importance of these reasons differs among pharmaceutical companies, depending largely upon their size. Large pharmaceutical companies generally tend to focus on factors such as cost, speed/flexibility, risks and core competencies, while small and medium-sized companies are generally driven to outsource in order to gain access to technology, capacity, equipment and/or expertise.

Global Preclinical Outsourcing Market

GBI Research estimates that the global preclinical outsourcing market was worth $3.8 billion in 2009, and is expected to grow at a CAGR of 11.2% to reach $7.9 billion by 2016. Key growth drivers in the outsourcing market include increasing R&D expenditures, cost advantages in Asian countries with respect to preclinical R&D, and laboratory animal requirements. However, flattening demand for outsourcing toxicology services and difficulty acquiring an experienced talent pool may hinder preclinical outsourcing market growth in the future.

A study of 10 major countries that are major sources of preclinical outsourcing suggested that spending on preclinical outsourcing is increasing every year. In 2009, total outsourcing spending accounted for 13.8% of total preclinical spending, with in-house spending accounting for the remaining 86.2%. With significant cost savings associated with the outsourcing of preclinical research, global pharmaceutical companies are increasing the share of outsourced preclinical research as a percentage of overall preclinical research spending. Countries such as India and China are able to provide a cost advantage of 50% to 60%, making them attractive destinations for preclinical research outsourcing. 

In future, with the increasing cost of bringing a molecule to market, it is expected that pharmaceutical companies will increase outsourcing even further.

The U.S. accounted for the highest share of preclinical outsourcing spending of the 10 countries considered in this study. Of the $3.8 billion of preclinical work being outsourced, the U.S. leads with a 73% share, followed by France, the UK and Germany, accounting for 6%, 6% and 5%, respectively. 

According to PhRMA, R&D spending on pharmaceuticals in the U.S. has increased from $21.9 billion in 1996 to $65.3 billion in 2009, while NDA/BLA approvals decreased from 53 in 1996 to 25 in 2009. The ever-increasing cost of drug development in the U.S. is driving large pharmaceutical companies to outsource preclinical work to low cost countries such as India and China. Large pharmaceutical companies based in the UK, France, Germany and Switzerland, also account for a large share of preclinical outsourcing. 

Outsourcing Trends

The pharmaceutical industry is currently experiencing intense price competition among market participants. Externalization of core expertise, functions and activities relating to the early stages of drug discovery and development, in particular preclinical R&D activities, has gained an increased level of importance in the modern pharmaceutical industry. In such a scenario, the following trends have been observed in the current preclinical outsourcing landscape and are expected to shape that landscape in future. 

Strategic Partnerships and R&D Collaborations

CROs play a key role in meeting the challenges faced by pharma’s R&D departments. With an increasing number of challenges in early clinical discovery and development, the industry is seeking to enhance partnerships with CROs in order to further improve results. 

The partnership business models between pharmaceutical companies and CROs have evolved during the last number of years, and are now based on an analysis of core competencies. Fully integrated and functional business models are the two major preclinical service models in today’s outsourcing market. For example, Jubilant Biosys Ltd. entered into a discovery and development collaboration with Endo Pharmaceuticals, a U.S.-based pharmaceutical company, in June 2009. The objective was to develop a portfolio of targets in the area of oncology, with particular focus on delivering preclinical candidates that could be selected for joint clinical development. 

In 2010, many pharmaceutical companies extended their strategic partnerships and research collaborations with CROs. Such long-term deals have increased focus on capitalizing on core competencies to build strong relationships, rather than meeting immediate targets. 

CRO Capacity Concerns

Many CROs are currently facing capacity concerns due to over-expansion in an anticipation of downsizing of internal capabilities by pharma and biopharma, which would result in increased outsourcing utilization. Due to over-expansion, CROs are facing significant challenges to best utilize their existing and new facility space. Therefore, a number of CROs are consolidating their facilities by closing additional facilities. 

Optimizing existing capacity to conduct preclinical studies for clients, rather than constructing additional capacity in anticipation of future demand, has become an important trend in the preclinical outsourcing market.

Innovative Management of Outsourcing Projects

Pharmaceutical companies are using preclinical outsourcing as a strategic tool, assigning the management of outsourcing projects to dedicated groups that are responsible for finding CROs, evaluating them and managing the outsourced projects. For example, Merck established External Basic Research, a virtual research site, in which all laboratory work, both medicinal chemistry and supporting biology, is carried out by external partner CROs. The ultimate goal is to deliver 25% of Merck’s preclinical pipeline through this model.

J&J plans to use a similar model to transfer as much as 40% of its preclinical candidates to the next clinical development stage. In addition, BMS and Wyeth have formed significant partnerships with companies in India, and have their own employees on site to manage these collaborations. Eli Lilly has used this model in both China and India, and an increasing number of pharmaceutical and biotechnology companies are likely to follow this management system in the near future.

Strategic Shift in Funding and Payment Patterns

Funding and payment patterns for preclinical outsourced projects with service providers have experienced a drastic change in recent years. A sponsor-CRO business model evolved from the traditional Fee-for-Service (FFS) model, where the client makes payments to the service provider for individual services, to a Partnership Model, and then to a Full-Time-Equivalent (FTE) model, where the CRO provides the client with a project team dedicated to the client’s studies, for a specified period of time, at a fixed rate per FTE unit.

The effectiveness of the FTE model depends on the nature and scope of the preclinical work, timelines, the duration of the studies, and the level of commitment from the partners in investing in the business relationship. Under an FTE agreement, both sponsor and CRO work together to manage the resources relevant to the outsourced work. 

Recently, the risk-share model, in which projects are jointly funded by both the client and the CRO, has grown more popular. This funding model involves equity partnerships between large pharmaceutical companies and their CRO partners. These partnerships may vary depending upon the needs, skill sets and capacities of the partners. Eli Lilly (with Covance) and BMS (with Syngene) have engaged in this kind of business model.

Emergence of ‘One-Stop Shops’ and ‘Boutique Providers’

Lately, ‘one-stop shop’ CROs, where a single CRO provides the entire range of preclinical services, have changed the way pharma companies outsource preclinical research to CROs. Large CROs already offer almost every component of preclinical research, from early drug discovery to process chemistry formulations, preclinical ADMET testing and animal model development. Some CROs have also begun to offer clinical trials in addition to other services.

On the other hand, ‘boutique providers’ are another type of CRO, usually consisting of a group of individual consultants, such as scientists, retired professionals or healthcare specialists, with a certain expertise, often in areas such as pathology, bioanalytics, medicinal chemistry, biotechnology and laboratory automation. These consultants develop a business providing services in the preclinical outsourcing industry, based on the provision of high quality and excellent customer service.

Future Outlook

The global preclinical outsourcing market is expected to strengthen in the coming months and years due to drying pipelines, the increasing cost of launching new drugs, the patent expiries of leading brands and cost advantages associated with outsourcing. While Eastern Europe, India and China are the major destinations for preclinical outsourcing, the U.S. remains the largest customer for CROs in these countries. The worsening situation of the US economy is expected to cause significant reductions in the government’s healthcare budget, leading to severe financial constraints for pharmaceutical companies. The U.S. healthcare reforms, an increasingly favorable market for generics, and other financial pressures are making it difficult for pharmaceutical companies based in the U.S. to remain profitable. 

However, significant change has been witnessed in the way preclinical outsourcing is conducted, with new and more collaborative models continuously evolving in the preclinical outsourcing landscape. In the future, outsourcing contracts are expected to be more long-term and collaborative in nature, and will focus on capitalizing on the strengths of both partners and optimizing the cost structure of preclinical research. 

Jay Mehta is a pharma analyst at GBI Research. He can be reached at jmehta@gbiresearch.com. GBI Research is a business information company providing global business information reports and services. GBI’s team of analysts, researchers, and solution consultants use proprietary data sources and various tools and techniques to gather, analyze and represent the latest and the most reliable information essential for businesses to sustain a competitive edge. For more information, visit www.gbiresearch.com.