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Apr 30, 2012

Surveys Point to Biopharmas Following the Money by Outsourcing More

CROs are playing a growing role in R&D, and companies are also offshoring clinical trials.

Surveys Point to Biopharmas Following the Money by Outsourcing More

Biopharma’s growing appetite for cost-cutting is prompting more firms to outsource R&D operations to third parties in the U.S. or overseas. [© walex101 - Fotolia.com]

  • The lure of lower costs, and to some extent the need to navigate the growing jungle of regulations, will have more biopharma companies continuing to outsource R&D operations to third parties in the U.S. or overseas.

    A study released in December by EquaTerra (soon before its acquisition by KPMG) found growing demand for outsourcing new drug R&D including clinical trials and drug manufacturing, in addition to back-office functions long since farmed out to third parties such as call centers. Not surprisingly, cost savings is key. Companies are looking to redirect capital to more strategic activities and improve shareholder return-on-investment.

    Biopharma’s growing appetite for cost-cutting can be seen in two study results. Of pharma organizations that outsourced at least one function—IT, finance/accounting, HR, procurement, or call center/customer relationship management—39% said they plan to expand outsourcing into new business units or geographies, versus 30% overall. And no biopharmas planned to eliminate outsourcing, compared with 2% overall.

  • Outsourcing R&D

    “You can automate certain activities like finance and accounting and HR, more than you necessarily can with R&D,” Stan Lepeak, director, global research, KPMG Management Consulting, told GEN. Lepeak and Vicki Phelan, pharmaceutical industry practice lead with KPMG’s Shared Services and Outsourcing Advisory practice, both noted that R&D has historically been viewed as a crown jewel of operations, and thus companies have traditionally been reluctant to engage third parties. As a result, many companies have yet to reach the full potential of outsourcing in terms of maximum savings.

    However, R&D outsourcing is increasingly taking place, and for reasons that go beyond cost, Phelan told GEN: “Organizations now, both within SG&A as well as in R&D, have taken this best of breed approach. When you go to a best of breed approach, it is more costly. But you get a higher quality product. That’s where R&D leaves a lot of money on the table,” Phelan said.

    A Booz & Co. survey of BayBio members also found growing interest in outsourcing more R&D activity to CROs. The survey found two reasons for this beyond cost-cutting: to comply with increasingly complex regulatory requirements and to access new patient samples in large enough numbers needed for diseases thinly spread across a population.

    U.S. companies are increasingly being directed by overseas regulators to include local populations during their clinical trials, Matthew Le Merle, a partner based in Booz’s San Francisco office, told GEN. “We do expect that for major populations—China, India, and other very large population bases—you will need to be doing more local trial activity. And that, in turn, does imply that if you don’t have the ability to do trials in those countries, that you need to find a partner that can.”

    Beyond clinical development, Le Merle added, “most approvals require some dialogue and some back-and-forth, and it’s very hard for a U.S.-based English speaking company to make sure they’re really on top of all of the questions as they surface.”

  • Types of Partnerships

    More often, he said, outsourcing companies are not biopharma giants but early-stage companies looking to stretch scarce capital and plug knowledge gaps. As they grow and bring products to market, they generate the revenue that lets them at least think of offering some operations themselves. And if they grow into biopharma giants, Le Merle added, they can plug pipeline holes by snapping up smaller life science companies. “That cycle is one that we’ll see continue to play out.”

    Le Merle cited Gilead as one such company. The company spent $10.8 billion to diversify beyond HIV treatments by acquiring Pharmasset, in a sale completed in January. Gilead outsources clinical trials and much of its manufacturing but also owns many manufacturing facilities worldwide and has begun expanding its Foster City, CA, headquarters to accommodate more R&D. Yet Gilead’s latest R&D project, announced April 19, has the company turning to Adimab, which will identify antibodies against two targets selected by Gilead.

    As Le Merle acknowledged, few firms grow as successfully as Gilead: “It’s only a game that a handful can play.”

    A second Booz survey identified four types of relationships between biopharma companies and CROs:

    • Qualified talent suppliers providing companies with temporary employees with specific skills to expand capacity or enhance capabilities.
    • Preferred capacity partners offering services that biopharmas may also retain internally to expand capacity during peak periods.
    • Preferred capability partners delivering services deemed noncore by companies.
    • Strategic partners that join with companies to deliver overall development results.

    “We came away with the sense that people don’t really know which strategy is the best strategy for them yet,” Le Merle said. Over time he anticipates that companies will go from selecting CROs project-by-project based on lowest bids to forging more strategic relationships involving multiple contracts. At least that’s what outsourcers hope will happen. A wider scope of services would prove more appealing to CROs, said Phelan of KPMG, by letting them spread costs across both lucrative and less lucrative functions.

  • Cost Cutting a Driving Force

    More support for biopharma outsourcing emerged in a third report released in January. In its 15th Annual Global CEO Survey, PricewaterhouseCoopers included a telling statistic—43% of surveyed biopharma CEOs said they “outsourced a business process function” within the past 12 months, compared with 35% for all industries. “Pharma and life sciences CEOs are increasingly challenging their companies’ cost bases, especially as pricing and margins come under greater pressure,” PwC reported.

    The PwC results came in the same survey that showed 28% of biopharma CEOs saying they “insourced a previously outsourced business process or function” within the past 12 months, compared with 20% in all industries. That’s an indication that at least some biopharma companies are considering bringing work back Stateside, if not entirely in-house. This would certainly benefit CROs like Albany Molecular Research (AMRI), which in November announced plans to hire more than 40 synthetic chemists by the third quarter of this year to support drug discovery programs for Eli Lilly under a six-year collaboration.

    Biopharmas are certainly likely to go the tried-and-true outsourcing path. The only potential letup could come if companies conclude they have replenished their pipelines enough to recoup the billions lost as blockbusters jump off the patent cliff. Moody’s recently predicted the cliff will bottom out this year, with the industry heading back to positive earnings growth by 2013. A flattened cliff could slow down outsourcing but won’t likely stop it, given shareholder pressure to produce more ROI.


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