November 15, 2008 (Vol. 28, No. 20)

Considerable Flexibility in Terms of Resource and Manpower Allocations Offer Key Benefits

Numerous factors are driving increased outsourcing of medicinal-chemistry activities among both pharma and biotech companies. The emphasis is on cutting costs, minimizing infrastructure, and enhancing flexibility in project planning and the allocation of resources and manpower.

Historically viewed as the brain trust and prized jewel of the pharmaceutical industry—a living, breathing component of a company’s intellectual property (IP) assets—medicinal chemists have long been valued as much, if not more, for their range of experience and years at the bench as for their chemistry expertise. So even as pharma reaps the benefits of outsourcing early-stage discovery and medicinal chemistry activities, it must balance those gains against the risks, potential pitfalls, and need to protect its IP in order to maximize the value of the knowledge base encapsulated in its staff of seasoned medicinal chemists.

A range of speakers came together in September at the “Pharma ChemOutsourcing” meeting in Long Branch, NJ. Topics included medicinal-chemistry sourcing, discovery outsourcing, and sourcing of synthetic route design and process optimization. Presenters shared their perspectives and experiences and provided valuable insights and recommendations about how to select and work with a medicinal-chemistry CRO partner to maximize the gains from these collaborative arrangements and minimize the missteps and risk of failure.

Contributing to the trend toward increased outsourcing of discovery activities, and medicinal chemistry in particular, is the flexibility it offers companies in terms of resource and manpower allocation.

“Large pharma’s early-stage pipelines are being heavily back-filled by biotech,” noted Mark Sawicki, Ph.D., senior director of business development at AMRI (Albany Molecular Research). Pharma looks to CROs to supplement internal resources as needed to support these in-licensed programs or other internal programs. If a target fails and a program is canceled, the company can “instantly redirect resources, providing rapid reaction and economic benefits,” said Dr. Sawicki.

Another factor is the ability to tap the specific expertise of a CRO, which might have a critical knowledge base in a particular aspect of biology, for example, or substantial experience in a specific therapeutic area.

Recent actions by Eli Lilly are an example of how the pharmaceutical industry is changing in response to declining productivity in recent years and how these changes will benefit CROs. In a recent report to investors, Lilly stated that it is in the process of transforming from a fully integrated pharmaceutical company—“the old FIPCO model—into what we refer to as a fully integrated pharmaceutical network—or FIPNET. In the new model, we draw on a broad range of resources outside our company’s walls.”

The report went on to describe some “fairly traditional outsourcing” work in discovery and development with companies in China and India, noting that Lilly has reduced its corporate headcount by 11% worldwide since 2003.

“We are pioneering new ways to share risks and rewards,” the report said, emphasizing ongoing and expanding programs with Asian CROs that will develop compounds from Lilly’s pipeline through preclinical development and, in some cases, through Phase II studies.

According to Kalexsyn, most CROs do not employ many skilled medicinal chemists, a situation that is changing as customer needs are evolving.

Explosive Growth

In essence, “much of the practical bench-level work will be done by partners,” Dr. Sawicki said. “The success of this strategy will most likely not become known for many years, but it bodes well for the CRO industry.

Paul Greenspan, associate director, medicinal chemistry at Millennium: The Takeda Oncology Company, attributed the “explosion in medicinal chemistry outsourcing over the last five years” largely to the emergence of low-cost service companies in areas such as China and India. As in Millennium’s case, much of the outsourced work involves the routine, time-consuming aspects such as scale-up of syntheses and preparation of synthetic intermediates to support the company’s own medicinal chemists and give them more time to leverage their expertise and focus on innovation and the identification of new molecules to bring forward.

In an effort to offer their customers the cost-savings that are leading a growing number of pharmaceutical and biotechnology companies to look to China and India for contract research services, the CROs themselves are entering into alliances with their Asian counterparts, blurring the distinction between using a domestic or an offshore contract services provider. An example would be the recently announced alliance between Provid Pharmaceuticals, a drug discovery service company, and Acesys Pharmatech, a contract research provider in Nanjing, China, that specializes in medicinal-chemistry project support.

“For the most part, CROs do not have skilled medicinal chemists,” contended David Zimmermann, CEO of Kalexsyn. That is, if you define a med chemist as more than a synthetic chemist who makes biologically active molecules. This reality is changing, he said, “but we are at the nascent part of that journey.” As pharma downsizes with respect to manpower, more experienced med chemists are finding their way to CROs.

“We are seeing an erosion in the price differential” between CROs in China and India compared to the U.S. due to increasing infrastructure and salary costs,” said Zimmermann, as the knowledge base and experience of medicinal chemists in offshore CROs is increasing.” He predicted that in about 10 years we will be at an equilibrium between cost and experience.

Global Partners

At Sepracor, which focuses on the treatment of respiratory and central nervous system disorders, the split between external and internal med chem work is about 2:1. “Two-thirds of our research and budget goes outside to our global partners, in both biology and chemistry,” said Thomas Large, Ph.D., senior vp drug discovery at Sepracor. The company works with both academic and CRO partners, with all project leaders being internal staff.

Dr. Large emphasizes the importance of distinguishing between medicinal chemistry and synthetic chemistry. He describes “a big rush toward outsourcing of synthetic chemistry,” with the wave of outsourcing med chem activities progressing more slowly. Sepracor’s principal med chem partner is Scynexis.

“That experience has been overwhelmingly positive,” said Dr. Large. Many of the medicinal chemists in CROs come from the pharmaceutical industry as it scales back on core staff, he added. They bring with them “valuable drug-hunting medicinal-chemistry experience.”

If managed as a truly collaborative, intellectual partnership, “you can get to the point where it is a high functioning, integrated team,” in which the external partner has “a high sense of ownership” of the project.

“You don’t get to that point by chance, especially with medicinal chemistry,” Dr. Large explained. “You have to tell them everything: show them all the biology data, tell them all your ideas, get their feedback, and leverage their skills. If you did it as a transaction, I think by definition they would become synthetic chemists, not medicinal chemists.”

Millennium has entered into five significant collaborations with chemistry CROs—some successful and some not, according to Greenspan. The reasons some partnerships failed were because “the company didn’t provide the level of service we wanted, or we weren’t clear enough in our needs and expectations, or we didn’t understand clearly enough what our own needs were and how they could best be met in a cost-effective way.”

The two most common pitfalls in working with a CRO are unrealistic expectations and poor communication, asserted Greenspan. There is certainly truth to the adage “you get what you pay for” and expectations of quality, reliability, and service should take into account the relative price being paid.

Communication problems may include time delays, language difficulties, and cultural barriers—an example of the latter being a CRO partner’s reluctance to give bad news or to offer a contrary opinion when the company has unrealistic expectations. Good and open channels of communication are critical in medicinal chemistry outsourcing because it is “a day-to-day business,” said Greenspan. “You may be trying and troubleshooting new chemistries and making changes as you go. Direct communication with the chemist doing the work is important.” Work that proceeds along a path doomed to failure wastes valuable time and resources.

“Medicinal chemists like to talk about successful chemistries,” said Zimmermann, but you need your CRO partner “to talk the most and the loudest when things are going badly.”

When assessing a potential CRO partner, Zimmermann recommended evaluating the caliber of scientists the CRO hires—“would you hire these scientists to work as medicinal chemists in your company?” he asked. When Kalexsyn hires a medicinal chemist, it is looking for a synthetic chemist who has experience in multiple sciences.

“They understand pharmacology, ADME, toxicology, and physico-chemical parameters, in addition to their chemistry and molecular modeling skills.” They use all of these to weave together a structure-activity relationship strategy to advance hit-to-lead and lead optimization toward clinical candidates.”

He also recommended determining whether there is a philosophical and communications fit between the two companies. “These are inter-related and one without the other is a failure.”

The third critical factor is cost. Historically, cost was the first consideration, noted Zimmerman, but “pharma learned they have taken some bumps and bruises with that philosophy.” In a tenuous partnership, for example, the need for pharma to maintain on-site oversight throughout a project can become costly and greatly inflate the initial project price estimate.

Zimmermann further advised assessing a CRO’s analytical capabilities. A company “does not want to have to bring a compound back in-house and do a full characterization.” Before selecting a CRO partner he recommends hands-on site visits. “Invest in the relationship” and don’t assume anything, he said.

Evolving Business Models

Outsourcing models vary greatly in terms of the scope of services contracted, the working relationship between the company and its CRO partner, the payment scheme, and whether risk and future gains are shared. These are complicated decisions that must be made upfront by the outsourcing company based on its clearly defined needs, thorough vetting of potential CRO partners, understanding of the CRO landscape and the potential benefits and risks of each working model, and long-term goals.

Rather than “a dynamic shift, we are seeing a diversification of business models,” according to Dr. Sawicki. Whereas a decade ago virtually all CROs operated on a fixed-fee, or time and materials basis, more recent years have seen the full-time equivalent model emerge, with one or more scientists in the CRO dedicated to a particular program.

The newest business model incorporates shared risk, in which the CRO takes a greater responsibility for the direction and decision-making components of a project and also shares some of the risk and potential future success based on milestones and royalties. All of these models have their place in an outsourcing portfolio of the pharmaceutical industry and will continue to exist and to mature, predicted Dr. Sawicki.

Some companies, especially young and virtual biotech firms that have minimal in-house research and analytical capabilities, may look for a CRO that it can partner with for all aspects of discovery biology and chemistry and that has the leadership and expertise to help drive a program and participate in decision-making at critical junctures. These types of collaborations are more likely to warrant a risk/profit-sharing business model, however that is not without future risk.

For example, a biotechnology company that plans to take its lead compound through preclinical or early-stage clinical testing and then out-license it may find a risk/profit-sharing contract research model attractive in the short term. But it could be complicating future plans, as a potential pharma partner may balk if a drug candidate comes with too many strings attached.

In summary, Greenspan offers companies exploring med chem outsourcing opportunities several recommendations: understand your organization’s needs and communicate those to your partner; determine your comfort level regarding intellectual property, particularly before outsourcing overseas; do a fair amount of due diligence (learn what various CROs have to offer and talk to others with experience); be prepared to make mistakes and to fail and learn from them; and, if a partnership is not working, end it, after giving it sufficient chance to succeed. Furthermore, do not assume that things stay static. This is a rapidly evolving area, and information gathered about a CRO as little as six months ago may be out of date.

At Sepracor, which focuses on respiratory and CNS disorders, the split between external and internal med-chem is 2:1.

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