August 1, 2008 (Vol. 28, No. 14)

Desire to Save Money, Boost Technology, and Speed Discovery Process Drives Growth

It’s an old story—pharma companies are outsourcing to CROs to cut costs. Kalorama Information has tracked the growth of CRO drug discovery since the beginning of the decade. Cost savings remain a key instigator of outsourcing decisions. These days, cost cutting is just one of many arguments for outsourcing. Companies also outsource to boost technology, benchmark internal programs, and to speed up the process.

Not only have the reasons for outsourcing changed, the scope of outsourcing has also expanded. The pharmaceutical industry has a long history of outsourcing noncore functions. Over the past two decades, however, this pattern has changed as companies began routinely outsourcing a number of core functions such as clinical trial management and manufacturing. Drug discovery is one of the more recent core functions to be outsourced.

Discovery has become increasingly complex since the 1990s as a result of advances in molecular biology and the emergence of biological therapies. These advances plus the emergence of new technologies have made it impractical for companies to undertake all drug discovery functions in- house. Therefore, the industry is choosing to outsource core drug discovery functions more frequently.

Issues over loss of control, intellectual property, and confidentiality remain a concern for some companies, but in many cases companies and CROs are addressing these issues in improved strategic partnerships.

Drug Discovery Segment

At Kalorama, we continue to view contract drug discovery as a high-growth industry. The global drug discovery market reached $5.4 billion in 2007, an increase of 15% from 2006. This market is expected to experience robust growth and exceed $8 billion in 2010 and $14 billion in 2013.

It is possible to outsource all four phases of drug discovery—target identification, target validation, high-throughput screening, and lead optimization. For market analysis purposes, the CRO drug discovery market is segmented by important services across these phases: biology services, HTS, chemistry services, and lead optimization. The largest segment of the contract drug discovery market is chemistry services, which held almost 41% of the market in 2007.

By outsourcing portions of their drug discovery programs, many pharmaceutical and biotechnology companies have found an effective cost-cutting strategy that can also improve the hit-to-lead conversion and early identification of unsuccessful compounds. In view of the fact that outsourcing can accelerate the drug discovery process, the business of contract drug discovery has evolved from providing low-end research services to more value-added high-end research.

A critical bottleneck in the drug discovery process is the hit-to-candidate stage. Scientists interviewed for Kalorama Information’s research report Outsourcing in Drug Discovery generally agreed that the number of potential targets has increased sharply over the last decade, but information about those targets, i.e., sufficient understanding of gene and protein function, especially in the context of biological pathways, has not increased at the same rate. To break the bottleneck, anti-targets need to be eliminated earlier, freeing up researchers to concentrate their time and attention on potential targets of interest.

Another bottleneck is the characterization of ADME properties of new molecular entities in the pipeline. With the number of identified drug targets increasing, candidate compounds with significant ADME and toxicity profiles need to be determined earlier in the process of drug discovery and development. Failure to determine ADME characteristics and physiochemical properties can cause a compound to fail during later drug development stages or in clinical trials.

These are areas where CROs can be of assistance. Advances in genomics, combinatorial chemistry, and high-throughput screening have all contributed to an explosion of new biological targets and new drug leads. Most pharmaceutical and biopharmaceutical companies, however, do not have the expertise or the in-house programs to fully utilize these novel technologies. Thus, in order to keep pace with technological developments and evaluate the usefulness of potential drug compounds more efficiently, companies are turning to outsourcing to increase the efficiency and reduce the over all cost of the drug discovery process.

A key goal of CROs is to provide flex capacity or complementary capabilities for a sponsor’s in-house operations. A sponsor can take advantage of the CRO to avoid or convert certain fixed costs—such as those for maintaining specialized personnel with specific expertise, as well as facility expenses—into variable costs. CROs can also provide expertise for specific needs. Thus, CROs can add momentum to a sponsor’s R&D process, ultimately decreasing development time as well as minimizing the effect on the sponsor’s bottom line.

Offshore Partners

Another major trend that continues to gain momentum is choosing outsourcing partners in Asia and Eastern Europe. It is not only large pharmaceutical and biopharmaceutical companies that are moving their outsourcing offshore—smaller biopharmaceutical companies are following this trend as well. Small biopharmaceutical firms such as virtual companies that lack the infrastructure to carry out complex chemistry, biology, and lead-optimization services are choosing outsourcing partners in India or China.

China and India are the major countries to which drug discovery is being outsourced. Both have significant scientific expertise, a cost advantage (due to lower wages and in some cases, significant tax incentives), and the infrastructure needed to successfully perform drug discovery activities. Russia and the Ukraine also have a growing presence in the drug discovery outsourcing market.

The number of Chinese CROs offering drug discovery services has expanded significantly in just three years. With the increase in the number of Chinese CROs, and a broadening of the services offered, change has occurred in the pricing scheme of Chinese CROs. When CROs were first being established in China, the payment structure was basically a set fee-for-service scheme. Today, CROs tend to offer a variety of pricing schemes. FTE pricing is still popular, but companies are experimenting with risk-sharing models.

India is emerging as a major player in drug discovery services driven both by the emergence of the country’s internal research-based drug industry as well as interest from Western pharmaceutical and biopharmaceutical firms seeking to cut back spiraling R&D costs. Indian CROs are following in the footsteps of some of their Western counterparts and developing full-service offerings for its pharmaceutical clients, which includes the drug discovery phase of the drug development process, through clinical research and manufacturing.

To keep pace with the Chinese and Indian competition, many CROs in the former Soviet bloc have culled together their most experienced chemists and are providing services that include preparing custom libraries, advancing screening hits into families of leads, and designing libraries that target important biomolecules such as kinases and ion channels. Many also offer, or are planning to offer in the near future, in vitro biological screening of the chemical libraries they build.

Strategic vs. Tactical Outsourcing

The two common approaches to outsourcing are strategic and tactical. Historically, outsourcing of pharmaceutical and biopharmaceutical R&D has been tactical, as opposed to strategic. This trend is changing as more companies enter into strategic partnerships with CROs. That’s not to say all outsourcing is strategic; contracts of both models continue to be employed relative to the sponsor’s specific requirements and outsourcing strategy.

Outsourcing drug discovery activities presents some unique legal challenges that can result in the failure of contracts and relationships. The pharmaceutical industry is based on information that is protected by patents, trade secrets, trademarks, and copyrights. Therefore, a top concern in outsourcing is protecting IP rights and privacy issues. These challenges can be mitigated, however, with the right business model, adequate legal protection, and a robust knowledge-management system. Most problems can be averted by making certain each outsourcing contract has a well-defined IP provision that clearly establishes ownership of IP.

The most successful sponsor/CRO partnerships are built on trust and effective communication. Problem solving in lead discovery and lead optimization, as well as other drug discovery phases, all require good communication between the sponsor and the CRO for successful completion. The chemical development and synthesis areas are rich with examples of the importance of teamwork and communications. These projects often have intense needs and constrained timelines. Products from these projects are usually starting materials for other projects, and significant cost and resources are committed in anticipation of delivery, requiring close coordination of efforts.

Bruce Carlson is publisher at Kalorama Information. The recently released Outsourcing in Drug Discovery market research report can be found at Email: [email protected].

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