Trends in Biotech/Pharma Outsourcing Industry

The increasingly global nature of the pharmaceutical/biotech industry endorses Outsourcing, as most companies tend to exploit the market by gaining competitive advantage. Pharmaceutical companies with little or no experience have realized that mastering the entire skill range within an industry is not viable. Moreover, flexibility is becoming increasingly important within the industry. As a result, companies have started focusing on their core competencies in which they can add greatest value. The growth of the pharmaceutical contract service industry in recent years has led to a significant increase in the number of services and functions available for outsourcing. The cost pressures have led to pharmaceutical manufacturers reassessing their financial situation and, in the wake of the resulting downsizing trend, to the development of a contract service industry specifically targeted at the pharmaceutical industry.

The growing importance of small pharmaceutical and biotech contractors is increasing, with representation of small pharmaceutical and bio-pharmaceutical companies in the client mix. Although the 40 largest pharmaceutical companies account for two-thirds of industry R&D spending and produced most of the commercially approved products, most view outsourcing as only a tactic to overcome near-term capacity shortages. In contrast to the Big Pharma players, smaller companies offer opportunities for strategic relationships that are more stable because of their limited in-house capabilities. Their dependence creates opportunities for contractors to secure equity or royalty positions that can boost financial returns. Moreover, maturing biotech pipelines and accelerating licensing activity are generating more opportunities in this segment.

2001 was a robust year for most publicly traded CRO’s and contract manufacturers, with many companies able to turn losses into profits and show revenue increases of 20% or more compared with revenues in 2000. POMA Sourcing Survey (2001) indicates that contractors can anticipate another good year in 2002, although growth rates are not expected to be as strong. As we move into 2002, some trends that accelerated in 2001 are likely to reshape the outsourcing industry during 2002.

Outsourcing R& D: The modern pharmaceutical market though approves Outsourcing, doesn’t seem satisfied with the fundamental and strategic correlation between the need for resources and Outsourcing. Rightly so, Outsourcing should be a long-term strategy at the planning stage rather than being a reactive measure to circumstances. Talking about R&D units in the pharmaceutical/biotech industry, the leading companies are the CROs (Contract Research Organizations). Estimates by Datamonitor reveal that the CRO market was worth $4.6 billion in 1998, accounting for 22% of global $20.9 billion ‘development’ expenditure. 60% of this revenue was generated by clinical services, and 40% by non-clinical services. Frost & Sullivan estimates that R&D expenditures across the biotech industry would surpass $50 billion by 2005. This is expected to result in a proportional increase in the CRO market size. A survey conducted by Datamonitor has pointed out that most pharmaceutical companies believe Outsourcing to be the most effective method for limiting R&D costs.

The Need for Outsourcing: Analysts at Frost & Sullivan suggest, that with sophisticated technologies around such as high-throughput screening that are becoming a progressively more important part of the drug development process, companies are seeking outsourcing partners who will be able to provide superior technology and launch quality products in the market in a short span of time. Pharmaceutical companies today recognize the need to leverage in-house resources with specialized, competent partners particularly in the following:

-> Research in Biotech Industry
-> Development in CROs (Contract Research Organizations)
-> Manufacturing in CMOs (Contract Manufacturing Organizations)
-> Distribution in Co-marketing & CSOs (Contract Sales
Organizations)

Consumer empowerment is one of the main forces transforming the pharmaceutical industry. The trend toward individualized health management will create enormous opportunities for manufacturers and service providers within the pharmaceutical industry by enabling them to enhance their traditional offerings and to exploit entirely new market spaces. The key factors that lead companies to look for outsourcing of their work can be categorized as follows: the search for efficiencies in the drug development cycle, extending a company’s capacity, consolidation of the pharmaceutical industry, access to specific therapeutics expertise and globalization of the market within Europe and the USA.

As outsourcing in the industry matures, pharmaceutical manufacturers should select their outsourcing partners strategically and consider their partnerships to gain competitive advantage. As a result, pharmaceutical companies will ‘focus on total cost of doing business and look at ‘long-term needs and partnerships’. Effective partnering and outsourcing will however require trusting relationships and highly interactive programs.

The Future of Outsourcing: However, many challenges exist for the successful implementation of outsourcing within the pharmaceutical industry. The industry is characterized by inherently high risk; only one in 5,000 compounds actually becomes a product, commercial drugs cost $300 million to develop, and less than 50% of new products return the development cost. Tight governmental regulations compound this risk. Unlike other industries, there have been no transformational developments to drive outsourcing—even marginal performers can succeed. An immature contractor segment also characterizes this marketplace.

These forces are reshaping Pharma; they are the forces behind the consolidation of the industry, the growth in the number of alliances and the increase in outsourcing. Such changes are also contributing to the growing divergence between what Pharma companies need to achieve and what their employees want.

Datamonitor believes that centralized outsourcing departments will have to manage a portfolio of outsourcing agreements in the future. Such agreements will range from low technology, distanced agreements to strategic alliances, depending on the function being outsourced. The drivers of CRO market growth to 2003 will be increasing R&D costs, the launch of biotechnology products, continued M&A activity, and increased confidence in the quality of services provided by CROs. Analysts at Datamonitor also predict a consistent growth of 15 – 20% of the CRO market until 2003. The use of contract manufacturing is expected to increase in the future, as companies rationalize their manufacturing facilities, many of which currently operate below capacity. In the future, pharmaceutical manufacturers will attempt to move towards direct distribution as the role of large pharmacies for both payers and manufacturers becomes more established. It is believed that the true virtual pharmaceutical company is not a realistic proposition in future, although a virtual subsidiary to a large parent company may offer significant benefits.

Originally Published in CanBiotech BioMed Outsourcing Newsletter: Volume 1, Issue 1, September 2002
Trends in the biotech/pharmaceutical outsourcing industry
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