04 June 2004
Changing Trends in Pharmaceutical Outsourcing: The Allure of Emerging Markets
Across the industrialised nations of the world, the pharmaceutical industry has
traditionally been considered one of the most highly Research & Development
(R&D) intensive sectors of technology. It has for over fifty years
delivered a stream of innovative scientific advances in the field of medicine,
thereby earning above-average growth rates and returns on investment. When
compared with the R&D expenditures of other areas of technology, the
biopharmaceutical industry is ranked only second to that of information,
communications and technology. The industry also contains the highest research
intensity of any other area of manufacturing with a ratio of R&D to sales
of 17.7%.
Between 1990 and 2000 investment in R&D increased by 121% and in 2000 the global pharmaceutical industry invested approximately $58 billion in the R&D effort. However although it is generally assumed that companies with the highest R&D expenditures will be the most innovative and productive, this relationship has proved to be much more complex than previously supposed. In an increasingly competitive pharmaceutical market, players both large and small find themselves struggling to cope with innovation, cost containment and global competition. Thus after decades of rapid growth it can be argued that the causes of declining sales and weaker innovation are threefold: R&D, customer expectations and structural change.
- R&D: A widening gap has appeared between the input costs to R&D and its output in terms of New Molecular Entities (NMEs) approved for marketing. According to industry research group CMR, although the inflation-adjusted industry spend on R&D doubled between 1995 and 2002, the average number of NMEs approved per year during this period fell by more than half. In 2003, only 26 NMEs were launched onto the world market, and this was preceded by equally disappointing results in 2002 and 2001.
- Customers: Customers have become much more discerning in their assessment of the value of the choices open to them with purchasing decisions increasingly influenced, not only by considerations of clinical effectiveness, but also by the pressure on healthcare buyers to contain costs.
- Structure: The structural changes taking place within the pharmaceutical industry itself is leading to more intense competition on a global scale with increasing competition in areas of R&D such as ‘therapeutic substitutes' and patented products all competing for a share of the market. Taken within a global context, patents protecting 80% of blockbuster drugs in 2000 will expire by 2007, thereby releasing $67 billion to generic erosion.
If benefits are to be derived from these R&D investments, long-term planning is required as well as consideration of the possible changes to the commercial and technological environments in which the industry operates. Decision-making on projects therefore need to take into account the increasing cost of drug development and the role of external alliances and partnerships as a means of facilitating the R&D process. The technical problems experienced in clinical development, combined with the growing cost of the process suggest that few companies can develop all of their product offerings in-house. Consequently many have turned to specialist Clinical Research Organisations (CROs) to carry out this function. This approach has enabled companies to spread the risks and costs involved in drug development; gain access to new technologies and expertise that drive innovation; as well as acquire the ability to concentrate resources for maximum effectiveness while not compromising on productivity and quality.
Trends in Pharmaceutical Outsourcing
Outsourced research has historically evolved from the need of pharmaceutical manufacturers to supplement their in-house testing resources through the contracting of CROs. The ability to specialise in certain aspects of drug evaluation, thereby achieving economies of scope and scale in the drug testing process, has meant that over the past few years CROs have come to be viewed as a pivotal instrument in containing rising R&D costs and to shortening a product's time-to-market. This capacity to reduce a drug's testing time by as much as 30% is seen as particularly important since a manufacturer can lose as much as $1 million or more in sales for each day that a blockbuster drug is delayed on to the market. As a result, about 19% of all testing is now outsourced, accounting for worldwide CRO revenues of approximately $7.8 billion in 2002.
With an average annual growth rate of 14.6%, the competitive structure of the pharmaceutical R&D outsourcing market can be characterised as five major multinational players all of which have grown through Merger and Acquisition (M&A) over the last decade; mid-tier competitors which have developed a focus on particular segments of the R&D process, therapy areas or geographical markets; and niche competitors that are highly specialised, often possessing specific therapeutic or geographical expertise .
The Allure of Emerging Markets
Although more than half of all drug evaluation revenues are earned in the United States alone, CROs continue to follow their pharmaceutical clients in their quest to extend their global reach, thus enabling these companies to not only capture a greater proportion of potential business, but to also gain access to low-cost clinical testing areas such as India, China and Eastern Europe. Since such cost savings can be passed on to pharmaceutical clients, the competitiveness of CROs can thereby be considerably enhanced. Consequently many contract research companies are expanding their presence in Eastern Europe and Asia through alliances with, and acquisitions of, local providers thus allowing for rapid access to local expertise and relationships which would otherwise take years to establish [11]. Examples include Quintiles, Covance, ICON Clinical Research, Kendle, Pharmaceutical Product Development, PAREXEL and Omnicare to name a few.
In the case of India, stricter intellectual-property protections are paving the way for a growing number of Indian firms to take over components of the drug discovery work traditionally conducted by American firms. Although the hub of such activity is currently located in Hyderabad, smaller Indian firms such as Shantha Biotechnics now produces enzymes for American clients such as Calbiochem - an affiliate of Merck KGaA of Germany. In the case of Ociumum Biosolutions, which is also based in Hyderabad, the company has sold some of its software to Dow Agro Sciences, while recently setting up contract research operations in Indianapolis.
Although China lags behind India in servicing the American life sciences markets, it is striving to catch up and remains one of the fastest growing pharmaceutical markets in the world. Over the past decade, there has been a steady influx of foreign multinational companies accompanied by the establishment of a large number of domestic pharmaceutical firms. Since intellectual-property protection still remains a concern in China, outsourcing has so far been inclined to revolve around projects relating to the assembling of micro arrays, or the altering of formulations of existing drugs with a view to possibly extending patent life. Nevertheless, multinational companies such as Roche and Eli Lilly have awakened to the commercial merits of highly trained, low-cost Chinese scientists. As a recent report Research & Development in the Pharmaceutical Industry: Options for Success points out, with continued pressures on pharmaceutical companies to reduce the time and money it takes to develop a new drug - typically 7 to 10 years at a cost of $800 million or more - lower cost locales such as India and China are proving to be increasingly attractive.
The Future of Pharmaceutical Outsourcing
The R&D outsourcing market is predicted to grow from $9.3 billion in 2001 to $36 billion in 2010, representing an annual average growth rate of 16.3% compared with an average growth in global R&D expenditures of 9.6% over the same period. This growth in outsourcing will continue to be fuelled principally by the demand for R&D enabling technologies such as genomics, high through-put screening and proteomics, all of which facilitate the discovery of more and more new targets, thus reinforcing the need for further clinical testing and hence outsourcing.
