There is some buzz around the trending of Big Pharma outsourcing all or parts of their R&D value chain, and with them many varied opinions ranging from this being a drastic change to the pharmaceutical business to, "just another day in the life of Big Pharma". There are a multitude of reasons for pursuing this avenue, some of which I will review in the following article as well as discussing how trendy this trend really is, or isn't.
First of all, what does it mean to outsource R&D for Big Pharma? This approach can come in many shapes and sized depending on the needs and drive for the model. Some companies seek partial options such as just compound development, clinical trials of the drug substance, or the finish and fill process of the final drug product. The use of CROs (contract research organizations) and CMOs (contract manufacturing organizations) are more widespread than ever. While the principal components of outsourcing these operations are vast and time consuming including properly vetting a CMO's quality procedures, long-term financial viability, and specific capabilities, for example, the ROI for this investment is obvious. Take into consideration the significant amount of capital needed to build the manufacturing capabilities for a particular drug production process and then how many different production processes may be needed for one Pharma company. For guidelines on how to select the right CMO for your organization see this complimentary post from Martin Przeworski, Tips for Selecting the Right Contract Manufacturing Organization. Another potential course of action is to fully outsource the entire R&D function end to end for a particular therapeutic area. In this situation the importance of supplier relationship management becomes more critical than ever. All of the moving parts need to seamlessly align and the ROI needs to be justified.
Various causes are cited as to why Big Pharma outsources R&D to smaller pharmaceutical companies and/ or third parties. One essential explanation is that it is just not possible for one pharmaceutical company to touch all potential drug markets. In order to scale their operations to reach into new markets they need to partner with other organizations specializing in the areas they are attempting to break into. From that perspective it just makes sense, Big Pharma has the cash to fund the venture and that smaller, startup organization is looking for the exposure and has the skills and capabilities. In the same respect Big Pharma is experiencing a significant decline in new, innovative compounds to turn into blockbuster size revenue streams. There are significant implications from the patent expirations, many of the top blockbusters are expected to go off patent between 2009 and 2015 with an estimated $170B loss in revenue for those companies collectively. Understandably, partnerships are just one avenue these organizations are seeking to pick up the pieces. Another possible reason is expansion into new geographical markets, it may not make sense to build their own operation up in a market where a viable partner already exists and resources can be exploited to both parties' benefit. Not only is the actual presence significant but the untapped markets of emerging countries and the need for pharmaceuticals provides a solid basis for this approach.
The underlining theme throughout the above instances is clearly financial. Either Big Pharma has the funding and is lacking something or they are looking to bolster their revenue stream for one reason or another. This is certainly not a new concept in the pharmaceutical industry, the relevance of LOE (loss of exclusivity) for many of this companies is what brought it to light in the industry's eyes in recent years. In-licensing has been going on in Pharma for decades, "Since at least the 1970s, as much as 30 – 40% of Big Pharma sales have been generated from compounds licensed from outside their own R&D labs". Smaller start up pharmaceutical companies have always sought out funding from one resource or another, whether that be the government or a larger entity seeking a mutually beneficial arrangement. While this is not an emerging trend in general, the core fundamentals of it evolve over time. Examples include moving into emerging markets or the testing of new theories like expanding into complementary therapeutic areas or branching out into completely new ventures via diversification opportunities. And what works for one company may not work for another so there is no perfect formula for success in the pharmaceutical industry. The best path is to continue to innovate and pursue different methods until determining the right mix at the right time.
First of all, what does it mean to outsource R&D for Big Pharma? This approach can come in many shapes and sized depending on the needs and drive for the model. Some companies seek partial options such as just compound development, clinical trials of the drug substance, or the finish and fill process of the final drug product. The use of CROs (contract research organizations) and CMOs (contract manufacturing organizations) are more widespread than ever. While the principal components of outsourcing these operations are vast and time consuming including properly vetting a CMO's quality procedures, long-term financial viability, and specific capabilities, for example, the ROI for this investment is obvious. Take into consideration the significant amount of capital needed to build the manufacturing capabilities for a particular drug production process and then how many different production processes may be needed for one Pharma company. For guidelines on how to select the right CMO for your organization see this complimentary post from Martin Przeworski, Tips for Selecting the Right Contract Manufacturing Organization. Another potential course of action is to fully outsource the entire R&D function end to end for a particular therapeutic area. In this situation the importance of supplier relationship management becomes more critical than ever. All of the moving parts need to seamlessly align and the ROI needs to be justified.
Various causes are cited as to why Big Pharma outsources R&D to smaller pharmaceutical companies and/ or third parties. One essential explanation is that it is just not possible for one pharmaceutical company to touch all potential drug markets. In order to scale their operations to reach into new markets they need to partner with other organizations specializing in the areas they are attempting to break into. From that perspective it just makes sense, Big Pharma has the cash to fund the venture and that smaller, startup organization is looking for the exposure and has the skills and capabilities. In the same respect Big Pharma is experiencing a significant decline in new, innovative compounds to turn into blockbuster size revenue streams. There are significant implications from the patent expirations, many of the top blockbusters are expected to go off patent between 2009 and 2015 with an estimated $170B loss in revenue for those companies collectively. Understandably, partnerships are just one avenue these organizations are seeking to pick up the pieces. Another possible reason is expansion into new geographical markets, it may not make sense to build their own operation up in a market where a viable partner already exists and resources can be exploited to both parties' benefit. Not only is the actual presence significant but the untapped markets of emerging countries and the need for pharmaceuticals provides a solid basis for this approach.
The underlining theme throughout the above instances is clearly financial. Either Big Pharma has the funding and is lacking something or they are looking to bolster their revenue stream for one reason or another. This is certainly not a new concept in the pharmaceutical industry, the relevance of LOE (loss of exclusivity) for many of this companies is what brought it to light in the industry's eyes in recent years. In-licensing has been going on in Pharma for decades, "Since at least the 1970s, as much as 30 – 40% of Big Pharma sales have been generated from compounds licensed from outside their own R&D labs". Smaller start up pharmaceutical companies have always sought out funding from one resource or another, whether that be the government or a larger entity seeking a mutually beneficial arrangement. While this is not an emerging trend in general, the core fundamentals of it evolve over time. Examples include moving into emerging markets or the testing of new theories like expanding into complementary therapeutic areas or branching out into completely new ventures via diversification opportunities. And what works for one company may not work for another so there is no perfect formula for success in the pharmaceutical industry. The best path is to continue to innovate and pursue different methods until determining the right mix at the right time.
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