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Outsourcing Pharmaceutical Research and Development – pros and cons

Posted on June 5th, 2017 by in Chemical Manufacturing Excellence

Outsource

There is hardly anyone who has not heard of outsourcing – add nausea – a manufacturing strategy that has become commonplace since the early 1990’s.  The public thinks of outsourcing as manufacturing goods, that were once made domestically, in the developing economies and then importing them for sale.  The trade off for inexpensive goods has usually been a loss of domestic jobs and a reduction in workers’ wages.  When it comes to science and technology development outsourcing has a somewhat different meaning.  Outsourcing is described as acquiring services from an outside (unaffiliated) company or an offshore supplier.  Let’s delve into the subject.

Finding the next billion-dollar blockbuster drug is every pharmaceutical company’s dream.  That productivity of research and development (R&D) is a challenge for the pharmaceutical industry is well known as seen in Figure 1. Discovery of new molecule entity (NME) has declined and development time has increased causing the industry to look for ways to trim R&D costs.  NME designation indicates that a drug in development is not a version or derivative of an existing and previously investigated, trialed and approved substance.

NME

Figure 1. Productivity of Pharmaceutical R&D

(Source: P. Ramirez: Birmingham Business School, CMR International & IMS Health, and Thompson Reuter, June 5, 2014)

Increased globalization and rapid technological changes over the past few years have driven many companies who perform R&D to start to outsource their research and development.  The goal is to buy-in molecules at later stages of development to mitigate risk (Figure 2).  Indeed, multinational pharmaceutical companies (MNC) have been reorganizing their R&D activities.  There will be important short and long-term implications for the knowledge base of the firms; the geographical locations of R&D; the science and research capabilities of countries; and global knowledge flows.

Outsourcing Pharma

Figure 2 Outsourcing allows Buy-in of Molecules at Later Stages

(Source: adopted from CMR International & IMS Health, and Thompson Reuter, June 5, 2014. Click to enlarge)

Since 1980’s one vehicle for new drug discovery has been strategic alliances with academia to access new scientific knowledge and technologies.  Academic researchers have also been involved in the validation of targets leading to a great deal of cooperation along the value chain. The productivity decline shown in Figure 1 would have been even more extensive had academics not been contributing to drug identification and development stages.  Companies have had to locate in-house R&D efforts close to academic centers to facilitate academic alliances.  The process has effectively re-centralized the geographic locations of in-house R&D in few world clusters of scientific excellence.  This is a reversal of the process of geographical expansion that took place in the 1990’s.

Another route has been to outsource R&D to independently owned institutions called contract research organizations (CRO).  Only part of the R&D value chain along the discovery and development process is contracted out, not the entire chain.  All parts of the discovery process that require judgment, creativity and cannot be articulated in a Standard Operating Procedure (SOP) are retained in-house. Routine R&D activities such as toxicology, drug metabolism, formulations are outsourced.  Well-understood science, robust and repetitive can also be outsourced (Source: P. Ramirez: Birmingham Business School, 2014).

Some of the advantages of outsourcing drug development include: staffing and cost flexibility, cost reduction and risk reduction. Research becomes a variable cost rather than fixed cost such as closing down buildings; reducing scientific headcount; increasing speed to kill projects.   Significant increases, however, occur in search and monitoring costs.  Cost reductions are possible assuming contract research organization (CRO) is cheaper than in-house work.  If needed, same scientists who do the work may be rented back at cheaper rates.  Reduction of risk takes place through ‘buy-in’ projects further down the drug development pipeline.

There are serious disadvantages in outsourcing drug R&D.  The closure of facilities and break-up of specialist teams weakens national industrial knowledge base and national industrial research base.  Other disadvantages include loss of cumulative knowledge base with the dissolution of the teams and the weakening of R&D capability because of doing less research and development.  Rather, the companies must build capability as buyer of R&D.  A study by the Center for European Economic Research shows the cost savings that result from outsourcing R&D can be easily overshadowed by the added complexity to manage the process throughout the organization.

CROs are under intense productivity pressure, thus have less time to reflect, think, learn and train.  Much of the real work is done at CROs thus weakening learning-by-doing at the MNC’s.  Western CROs have under intensive pressure from competing Chinese and Indian CROs.  Let us hope farming out pharmaceutical R&D does not end up a short-term win and a long-term loss for the major drug makers.

Contracting out research and development work is becoming something of a fad as other industries look for ways to cut cost.  For example, two major airframe manufacturers have outsourced engine development for newly designed aircraft models.

Watch this space for a future post about other industries outsourcing development work.


 

All opinions shared in this post are the author’s own.

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