New Global Pharmaceutical Outsourcing Trends

By Jim Zhang, Ph.D.

It has been widely recognized that the global pharmaceutical industry is currently experiencing dynamic change. Under high pressure to contain fixed costs, all drug companies are currently reducing their internal capacities in R&D, manufacturing, and even marketing and, instead, increasing their outsourcing. To a large extent, the drug companies, large or small, now rely on outsourcing service providers more than ever to fulfill their tasks, solve their problems, and improve their efficiency and productivity.

Outsourcing Demands
In recent years, many major pharma companies have remodeled their traditional drug R&D operations. They now focus on de-risking their R&D efforts via external, outsourced resources. Meanwhile, the global competitive environment also has forced them to constantly streamline manufacturing operations, leading to an increased demand for contract manufacturing of marketed drugs, especially small molecule generic drugs (e.g. intermediates, APIs, finished products).

A much softer outsourcing demand presently exists in the R&D-focused biotech industry. Compared with the time before the financial crisis, the global-funding models of many VC investors have changed. Due to the funding shortage, many small biotech companies that focus on small molecule drug R&D have either reduced the scale of their R&D or cut the number of their programs — or even closed their entire operation. The outsourcing demand by the community of these small, R&D-focused biotech companies has thus been significantly weakened since the global financial crisis.

New Trends In Each Service Sector
New outsourcing strategies and types of services are developing in almost every stage of the drug R&D and manufacturing process. For instance, in the sector of target identification and validation, genomics and proteomics research and gene-silencing technology have now been widely used to validate more complex and structurally diverse disease targets. A variety of microarray technologies also are widely used to study the differences in gene expression patterns and gene interactions. Most of this type of work is now performed by either academic research organizations, specialty biotech companies, or professional CROs.

A virtually integrated, cross-functional outsourcing operation of drug discovery research is currently prevailing as the latest outsourcing model, especially for small molecule drug discovery. Chemical synthesis and biological testing work is now almost completely performed by CROs and, to a lesser extent, academic research organizations.

The worldwide outsourcing demand for preclinical research and development is, however, still soft at present. Almost all major pharma companies have publicly announced that their current and near future R&D focus will be on the late-stage drug candidates. Meanwhile, many drug companies also are shifting their research methodologies for toxicology (tox) studies to include molecular biomarkers, imaging, and companion diagnostics, as these new technologies are able to provide better safety profiles of trial compounds.

The clinical trial has now, indeed, become a global process. More and more trials now require the inclusion of global trial sites, with an increasing proportion of patients from the emerging countries participating in trials. Those CROs that are already well-established in these emerging countries appear to be well-positioned for success in the competitive global industry.

Likewise, the global CMO sector also is currently experiencing strong demand for both APIs and pharma intermediates of the marketed drugs, in particular, generic drugs. Moreover, as more drug companies now pursue personalized medicines (which will result in more diverse product portfolios for these companies), it is expected the demand for related outsourcing services will become stronger in the future.

Major pharma companies also are gradually increasing the outsourcing proportion of their formulation work, especially for small molecule generic drugs. Meanwhile, as drug companies of all sizes are gradually increasing their focus on biologic drugs, the outsourcing demand for R&D and manufacturing of biopharmaceutical products is growing rapidly. However, unlike the outsourcing of small molecule drugs, large-scale outsourcing of biologics did not start until very recently. Most biopharma companies still have not yet established a strategic plan for their bio-outsourcing practice. At present, the majority of bio-outsourcing activities are still centered on low-end tasks such as the development of cell lines, contract manufacturing of developmental biologic drugs to support clinical development at various stages, and bio-analysis and product characterization. Meanwhile, because of the worldwide recognition of the huge future growth potential of the biosimilar market, increasing numbers of global CROs and CMOs are aggressively enhancing their capabilities and expanding their services in this new area.

Latest New Technologies And Services
Today, major pharma companies are in desperate need to develop better drugs with high success rates. The key bottlenecks include selecting the right therapeutic targets and understanding the cause of severe side effects. That’s why pharma companies are focusing more on the basic type of research in genomics and proteomics, primarily through collaboration with academic research organizations, specialty biotech companies, and/or CROs.

To increase productivity and efficiency, both drug companies and outsourcing service providers have been striving to make improvements in every aspect of the drug R&D and manufacturing processes. Consequently, new technologies such as biomarkers, molecular imaging, and companion diagnostics as well as new services such as antibody library construction and screening, genomic testing, and cell-line development have been developed.

Focusing On Emerging Markets
The new model of “more achievements for less cost” has forced many drug companies to think about the possibility of moving some of their operations to low-cost emerging markets. These companies are focusing not only on expanding their market space in these regions, but also outsourcing more costly R&D and manufacturing work to these markets, especially for small molecule drugs. The recent financial crisis has further strengthened this trend.

Most emerging markets possess a number of attractive factors to all global pharma companies. For instance, one such factor is the availability of a large talent pool that earns a wage still relatively low compared to Western countries but that has nearly comparable technical capabilities and skills. This situation is especially true in China and India.

To realize their goals, the global drug companies are currently looking for partnerships with local companies or research organizations in the emerging countries that possess the desired technical capabilities. Meanwhile, to meet these demands by the global drug companies and to have a firm position in the fast growing regions, almost all major CROs and CMOs have put a significant amount of their investment into these emerging countries, including building up their service capabilities and capacities through either vertical growth, partnerships (including joint ventures), or acquisitions of local service providers.

Future Outlook
As almost all major pharma companies have reprioritized their therapeutic focuses, including abandoning a number of programs in their pipelines, it is expected that global drug R&D spending will remain flat or even slightly decrease in the next couple of years. However, in the meantime, as they are cutting the fixed cost and improving productivity and efficiency, all these drug companies are aggressively increasing the outsourcing of core drug R&D and manufacturing.

Based on the past growth trend and the future growth drivers of this industry, it is believed the global pharma outsourcing industry will still experience fast growth in the next five years (2011 to 2015). We forecast that the global pharma outsourcing market will likely grow in a CAGR of about 12% during this time period, and the market value will likely climb from about $85B to as much as $150B by 2015.

The CROs and CMOs each presently make roughly equal contributions (CRO:CMO = 48:52) to the total global pharma outsourcing market value. Of the total CRO market value, which is about $40.5B, chemistry-based drug discovery research service accounts for about 25% (about $10.7B), whereas the biology-related services, which include preclinical and clinical development, account for about 75%.

On average, the current R&D outsourcing penetration in the global pharmaceutical and biotech industries combined is estimated to be around 37%. Based on the current outsourcing strategies drug companies are taking, the outsourcing proportion will still rapidly grow and reach close to 67% by 2015 or so, representing a CAGR of about 12.5% between 2011 and 2015. In other words, by around 2015 the proportion of the fixed operation cost out of their total operation cost for most drug companies will be only about 1/3, decreasing from the current rate of about 2/3.

In addition, as all major pharma companies are currently narrowing their service provider pool to only a couple of preferred CROs in the key service sectors, it is expected that fiercer competition will occur in the global pharma outsourcing industry in the next couple of years. As a result, an industrywide wave of CRO consolidation is expected to take place in the very near future.

The Evolution Of The Networked Partnership
All global pharma companies have realized that outsourcing is a successful and efficient way to operate R&D, manufacturing, and even marketing. It is also the best way to improve R&D productivity and work efficiency. As such, nowadays almost all major pharma companies have established special internal operation units specifically for managing partner relationships. Meanwhile, almost all small biotech companies have converted their previous full-scale R&D operations to integrated virtual operation models. To a large extent, they are now relying more on the outsourcing service to fulfill their tasks of both R&D and manufacturing. It is thus appropriate to say that today the outsourcing service industry is playing a significantly important role in moving the entire pharmaceutical industry forward.

In fact, the term “outsourcing” now should include partnerships, collaborations, alliances, and any other similar relationships. Combined, they make up a “networked partnership.”

About The Author
Jim Zhang, Ph.D., is president and managing director of JZMed, Inc., a market research company specializing in research on the Chinese pharmaceutical outsourcing industry. The company also provides consulting services for pharmaceutical outsourcing in China.