Pharmaceutical Outsourcing Part 2: An Introduction to Drug Discovery Strategies new opportunities lie in a fully integrated global outsourcing strategy

SUMMARY

Introduction

The pharma industry is facing a crisis over R&D productivity, as reflected by the low level of new drug approvals despite companies investing the highest ever amounts in R&D. As a result, companies are seeking novel ways to drive growth, with many opting to increase their reliance on third parties - through licensing, collaborative and outsourcing agreements - in an attempt to achieve this.

>Scope of this report

• Evaluation of the key benefits and risks associated with outsourcing drug discovery functions
• In-depth country profiles examining the suitability of key emerging countries for outsourcing drug discovery work, including China, India, and Russia
• Case study analysis evaluating how companies use drug discovery outsourcing in practice
• Key recommendations on how companies can optimize their drug discovery outsourcing strategy and realize the full value it offers

Research and analysis highlights

The emergence of countries such as China and India as suitable destinations for drug discovery outsourcing is creating new opportunities for foreign pharma and biotech companies to achieve cost savings as well as increase their overall R&D productivity, but companies must still proceed cautiously, as there are particular risks in these countries.

With the increasing globalization of the drug discovery service market, pharma and biotech companies must look to fully integrate global outsourcing into their drug discovery strategy to be able to exploit the full spectrum of benefits that different countries offer with respect to drug discover services.

Companies need to ensure they are realizing the maximum value that outsourcing drug discovery functions offers. As a result companies need to ensure they are using outsourcing strategically where possible, creating a robust screening process for vendors as well as using an effective management and monitoring system for external alliances.

Key reasons to read this report

• Identify the best way to tackle the common reasons why outsourcing agreements fail to live up to the customer's expectations
• Assess the commercial implications of the increasing globalization of the outsourcing market for drug discovery services
• Understand how to optimize the use of outsourcing in your drug discovery strategies to capture the maximum benefit

TABLE OF CONTENTS

• About the Strategic Intelligence Team
• Scope of the report
  • Definition of outsourcing
  • Format of the report
• CHAPTER 1 DRIVING FACTORS OF DRUG DISCOVERY OUTSOURCING
  • The pharma industry is facing an unprecedented number of challenges
    • Is the pharma industry's R&D productivity in decline?
      • R&D investment has been increasing, but the number of NMEs approved has been falling over the past decade
      • Increasing drug development costs are leading to lower returns for companies
  • Companies are shifting towards a "networked pharma model"
    • Product in-licensing and co-development deals are helping to boost major companies' R&D productivity
    • Outsourcing provides an opportunity to drive productivity and efficiencies across a variety of business functions
      • There are a number of steps within drug discovery that can be outsourced
  • Drug discovery outsourcing provides an opportunity for companies to boost long-term R&D productivity
    • Key advatages and benefits of drug discovery outsourcing
      • Outsourcing offers a number of financial advantages
      • Outsourcing can help shorten the drug discovery stage
      • Access to additional drug discovery expertise and technologies
      • Focus on core competencies
      • Flexibility is another advantage
    • Key disadvantages and risks of drug discovery outsourcing
      • Outsourcing is not without its own costs
      • The level of returns on compounds generated through outsourcing agreements tend to be lower than in-house
      • Reduced opportunity to develop internal expertise
      • Some companies are concerned about the loss of control
      • Confidentiality of proprietary information is of the utmost importance
• CHAPTER 2 OPTIMIZING DRUG DISCOVERY OUTSOURCING STRATEGIES
  • Introduction
  • The wider issues that need to be considered when outsourcing drug discovery functions
    • Adopting a holistic approach to outsourcing can be useful to identify additional external opportunities
      • Case Study: Novartis's recently formed Strategic External Resourcing Group provides an opportunity for a more cohesive outsourcing strategy
    • Pharma and biotech companies use outsourcing either tactically or strategically
      • Traditionally, companies have used outsourcing of drug discovery functions as a tactical tool
      • Strategic use of outsourcing can provide additional benefits
      • Case study: GSK adopts a strategic model to outsourcing by creating a Center of Excellence for External Drug Discovery
    • The type of outsourcing agreement that is suitable varies between projects
      • Full-Time Equivalent agreements are more suitable for longer-term agreements
      • Agreements associated with high risk should have a more collaborative nature
  • Maximizing value realization
    • Some degree of autonomy must be left with those involved in forging external alliances
    • It is important to involve relevant scientists to optimize an outsourcing strategy in practice
      • Case study: AstraZeneca has dedicated drug discovery alliance teams in therapy area departments
      • Case study: Eli Lilly has a Research Acquisition Group devoted to evaluating external alliance opportunities
    • Companies should use a robust screening process to identify a suitable outsourcing partner
      • Companies tend to use preferred vendors where possible
      • Companies should use at least a three-step filtering process
      • Potential vendors need to be filtered against a good, realistic set of selection criteria
    • Contractual terms that are satisfactory to both parties need to be negotiated
      • Objectives and goals of the agreement need to be clear from the outset
      • The degree of customer control is dictated by the contract
    • Effective management of a relationship with a service provider is key to successful outsourcing
      • The customer needs to devote resources to managing an outsourcing contract
      • Strong, open communication is a fundamental element
      • There should be a degree of flexibility in managing the relationship
      • Both parties should view the agreement as a partnership
      • Companies should make plans to manage disputes
      • Case study: Merck & Co.'s approach to managing external chemistry collaborations
    • Monitoring the relationship is a key tool for quality control
      • Companies should conduct regular and irregular assessments
      • Companies should base periodic assessments on performance metrics
      • Greater benefits can be realized when performance metrics are used well
• CHAPTER 3 OFFSHORING DRUG DISCOVERY FUNCTIONS TO EMERGING COUNTRIES
  • Introduction
  • Further integration of global outsourcing is an opportunity for companies to realize greater value
  • There are some key factors that companies need to consider before outsourcing to emerging countries
    • Companies should adapt their implementation approach when outsourcing to emerging markets
      • Case study: Wyeth takes a strong management role in its deal with GVK-Biosciences
    • Benchmarking the suitability of key countries for outsourcing drug discovery functions
      • Western service providers cannot compete with service providers in emerging countries on cost
      • Intellectual property protection remains weak, but is improving in India, China and the Russian Federation
      • Drug discovery capabilities are strongest in chemistry and weakest in biotechnology in emerging countries
  • Country profiles
    • India
      • Datamonitor's recommendations
      • Intellectual property protection
      • Scientific and technical drug discovery capabilities
      • Logistical factors
      • Foreign companies' drug discovery outsourcing activity in India
    • China
      • Datamonitor's recommendations
      • Intellectual property protection
      • Scientific and technical drug discovery capabilities
      • Logistical factors
      • Foreign companies' drug discovery outsourcing activity in China
    • The Russian Federation
      • Datamonitor's recommendations
      • Intellectual property protection
      • Scientific and technical drug discovery capability
      • Logistical factors
      • Foreign companies' drug discovery outsourcing activity in the Russian Federation
• CHAPTER 4: BIBLIOGRAPHY
  • References
    • Conference Literature
    • Publications and online articles
  • Sources
    • Conference Literature
    • Articles
  • Useful online resources
• APPENDIX: SUPPORTING DATA
  • Glossary of terms
  • Methodology
  • Exchange rate
  • List of Tables
    • Table 1: Number of FTEs in Johnson & Johnson Pharmaceutical Research & Development division
    • Table 2: Median gross weekly wage in the private sector in India, China and the Russian Federation is a small fraction of the cost in Germany and other Western countries
    • Table 3: Key drug discovery outsourcing deals involving Indian service providers since August 2004
    • Table 4: Key drug discovery outsourcing deals involving Chinese service providers since August 2004
    • Table 5: Key drug discovery outsourcing deals involving Russian service providers since August 2004
    • Table 6: Exchange rates*
  • List of Figures
    • Figure 1: R&D expenditure has increased substantially, however, NCEs approvals by the FDA have decreased
    • Figure 2: There has been a decline in the number of approval filings submitted for both new molecular entities as well as biologics in the US
    • Figure 3: Companies are increasingly using a 'networked pharma' operating model to improve productivity and drive efficiencies
    • Figure 4: The leading 55 pharmaceutical companies are becoming more dependent on in-licensed products to generate prescription drug sales
    • Figure 5: Secondary core and non-core functions are suitable areas for pharma and biotech companies to outsource
    • Figure 6: Drug discovery costs are estimated to account for around 25-35% of the total R&D costs of developing a drug
    • Figure 7: Four main steps in small molecule drug discovery
    • Figure 8: Key risks and benefits of outsourcing drug discovery functions
    • Figure 9: The greater role a customer plays in a drug discovery agreement with a third party, the greater resources the customer needs to dedicate to manage the complexities
    • Figure 10: Process of identifying outsourcing partners
    • Figure 11: Examples of key parameters companies should use in their detailed assessment of and proposal stage with potential vendors
    • Figure 12: Further integration of global outsourcing of drug discovery functions in a company's business model provides an opportunity for companies to realize greater value
    • Figure 13: Western countries offer a more secure environment and a wider range of drug discovery services than emerging countries, but they cannot compete with their low cost base
    • Figure 14: Key indicators for outsourcing drug discovery functions in India
    • Figure 15: Ranbaxy has increased its R&D expenditure as a proportion of sales over the past three years, highlighting its moves towards developing new innovative prescription drugs.
    • Figure 16: Key indicators for outsourcing drug discovery functions in China
    • Figure 17: The annual growth rate of scientific researchers' salaries in China has increased from 13.2% between 1998 and 1999 to 18.5% for 2001-02
    • Figure 18: Key indicators for outsourcing drug discovery functions in the Russian Federation