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 astream 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, thebiopharmaceutical industry is ranked only second to that of information, communications and technology. Theindustry 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 investedapproximately $58 billion in the R&D effort. However although it is generally assumed that companies with the highestR&D expenditures will be the most innovative and productive, this relationship has proved to be much more complex thanpreviously supposed. In an increasingly competitive pharmaceutical market, players both large and small find themselvesstruggling to cope with innovation, cost containment and global competition. Thus after decades of rapid growth it can beargued that the causes of declining sales and weaker innovation are threefold: R&D, customer expectations and structuralchange.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-adjustedindustry spend on R&D doubled between 1995 and 2002, the average number of NMEs approved per year duringthis period fell by more than half. In 2003, only 26 NMEs were launched onto the world market, and this waspreceded by equally disappointing results in 2002 and 2001.Customers: Customers have become much more discerning in their assessment of the value of the choices opento them with purchasing decisions increasingly influenced, not only by considerations of clinical effectiveness, butalso by the pressure on healthcare buyers to contain costs.Structure: The structural changes taking place within the pharmaceutical industry itself is leading to more intensecompetition on a global scale with increasing competition in areas of R&D such as ‘therapeutic substitutes' andpatented 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 thepossible changes to the commercial and technological environments in which the industry operates. Decision-making onprojects therefore need to take into account the increasing cost of drug development and the role of external alliances andpartnerships 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 offeringsin-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 newtechnologies and expertise that drive innovation; as well as acquire the ability to concentrate resources for maximumeffectiveness 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-housetesting resources through the contracting of CROs. The ability to specialise in certain aspects of drug evaluation, therebyachieving economies of scope and scale in the drug testing process, has meant that over the past few years CROs havecome 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 aresult, about 19% of all testing is now outsourced, accounting for worldwide CRO revenues of approximately $7.8 billion in2002.With an average annual growth rate of 14.6%, the competitive structure of the pharmaceutical R&D outsourcing marketcan 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,
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