In the last decade, while the top-line growth of big pharmaceutical companies has declined, Research and Development (R&D) costs have shot up by 55%, according to a study by Tufts University. R&D spending in this space recently hit $39 billion, up from $2 billion in 1980, says Pharmaceutical Research and Manufacturers of America (PhRMA), an association representing major drug manufacturers in the U.S.A.
Even more revealing, however, is aggregated R&D cost as a percentage of sales. At 19.2%, drug R&D soars higher than any other global industry. The high cost is not just salaries — it also includes the costs of “failed” pursuits, which in the drug industry could run as high as 95%. What is more, each drug can take anywhere between eight to 12 years to develop. The long gestation period adds significant cost and risk.
This has made major pharma companies focus on fewer projects instead of trying out more new products, thus shifting the cost from “research” to “development.” While this may sometimes effectively take care of the quarterly pressures from the investors, innovation tends to suffer — leading to fewer new products.
There’s no fast solution in sight. Only 58 new drugs in 2002–04 received marketing approval from the U.S. Food and Drug Administration (FDA), a 47% drop from the peak of 110 new drugs in 1996-98, according to the Tufts Center for the Study of Drug Development (CSDD). In fact, the last real blockbuster molecule was Pfizer’s Atorvastatin, marketed as Lipitor, which was introduced almost a decade back in 1997.
Critical Mass
The challenges facing the major drug industry are threefold: To reduce the actual cost of research; to compress the period of drug development; and to try out more research work, as opposed to focusing on a few projects.
Outsourcing provides opportunities to meet all the three challenges. And large pharma companies are already aggressively exploiting these opportunities.
The global pharma industry spent about $1.25 billion on R&D for each New Molecular Entity (NME) application approved by the U.S. FDA in 2004. Offshoring could bring that cost down by 40%–65%.Today, for example, the cost of hiring a medicinal chemist in the U.S.A. is approximately $250,000–$300,000 per year. In India, chemistry service providers like Jubilant Chemsys, GVK Biosciences and Chembiotek charge on an average of $60,000 per chemist — that is a straight reduction of 80%. The reason is they can hire a chemist at a pay package of $20,000 per year.
Employing Contract Research Organizations (CRO) is a good strategy for speeding up the drug-development project, especially during the clinical-trial phases. According to a January 2006 study by Tufts CSDD, drug sponsors (pharma companies) that are more extensive users of CROs tend to complete projects faster. According to the same study, CROs managed nearly 23,000 Phase I–IV studies at 152,000 clinical sites worldwide. CROs accounted for 15% of the total drug-development spending. India and China have emerged as the favorite destinations of global CROs.
The area of outsourcing that is still nascent but emerging rapidly is, research in the preclinical-development phase. Companies such as AMRI, Charles Rivers, Nektar, Evolva, and India-based companies such as Jubilant Biosys, Syngene and GVK Biosciences are players in this area. Outsourcing vendors here provide two advantages to major drug companies. First, they provide a reduction in cost because of offshoring (no wonder most of the major global companies like AMRI, Nektar and Evolva have opened India-research labs) and second, they often work on a risk and reward sharing mode. This enables the pharma companies to take up more projects than they would have otherwise taken, thereby widening the base of new drug-development projects. This is a fairly new model, and there is no major tangible data available. But industry sources say that some of these co-development projects — as they are known in industry parlance — are progressing quite satisfactorily.
It is no surprise that pharma companies have embraced outsourcing with open arms. Outsourcing drug-discovery services such as chemistry, biology, screening and lead-opt, is expected to touch nearly $7.2 billion by 2009, according to a new study by Kalorama Information, a division of MarketResearch.com.
Kalorama’s study, Outsourcing in Drug Discovery, predicts that the swiftly growing market for outsourcing services, fueled in part by impressive advances in the Asian market, will increase at a rate of 15% from the 2005 figure of $4.1 billion. In fact, upon discovering the benefits of outsourcing to Asia, many of the top pharma and U.S.-based CROs have opened their own operations in the continent, it says.
