International Biopharmaceutical Association Publication

Clinical Research Outsourcing

 Overview, Current Scenario & Future Outlook

Dr.Jayashree

Officer –Clinical Services

SPIC Pharma

# 18 Vaidayarama Street

T.Nagar, Chennai-600017

Tamilnadu, INDIA

# 91-44-55631903

Mobile # 91-9840836606

Summary

In recent years, cost pressures in the pharmaceutical industry have led to a rapid expansion of the market for outsourcing skills like manufacturing, R & D processes and sales functions.  Contract Research Organizations (CROs) are of particular interest as their work relates to the discovery of compounds and their subsequent development into marketable products. The benefits and pitfalls of outsourcing have been topics of debate in the pharmaceutical industry for some decade’s now.However; it is evident that the CRO market is growing and that more strategic partnership are being forged. This article deals with the Clinical Research Outsourcing Overview, Current Scenario & Future Outlook.

Overview

The cost of drug development has soared during the past ten years compelling pharmaceutical and biotechnology companies to look for new, smarter ways of conducting clinical research. Driven by mounting market pressures, companies are increasingly implementing outsourcing strategies to increase revenues through faster drug development. By decreasing their in-house facilities and staff, and outsourcing more of their R&D functions, pharmaceutical and biotechnology companies are reshaping the drug development services industry1.

Contract research has evolved from providing limited preclinical and clinical trial services in the 1970s to a full-service industry today that encompasses broader relationships with clients, covering the entire drug development process, including preclinical safety evaluation, pharmacology, study design, clinical trial management, data collection, statistical analysis, product support, and regulatory services. Pharmaceutical companies are now using drug development services companies not only to cover gaps in capacity, but also to increase their skills base, help to control costs, and reduce drug development timelines. CROs were first organized as outsourcing service companies that provided only clinical trial management. Today, many CROs have expanded their scope of services to provide comprehensive management of the complex drug trial processes for their client companies, as well as providing access to vast areas of expertise, which may not exist in the client’ s internal organization.

Outsourcing is not a new concept to pharmaceutical companies; however, its use increased dramatically in the mid-1990s, and it is expected to continue to increase going forward. It is estimated by 2004 nearly 42% of all pharmaceutical drug development expenditures will be committed to outsourcing, as compared to the 4% that was outsourced in the early-1990s. Some estimate that there are currently over 1,200 organizations involved in the clinical research, including pharmaceutical and biotechnology in-house clinical research, site management organizations (SMOs), academic medical centers, private research sites, and contract research organizations (CROs).

References

1.Scope e-knowledge center Ltd, Market Research Report July 2004

Over the past few years, CROs have received the lion's share of outsourced clinical research revenue. In 2001, in the United States, CROs received an estimated 60% of the clinical research outsourced from pharmaceutical companies. The combination of the growing trend by pharmaceutical companies to outsource a wider range of services, and the need to pass products through the testing and regulatory process in a rapid, cost-effective manner, has lead to skyrocketing growth of the CRO market. The CRO market grew from $1 billion in 1992 to more than $8 billion in 2002. CROs enrolled 7 million research subjects in 1992, and 20 million in 2001.

SCOPE forecasts the Indian clinical research outsourcing market to grow at a phenomenal rate of 80% in the coming year, while the relatively matured US$ 9 billion (2003-04) global industry is growing at 15-18%. According to industry sources, around US$ 40 billion is annually spent on drug development R&D. The extent of activity in the R&D investments by major drug manufacturers is one of the critical drivers of the market, as increase in number of new drugs and devices will directly determine the number of trials conducted per new drug. The increasing number of new approvals (drugs & devices) every year, and the trend towards more trials per drug invented, etc. are making the global market players resort to several strategic moves, one of the major ones being outsourcing.

References

2.Columbia Business School- May 20^th 2004

3.F.Kermani and G.Findlay,The Pharmaceutical R&D Compendium, 2000.

Typically, large CROs compete on the basis of medical and scientific expertise in specific therapeutic areas; the ability to manage large-scale trials on a global basis with strategically located facilities; by providing medical database management capabilities; providing statistical and regulatory services; the proven ability to recruit principal investigators, and patients into studies; and the ability to integrate information technology with systems to improve the efficiency of contract research. It is imperative that pharmaceutical and biotechnology companies pass their product through the testing and regulatory process in a rapid, cost-effective manner. To accomplish this goal, pharmaceutical companies are relying on outsourcing strategies to provide the services that can bring their therapeutics to market faster3.

There is no doubt that the big multi-national contract research companies such as Covance, Quintiles, PPD, MDS and Parexel have been the driving force in drug development’s move to outsourcing and will remain so. CROs hold nearly three-quarters of the growing market for outsourced development services. Further, the 10 largest publicly traded CROs hold slightly more than 50% of that market, with the top company holding about 12% market share.

CROs will continue to dominate this sector. However, there is a world of opportunity in contract research that extends beyond these traditional entities, and even if the large CROs maintain their hold on 70+% of the pie, the pie itself is so large and growing rapidly enough that the other 25% to 30% is nothing to sneeze at. We grouped the major competitive segments in the drug development outsourcing market into five categories: contract research organizations (CROs), academic medical centers and teaching hospitals (AMCs), laboratory (analytical) service companies, site management organizations (SMOs), and niche players (and this is a diverse bunch!).

Where the contract drug development dollars are going in 2003 and 2008:
CROs will continue to increase their share in the next five years, but the mix of non-CRO players is a dynamic one, and their slice of the pie will be worth close to $6 billion in 2008.

Though relatively young at just over 20 years, the contract research industry has proven to be indispensable in developing new pharmaceutical products. One of the most critical factors in determining the growth of the CRO market is the percentage of R&D spending that pharmaceutical companies elect to outsource. CROs now account for about 20% of the pharmaceutical and biotechnology R&D budget, and the market for contract research services is growing (see Figure). In recent years, a volatile period brought about by

the mergers of large pharmaceutical companies has challenged CROs to sharpen their business focus, strengthen their balance-sheets, refine internal practices and become more efficient in the drug development process. Due to the downturn that lasted from the late 1990s to the early 2000s, many companies endured project delays and cancellations by customers who were discouraged by mergers and acquisitions that temporarily shifted their focus from bringing new drugs to market. Now that the merger and acquisition activity has slowed, pharmaceutical companies are moving into a steadier stream of

business, whereas biotechnology companies are spending more money on R&D. According to a 2001 study conducted on the CRO market by UBS Warburg, “a growing percentage of outsourced pharmaceutical R&D and higher biotech demand is expected to drive the CRO sector growth ahead of the 10% or 12% norm.

Overall, CROs seem poised to take advantage of two significant trends: the anticipated biotech growth and efficiency gains, and margin improvement given a return to

normalized late-stage trial volume.

CROs have had to revise their business strategies and costs and restructure and cut certain costs. For instance, in order to make their R&D efforts more efficient, pharmaceutical and biotech companies have followed the heavy merger period by refocusing their R&D

strategy. Most of them have resumed outsourcing a substantial portion of their development component, focusing their resources on research efforts.

Given time, cost and pipeline pressures in pharmaceutical manufacturers and a lengthening and complicated US Food and Drug Administration (FDA) approval process, this outsourced portion is predicted to expand by 1% (of pharmaceutical R&D spend) per year throughout 2005. This increased use of outsourcing is also shown by the nature of the projects that CROs are undertaking. For example, outsourcing the total development programme to bring a new drug to market is now a service offered by a number of these CROs.Smaller pharmaceutical and biotech companies have outsourced their development work to CROs in this way in order to retain overall control of their products following successful drug development.4

There is now a greater use of outsourcing in the pharmaceutical industry than ever before. It can be argued that some of the improvements in clinical development have come about through a more strategic and proactive approach in using the services of CROs, rather than simply using them as a tactical measure on projects.

References

4.Ed Tomlinson ,“The 3Cs of successful outsourcing:Communicate,Collaborate,Capitalize by sharing information,pharma companies can get more out of their relationships with vendors (partnering strategies)”,Pharmaceutical executive ,october 2002

Current Scenario

Drivers of outsourcing

Over the last few years, the pharmaceutical industry has seen large companies use ‘downsizing’ strategies more and concentrates resources on core skills.  As industry margins come under increasing pressure, companies could begin outsourcing aspects of their development, manufacturing or marketing processes so as to concentrate on their core specialties.

Outsourcing an operation is a means of converting the fixed costs of maintaining the necessary personnel, infrastructure and expertise into the variable costs of paying a sub-contractor to perform that process when it is required.  Outsourcing also gives companies the flexibility to acquire skills and technologies in a cost and time efficient way, thus avoiding having to get heavy financial backing to develop them in house.  This strategy has been particularly influential in the pharmaceutical industry as the success of a large pharmaceutical company depends on competence in fields as diverse as combinatorial chemistry, computer integrated manufacturing and marketing medicines direct to consumers.

There are three major reasons why such companies might take the decision to outsource some of their services : lack of capacity, skill deficiency and cost control.  However, external cost pressures have also acted as a major driver for the pharmaceutical outsourcing market.  At bottom, the outsourcing market has developed in response to the downward and upward cost pressures exerted on pharmaceutical manufacturers’ profit margins. Given that such pressures are likely to increase in the future, CROs will become more and more important strategic partners for pharmaceutical companies.  It is, therefore, in the latter’s interest to consider probable developments in the CRO market and its major players.

¨                  Downward cost pressures :

As many governments in the developed world have increased healthcare spending significantly, they have been prompted to re-assess healthcare budgets to ascertain where savings could be achieved.  Governments identified pharmaceutical product spending as an area in which cost containment measures could be introduced because healthcare professionals and purchasers considered prescription only medicines to be overpriced.  As a result, downward cost pressures were exerted on the pharmaceutical industry.  The introduction of generic competition, me-too products and pharmaceutical formularies also exerted downward cost pressures and have pushed pharmaceutical drug prices down.  The changing customer base, which has resulted in pharmaceutical manufacturers having to negotiate price discounts on their products, has also reduced profit margins.5

Upward cost pressures:

Pharmaceutical manufacturers have also been subjected to upward cost pressures.  These have arisen due to the increasingly competitive nature of the industry and stem from a need to :

References

5.   “Data monitor”, Pharmaceutical Manufacturing International 2000 Issue 2

Acquire additional marketing expertise to promote products successfully in the     changing healthcare arena.

Maximize the sales potential of new and existing products through geographic expansion.

Increase research, development and production budgets to remain competitive.

Resistance to CROs

The fact that the CRO market has experienced steady growth over recent years suggests that pharmaceutical companies are happy to increase their spending on outsourcing.  However, Datamonitor’s primary research shows that there are some potential problems associated with employing CROs, including higher short term costs, loss of control over processes and loss of in-house expertise. It is not yet clear whether these drawbacks will become less prominent as some major CROs gradually develop into service providers with a broader spectrum.  Some could be resolved with the service profile and strategy of the newer CROs, but pharmaceutical companies and their CRO partners would have to address other issues that might arise.

The decision to outsource should be based on a long-term, strategic view that addresses and overcomes any deficiencies in internal capabilities. Outsourcing can reduce financial risk by limiting a pharmaceutical company’s capital investments, such as lab equipment and real estate, while converting fixed costs to variable costs (as researchers are CRO employees, not the pharmaceutical company’s).

Significant time and money will be saved in the drug approval process. Each day that a drug is delayed in getting to market can result in a $1 million-plus estimated revenue loss. Also, in the effort to accelerate the drug development process, companies are beginning to employ a “fail fast” approach that recognizes the value of discarding compounds earlier, during preclinical or Phase I, once it has been determined that they will ultimately fail. The tighter regulatory environment makes another convincing case for outsourcing. Approval time for New Molecular Entities (NMEs) increased from 11.6 months in 1999 to 16.6 months during 2002. Given the growing complexity and amount of data required by the FDA, it makes sense for companies to consider CROs with considerable experience in putting together NDAs that will survive regulatory oversight. (Source : Pharmaceutical Outsourcing: Contract Research Organizations. UBS Warburg LLC, 2003)

With the increasing pressure on pharmaceutical and biotech companies to get their drugs successfully through clinical trials, and considering the expense involved, it is not surprising that outsourcing has become a popular option. Outsourcing to CROs allows companies to benefit from the CROs’ ideas and expertise yet retain overall control of their products. It has been estimated that pharmaceutical and biotech companies are now using CROs on more than 60% of their clinical projects and that the annual industry spend on contract clinical services rose to nearly US$10 billion in 2001.6

6.M.Matheiu,PAREXEL’S Pharmaceutical R&D statistical source book 2002

Outsourcing process

                                       SPEED

                        COST                     SCIENCE &QUALITY

Cost * speed*quality = productivity

Key Considerations

Typical outsourcing issues that sponsors consider include:

• When to outsource
• Vendor selection
• Retaining in-house expertise
• Cost-effectiveness
• Patient recruitment
• Regulatory and ethical issues

While cost is also a determinant for selecting a service provider, it typically ranks at or near the bottom of survey responses for outsourcing selection criteria. Key selection criteria usually include such elements as expertise in a specific therapeutic area, ability to deliver study participants, speed and a strong reputation.7

Earlier this year, Kishin J. Kripalani, Ph.D., a director in the Department of Metabolism and Pharmacokinetics at the Bristol-Myers Squibb Pharmaceutical Research Institute, published a simple “decision tree” for companies considering whether to outsource drug development at the project level. Using cost-effectiveness as the guiding principal for outsourcing, Dr. Kripalani said companies should ask the following questions:

Answering “yes” to all of these questions would mean the work stays in house, while a “no” answer to any of the questions would advise outsourcing.

• Do we have in-house resources?
• Are the resources available?
• Would these resources be optimally employed on this project?
• Is it cost-effective to do the project in-house?
• Can we do it fast enough?

7.Source : Pharmaceutical Outsourcing: Contract Research Organizations. UBS Warburg LLC, 2003

According to Jan Malek, of Ernst & Young, the best outsourcing relationships:

• Establish measurable goals and objectives;
• Ensure that both parties benefit from the relationship;
• Maintain mutual respect and willingness to learn from one another;
• Involve senior management support;
• Use a joint, multilevel relationship management approach;
• Continually track and measure performance and provide feedback;
• Establish a periodic, formal and fact-based relationship;
• Have a progress review process in place;

Fundamental considerations: From Sponsors perspective

Financials: Is the business financially viable and sustainable? Other than reviewing basic business fundamentals, sponsors will want to know that the CRO will be there five or six years from now, when the FDA or another regulatory body comes to inspect.

Compliance: Does the CRO demonstrate an understanding of and compliance with the appropriate regulations wherever in the world they operate?

Capacity: Do they have the capacity to expand and contract with changing needs? Determine whether the CRO being considered has the resources available to deal with each project and its uncertainties.

Capability: Are they capable of taking on the specific project? Evaluate the CRO’s existing workload and personnel to determine if they have the right resources and people to effectively handle the project.
Experience: Does the CRO have experience and expertise in the critical area of need? Whether it’s in a specific therapeutic area, assay development or clinical trials, the sponsor needs to know that the CRO in question has a proven track record, both in its people and in its facilities.

Quality: How does the CRO measure quality and does it have processes in place to continually monitor quality? Essentially, quality revolves around how the CRO catches its mistakes, reports them and implements procedures for preventing them in the future.

What training and development programs exist for CRO staff? Are programs in place to ensure staff are following the most current rules for good clinical practice or are up-to-date on the latest FDA regulations?

Is this a company that has enough diversity of experience to be able to handle assignments outside its existing scope? If a company has experience with the CRO and is satisfied with the work being done in a given area of need, can the CRO be relied upon to take on additional work in a related area in order to avoid having to transfer projects to additional providers?

What are the opportunities with this CRO for overcoming the high transaction costs and high overhead costs of a traditional fee-for-service model? The standard CRO business model—based on addressing capacity but there is growing recognition that a new model, focused on providing innovative solutions in order to unlock the strategic value that today’s market realities demand.

In Pharmaceutical Innovation published this year by Data monitor, Steven Seget wrote: “Effective knowledge management processes, the integration of functional and therapeutic research expertise, and effective motivation in drug discovery impact a company’s ability to compete in the emerging paradigm. In addition to driving productivity gains, companies must structure their organization to effectively leverage internal capabilities with external partnerships. Long-term competitive advantages, established through the generation of innovation assets, will be found only in the most integrated and motivated organizations.”

A survey carried out in 2000 found that the top five CROs were growing at only 8.5% per year, whereas many CROs below them in terms of size were growing at over 20%. 10 This has led to the view that pharmaceutical companies are becoming much more selective in their choice of CRO. Whereas the largest CROs were often an automatic choice for major projects, pharmaceutical companies are turning increasingly to medium-sized CROs, which can be more responsive and flexible. These CROs have good geographic coverage, broad therapeutic coverage and years of experience in managing complex trials. They can also advise companies on realistic timelines for the clinical development of drugs in a range of therapeutic areas and on changes in regulatory guidelines. Thus, the medium-sized CROs are ideally placed to handle major projects and yet retain a more Personalized service for the client than the largest CROs can offer.8

Future Outlook

Reasons for outsourcing

Outsourcing offers a number of advantages to the companies. These include:

• Reduces the time (8 to 15 years) required to develop and bring a new drug to market
• Sponsor can convert the fixed costs of maintaining the personnel, expertise and facilities like data management) necessary for clinical trial management into variable costs
• Non-availability of services in-house
• Less knowledge of regulatory affairs in a particular country of interest
• Increased complexity of clinical trials
• Increased amount of data required from clinical trials
• Multinational and multi-center nature of current clinical trials
• Large requirement of patient populations
•  Regionalized diseases

CRO market size and growth

Data monitor estimated that pharmaceutical and biotechnology companies spent approximately $33 billion on R & D in 1997, out of which an estimated $3.8 billion was used for the outsourcing services offered by the CRO industry.  Data monitor’s figures for 1998 show that the CRO industry grew by approximately 11 percent, thus expanding the market size to $4.2 billion. So, the CRO market is expanding at a steady pace, a trend that is likely to continue in the near-term future.  Therefore, pharmaceutical companies will need to re-evaluate their perceptions of, and relationships with, CROs – particularly if the strategic direction of the CRO market is about to change.

8.“ Annual review of contract research organizations ”,European pharmaceutical contractor, spring 2002

The CRO market is dominated by four companies, which hold over 50 percent of the total market.  The largest is Quintiles, whose revenues passed the $1 billion mark in 1998 (39 percent growth).  Its market share amounts to 28 percent, followed by Covance with 17 percent, Parexel with 7 percent and PPDI with 6 percent. Other CROs include ClinTrials Research, Kendle International, Applied Analytical Industries and Phoenix International Life Sciences.  The major companies grew by over 20 percent in 1997-98, a figure higher than for the market as a whole.  This resulted from a trend for rapid growth – through acquisitions – among the big CROs, which is not reflected in the rest of the market.  The negative growth of the rest of the CRO market can be explained by the fact that many of the major CROs are buying smaller players, thus reducing the size of this market segment.

The information and statistics in this article were taken from a report published by Datamonitor in February 2000.

A recent UBS Warburg study revealed that of the US$38 billion that the US pharmaceutical industry invested in R&D in 2002-2003, around 20%-25% of this was spent on outsourcing. Given time, cost, and pipeline pressures in pharmaceutical manufacturers, together with the increased regulatory requirements, UBS Warburg predicted that this outsourced portion of pharmaceutical R&D spend would expand by a minimum of 2% per year throughout 2005 - 2007.9

 In 2003, the global pharmaceutical industry was estimated to have spent US$63 billion on R&D, with around 40% of this being devoted to clinical trials. According to another estimate by PhRMA and ING Barings LLC, outsourced clinical phase I-IV market in 1998 was about US $4.4 billion and is projected to grow to US $12.8 billion in 2007. Around 80,000 clinical trials are being conducted globally each year.

Outsourcing trends indicate a strong future. Outsourcing expenditures have grown at a 21% compound annual rate since 1995 to an estimated US$5.1 billion in 2000. For 2002, the CRO industry exceeded US$6 billion. Advances in genomics and proteomics are

revolutionising the way drugs are being discovered by pharmaceutical companies and this will lead to an increased demand for clinical trials. The leading pharmaceutical companies have set aggressive goals for drug development in the coming decade. Interestingly, Dr John Stageman, Global Vice- President of Enabling Technologies at AstraZeneca, recently concluded that, if AstraZeneca could ‘turn the clock back’, it would be far more proactive in outsourcing areas of its R&D.9 Furthermore, these statements were made in a panel discussion on whether biotech’s should emulate large pharmaceutical companies in the same way that they approach drug development.10

Future Perspective

Outsourcing Growth 

Growth of outsourcing slowing from mid-nineties

Broader demand for services

Risk/gain share through capital investment in products

9.source : Pharmaceutical Outsourcing Contract Research Organisation 2003,UBS Warbarg LLC.

It is estimated that the revenue potential for contract clinical research services including services provided by CROs, investigative sites, couriers and clinical labs will reach $75 million in 2005 and $300 plus million in 2010.

Analyst project that by 2008, up to 30% of global clinical trial activities will take place outside of the U.S and Western Europe due to high demand for study subjects and well trained clinical research professionals. China, Eastern Europe and Latin America are several key markets earmarked for rapid growth in clinical research grants.

CROs are also expecting a big boost from government spending thanks to national security and privitatization initiatives by the Bush administration. Covance CEO Chris Kuebler talked about “strong efforts” by government agencies to outsource to CROs “at levels never before seen”, and a story in the Washington post in July 2003 indicated that research positions at the National Institute of Health are included in the Bush administration ‘s program to outsource more government activities to private firms.11

Business Indicators

( Source : Jim Miller in the Bio/Pharmaceutical Outsourcing Report September 2004)

Strong demand for early development services

Revenue for the contract services industry grew approximately 13% for the January –March quarter, but preclinical, phase I and bioanalytical and laboratory services revenues jumped more than 20% at many companies .Industry executives pointed to increased spending by both Big Pharma and small pharmaceutical –biotechnology companies as a reason for the activity growth.

In fact, capacity shortages may be emerging for preclinical and phase I services. Aside from taking advantage of the situation to raise prices, most CROs are adding capacity, either through expansions of existing facilities or through acquisitions.

Performance of phase II-IV services at most CROs was much less robust because of low level of new contract signings in 2003.According to many industry observers, phase IIIb (testing for additional indications) and phase IV studies (marketing and pharmacovigilance) are in the strongest demand. Nevertheless, CRO executives indicated that the flow of new RFPs and contract signings was strong.

In fact, clinical and preclinical CRO executives are so upbeat about the demand for outsourced development services that many companies raised their 2004 revenue and profitability projections. The optimism reflects both the increase in study volume and a firming of the pricing environment. CROs have commanded price increases for preclinical work and have said that pricing for Phase II-IV services stabilized after some intense price competition the late last year. (Pharmaceutical Technology June 2004) 

10.Anon “ Big pharma offers  Biotech Advice”,Scrip No,2792,23 0ct 2002,p 12

11.Pharmaceutical Technology September 2004.