Outsourcing the way to control spiraling R&D budgets in drug industry

Jun 14 2004

Companies developing new drugs for the global market must deal with the rising costs of the R&D process – and outsourcing may well be the best route. That's the verdict of Dr Faiz Kermani, a specialist in outsourcing and research development for the pharmaceutical industry.

Dr Kermani – who works for leading independent clinical research organisation Chiltern International – says that the problem stems from rising clinical development costs.  In 2000, the global pharmaceutical industry was estimated to have spent US$58 billion on R&D, with around 40% of this being devoted to clinical trials.

“The cost of new drug development has been rising steadily since the 1970s,” he explained. “In 2001, the Tufts Centre for the Study of Drug Development estimated the cost of successfully getting a drug to market was approximately US$802 million; a second report issued in 2003 suggested that this figure had increased to US$897 million.

“Conversely, the consulting company Bain & Company recently proposed a figure of US$1.7 billion as the actual cost of successfully launching a new drug. A major difference between these two analyses is that Bain & Company factor in the expense of commercialising a new drug, whereas the Tufts CSDD figure focuses chiefly on R&D expenses.”

A variety of studies (including those by Tufts CSDD and Bain & Company), have demonstrated that expenditure on clinical development does account for a growing portion of total R&D investment. Tufts CSDD estimate that although total average (preclinical plus clinical) costs increased 5.8 times between the 1970s and 1990s, the corresponding clinical costs increased 8.6 times.

Companies involved in novel drug development frequently experience a heavy increase in expenditure when their compounds reach clinical trials. In its 2002 survey of its US-based member companies, the Pharmaceutical Research and Manufacturers of America (PhRMA) noted that the inflation-adjusted increases in clinical R&D costs were more than five times greater than the costs for preclinical work.

“The key lesson from this is one of selection,” added Dr Kermani. “Project selection and prioritisation, before entry into the development process, is therefore an important decision point.”

Dr Kermani also believes the rising costs of clinical trials are affecting R&D strategies and the manner in which companies operate. “A good example of this would be the number of Japanese companies have sought to carry out their clinical studies abroad, taking advantage of the lower costs and larger market size. If this becomes an industry trend, it would have significant implications for Japanas an R&D base since Japanese companies have shown a strong commitment to clinical research.”

Drug discovery technologies such as combinatorial chemistry, high throughput screening and genomics are resulting in an increasing number of new compounds with the potential to enter clinical development. Much will therefore depend on the decision-making process used to evaluate what compounds progress to clinical trials. Inevitably, the rising costs of clinical development are an important factor in this assessment.

“Outsourcing is one obvious solution,” explained Dr Kermani. “As clinical development is expensive and risk-intensive, companies involved in drug development have genuinely improved their options for success by outsourcing to clinical research organisations (CROs).”

The growing popularity of outsourcing is illustrated in an analysis of the USpharmaceutical industry by UBS Warburg. They revealed that of the US$30 billion that the USpharmaceutical industry invested in R&D in 2001, 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 1% per year throughout 2005.

“Outsourcing allows a company to concentrate on its core competencies and to utilise its R&D expenditure effectively,” concluded Dr Kermani. “An established outsourcing strategy is now an important feature of clinical development in most pharmaceutical companies. Nevertheless, for the relationship between biopharmaceutical companies and CROs to be successful and effective, it must be considered as a partnership.

From a small biotech in search of specialist advice, to a multinational pharmaceutical corporation requiring a global strategy for their clinical trials – all companies will seek a CRO that can provide honest and objective advice, and whose approach to drug development best complements their own goals.”

For further information please visit www.chiltern.com