Historically, pharma manufacturers have performed most major functions that are aligned with the lifecycle of their drugs.
However, they are increasingly outsourcing many functions. For example, Bayer Healthcare recently appointed Cardinal Health as the U.S. contract manufacturer for Xofigo®. Here, Tiffany Olson talks about the industry forces that are driving this trend.
Q: What are the key trends you believe are shaping the evolution of the pharmaceutical outsourcing services industry?
A: I think a variety of key trends are leading pharmaceutical manufacturers to use more contract services. At the very highest level, pharmaceutical companies are facing the same challenges as the broader healthcare industry. Trends such as the consolidation of hospital systems and the industry’s transition from ‘fee-for-service’ to an ‘outcomes-based’ payment structure, for example. As consolidation in healthcare systems continues, health systems will have increased bargaining power, putting price pressure on the pharmaceutical industry.
Additionally, cost management pressure from government programs have also placed increased price pressure on pharmaceutical companies—which in turn is causing them to re-evaluate their business models.
That said, rising drug development costs have been the most significant driver of the increased use of contract research organizations (CROs), while the loss of patent exclusivity and shift to orphan drug development are the biggest factors driving the increased use of contract manufacturing organizations (CMOs).
Q: Let’s talk more about the first trend. How have drug development costs led to an increase in CROs?
A: The high expense associated with research and development (R&D) has increasingly become a major source of economic pressure on pharmaceutical companies. It’s no secret that the productivity of pharmaceutical R&D departments has declined in recent years. Many believe this is due to the increased scrutiny and new regulations by FDA. According to the Tufts Center for the Study of Drug Development, in 2003 it cost an estimated $802 million to bring a new drug to market – compared to $2.6 billion in 2014 (1). As clinical trial requirements grow costlier and more complex, it has become increasingly challenging for R&D departments to achieve the same level of productivity they achieved in years past. More stringent clinical trial requirements also contribute to more products failing in the development stage, leaving successful products to carry the expense.
As pharmaceutical companies are challenged to reduce financial risk, R&D teams are under increasing pressure to reduce the cost of managing clinical trials. This is one reason why companies are increasingly turning to outsourcing the management of clinical trials to CROs. They need to shift R&D costs from fixed to variable.
Q: How would you characterize the growth of the CRO market?
A: The total market for CROs has grown to an estimated $16 billion, including medical devices, with the biopharmaceutical space representing nearly $13 billion per year. This indicates an annual growth rate of 10.9% from 2009-2014, and IBISWorld is projecting an 8.7% annualized growth rate through 2019 (2). CROs come in all shapes and sizes, and the market is fairly fragmented. These firms offer efficiency, access to patients, and cost management that can help expedite the drug approval process. According to Tufts Center for the Study of Drug Development, CROs are able to complete clinical trials four to five months faster than in-house R&D teams, savings that can translate to over $100 million in revenue potential.
Q: Now let’s talk more about patent expiration and orphan drug development. What role do these trends play in the rise of CROs?
A: As branded blockbuster drugs (like Pfizer’s Lipitor in 2011, Eli Lilly’s Cymbalta and AstraZeneca’s Nexium in 2014), lose patent exclusivity and generic versions of those drugs enter the market, brand name drug manufacturers experience a steep decline in revenues. This trend is increasing the pressure for pharmaceutical companies to consider outsourcing their manufacturing operations to a lower-cost CMO model.
Additionally, as the hurdle to improve the effectiveness of approved drugs gets higher, many pharmaceutical companies have shifted to orphan drug development. By their nature, orphan drugs can only be marketed to patient populations of fewer than 200,000. This translates to smaller manufacturing batches, which pharmaceutical companies may identify as best suited for a CMOs positioned to operate more cost effectively on a smaller scale.
Q: Are there other trends that are driving pharmaceutical companies to develop new business models for bringing their products to market?
A: I’d add that pharmaceutical companies will need to re-evaluate keeping production in-house as drugs convert from prescription to over-the-counter medications. I believe drug companies will also increasingly consider outsourcing the production of specialized pharmaceuticals, like radiopharmaceuticals, because the processes and regulations for developing these drugs are so complex and specialized.
Overall, pharmaceutical companies are evaluating their core competencies and developing strategic plans to transition through the many changes facing the industry. As organizations evolve their new models, they’ll increasingly re-deploy their talent to other high-value functions so they can continue bringing innovative and effective products to market.