Wednesday, September 16, 2009

Why has Outsourcing Gone Mainstream in the Pharmaceutical-BioPharmaceutical Industry

Gil Roth the Editor of Contract Pharma magazine invited several people to comment about the outsourcing trends in the industry in honor of the magazine's 10th anniversary. I sent him my thoughts and wanted to share them here as well (along with a few additional details):

At a macro level, the largest changes in the last 10 years that have occurred in the Pharmaceutical/Bio-pharmaceutical outsourcing-contracting-consulting space is how it has become totally main stream and in many ways regarded as a necessity to being competitive in a world where the classic Pharmaceutical Industry model no longer works. Layer on top of that what Thomas Friedman of New York Times fame labeled as “The Flat World” and it is no wonder that the outsourcing band wagon is so much the order of the day.

The way Wall Street would put is that this trend is a result of a “secular change”. That change is rooted in failed pipelines, lower R&D productivity, the rapid ascent of generic drugs (over 70% of US prescriptions in 2008), increased government regulations, the acknowledgment about the effectiveness of the sales force, extraordinary expense profiles, a public who will not or cannot appreciate the value of the product, a hostile congress and the advent of significant health-care reform from the Obama administration. By the way, Wall Street has acknowledged these secular changes by stripping much of the "P/E premium" from large pharmaceuticals stock prices and turned them into relatively poor performers.

When you combine those challenges with the enormous advances in technology and communication that enable global research and development and supply chains, an outsourcing strategy is not only prudent, it is a requirement. It is indeed a very straightforward way to lower the costs of doing business. When one adds on the acknowledgment of the demand generated by the rising wealth and demand for health-care from very rapidly developing countries including India and China, the requisite of using outsourcing as a way to enter those markets is on the top agendas of many senior executives in the industry.

While the Pharmaceutical/Bio-pharmaceutical Industry has been a notoriously slow adapter of change (yes, there are lots of reasons, not the least of which are regulatory) compounded by risk adverse cultures, the one thing they are not is naive. Gone are the days of “top line revenue” is the only thing that is of concern of management. Today there is a focus on “The Bottom Line” which includes unit costs, effectiveness and efficiency among the tactics. Sure there are other strategies being deployed, for example we have identified two camps in the industry, the consolidation camp and the diversification camp. The “consolidators” would include the big pharma mega-mergers (Pfizer-Wyeth, Merck-ScheringPlough, etc.) and include even some of the consolidation seen by several large biotechs. When you couple a parallel path by the big CRO's, contract manufactures, consultants, etc., the appeal of awarding large pieces of business functions in either long term contracts and/or joint ventures becomes attractive. In a similar fashion, the “diversifiers” (Sanofi, Novartis, etc.) want to focus on their new business endeavors such as animal health, consumer pharmaceuticals or diagnostics and therefore are far more likely to look at an outsourcing strategy as a natural way to allow management focus to be aimed at their new strategies.

The outlook, in my opinion even more to come with innovative joint ventures, terms and conditions and capabilities which will aid the industry to continue its path toward attractive business results.

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