When Pfizer’s chief executive Jeff Kindler was asked at the annual Credit Swiss Healthcare Conference in November 2008 what his company would look like in the future, he said it was, “getting smaller in order to grow faster.”

His words will resonate with much of the pharmaceutical industry today.

Faced with sickly returns as pipelines dry up, increasing development costs and expiring patents, thousands of jobs have been axed from research and development centres, while simultaneously new partnerships and outsourcing deals have been made.

A senior research analyst at Frost & Sullivan, Sumanth Kambhammettu, says the worldwide credit crunch has only intensified the effect of pre-existing challenges on the industry shifting its focus to cutting costs.

But Big Pharma – the top 20 to 25 pharmaceutical companies – is defying the credit crunch by maintaining its cash-rich status and the challenges it now faces means good news for outsourcing companies and those on the M&A trail.

“The emphasis really is on further cost cutting,” says Kambhammettu. “One can expect a spurt in outsourcing – both in R&D and manufacturing.”

Pharmaceutical shake-up

The bad news comes for those pharmaceutical and biotech start-ups with low cash reserves or a dependence on private equity. They will find themselves the targets for acquisition as Big Pharma looks for the next blockbuster drug.

“Companies with innovative late-stage products and technology platforms can expect to be acquisition targets for Big Pharma, although their bargaining power may be limited,” says Kambhammettu.

While large pharmaceutical companies have a history of outsourcing non-core functions, the last decade has seen the industry contracting out an assortment of areas, from clinical trials to manufacturing.

At Pfizer a major shake-up has seen the company move to a model of individual business units, shedding jobs and doubling the outsourcing of its manufacturing. As a result the number of manufacturing sites has dropped from 78 in 2004 to 48 at the beginning of 2009. As Kindler acknowledged, much of how Pfizer will look in the future comes down to how successful the company can be in generating increased revenue from internal and external sources.

The company has pulled the plug on its heart and obesity drugs and is looking to focus on oncology, pain, inflammation, immunology, diabetes, Alzheimer’s and schizophrenia. It announced in September 2008 that it had reached a global co-development agreement with Medivation for Alzheimer’s drug Dimebon and, among other deals, it has also developed a partnership with Australia’s Eskitis Institute to work on anti-infectives.

Reorganise and reallocate

Pfizer’s situation is not unique. It seems that the whole industry is looking to reallocate resources and reorganise business, adopting the mantra of “bigger is no longer better”.

“The whole industry is looking to reallocate resources and reorganise business, adopting the mantra of ‘bigger is no longer better’.”

A recent report by Kalorama Information says that in 2007, 34% of global R&D spending – or $26.4bn – was committed to outsourcing up from 22% in 2002 and much of that went outside the country where the business is domiciled.

The reason, say analysts, is that while biomedical knowledge is supposedly increasing exponentially, the gap between drug discovery and new pharmaceuticals appearing on the market is getting wider.

Bottlenecks in the drug discovery process are slowing development times. Scientists interviewed for Kalorama’s study said that despite the number of targets increasing sharply over the past decade, sufficient understanding of the gene, protein function and biological pathways of those targets has not increased at the same rate.

Advances in genomics, chemistry and high throughput screening have all added to increasing the number of targets and drug leads. Many companies, however, just do not have the in-house resources to capitalise on these developments.

One notable R&D outsourcing deal is Sanofi-Aventis’ decision to outsource its bone research to ProStrakan, a Scottish specialist pharmaceutical company involved in the development of prescription medicines.

Eli Lilly also unveiled a ten-year, $1.6bn lab services deal in August 2008 with testing company Covance after outsourcing many of its early-stage R&D programmes to Jubiliant Organosys in India. In addition, Novo Nordisk has said it is planning to outsource over 30% of its R&D work to India in the next few years.

Executive vice president of AstraZeneca and head of global discovery research, Jan Lundberg, has previously been quoted as saying that the industry needs to take objective decisions when it comes to looking at internal projects and outsourcing. Along these lines, in February 2008 AstraZeneca spun off much of its research for gastrointestinal diseases into a new company backed by private equity, Albireo.

Responding to a question on what externalisation would mean for the size of research organisations within big pharmaceutical companies, Lundberg said: “For us externalisation is about gaining further access to the global pool of ideas and talent. I can’t see a pharmaceutical company without a strong internal research programme. However, we want to evaluate the quality of external opportunities and to be a credible partner, bringing our own capabilities to the table.”

Downstream winners

The cost and time of developing and bringing a drug to market is over $900m and on average it takes about 15 years to get new drugs to market. Expanding the research and development process by outsourcing and partnering therefore seems a logical step.

Kambhammettu says in terms of development outsourcing Big Pharma is focusing its efforts on chronic areas with large patient numbers, such as oncology, cardiovascular and autoimmune disorders. He predicts there will also be a marked shift towards biotech products because there is lower generic competition.

“China and India offer significant scientific expertise, lower staffing costs and the ready infrastructure needed to successfully perform drug discovery.”

The big winners in Big Pharma’s search for new drugs, says Kambhammettu, are contract resource organisations (CROs) and contract manufacturing organisations (CMOs). These organisations are taking off in India, Brazil and China, while Singapore and Russia also promise great opportunities.

The advantage of China and India is that they offer significant scientific expertise, lower staffing costs and the ready infrastructure needed to successfully perform drug discovery, the Kalorama report concludes.

Russia and the Ukraine are also said to have a growing profile, with experienced chemists working to provide services from preparing custom libraries, advancing screening hits into families of leads and designing libraries that target important biomolecules.

The outsourcing landscape appears to have grown fastest in China. In 2004 there were only a few CROs but by late 2008 drug discovery laboratories were opened in Shanghai, Beijing and Suzhou. The US FDA reaffirmed the country’s growing stature by sending eight full-time staff to take up roles based in Beijing, Shanghai and Guangzhou in November 2008.

Previously, weak regulation of chemical ingredients in pharmaceuticals from China had seen manufacturers push counterfeit and faulty compounds. As the industry looks to outsource, the need for regulation and monitoring is vital.

Recent issues with melamine-tainted dairy products and problems with the blood-thinning drug Heparin, recalled by Baxter International Ltd following patient fatalities and adverse reactions in the US and Germany, further enforce the need for regulation.

Clinical challenges

In addition to drug discovery, pharmaceutical companies – driven by mounting market pressures – are looking to conduct clinical trials out-of-house. Not only has the complexity of conducting clinical trials grown over the past 20 years, but the number of drugs in development has increased, government regulations have tightened and patient recruitment has become more difficult.

“Developers need to submit new drugs for approval in multiple countries simultaneously, rather than in succession, to maximise revenue and reduce costs.”

Kalorama’s publisher Bruce Carlson says the trend has begun to shift trials offshore as drug developers seek recruitment in large populations of people eager to take part in clinical trial research, particularly in Eastern Europe, Asia and Latin America.

“These regions can often produce the required number of participants in half the time with improved compliance and cheaper medical professionals,” he says. “Developers need to submit new drugs for approval in multiple countries simultaneously, rather than in succession, to maximise revenue and reduce costs. Recruiting volunteers in multiple countries is essential.”

Wherever they are based, Kambhammettu says that mid-sized companies with a focus on innovative products targeting niche markets, as well as CROs and CMOs offering the best “value-for-money” in research and manufacturing, stand to win in the near future.

Announcements like those from GlaxoSmithKline that it is to cut 850 R&D jobs, or Merck which cut 7,200 jobs and said it was looking to outsource more of its manufacturing, only serve to strengthen this view.

At Merck, chief executive Richard Clark has said that the redundancies and overhaul were part of positioning the company for the future. He said that Merck hoped to speed innovation by consolidating research on particular diseases in single locations. He also announced plans to outsource more manufacturing. “If you don’t change these business models, we’re not going to survive as an industry, let alone a company,” he added.