Glaxo was well positioned for the boom years ahead in pharmaceuticals. But the clock was ticking and the new research facility was not yet ready. Headquarters told the researchers to proceed using whatever outside resources were available.

In many ways, Caudill and Childers' trek through the next 15 years parallels developments in contract services and outsourcing over the same period. Faced in the late 1980s with what Caudill now characterizes as an unsophisticated "cottage industry" in pharmaceutical services, the two launched their own company, Magellan Laboratories, hoping to attract chemists and researchers with drug industry experience.

Companies like Magellan turned out to be magnets for talent from large pharmaceutical companies, as researchers defected in frustration over the increasing aversion to risk within large drug firms' labs.

With this transfer of talent, pharmaceutical outsourcing expanded in the 1990s beyond the traditional business of contract manufacturing of chemical intermediates and active pharmaceutical ingredients (APIs)--currently the largest and most depressed outsourcing sector. It grew to include research, analytical, discovery, and process development services covering nearly every aspect of bringing new drugs to market.

Cardinal Health, one of several companies attempting to amass a comprehensive train of such services, purchased Magellan in 2002 for a reported $200 million. Caudill and Childers are now copresidents of pharmaceutical development services at Cardinal, adding a drug development dimension to what was already the leading service firm in distribution.

Today, major pharmaceutical companies have far fewer drugs in their development pipelines than they did 10 years ago. This creates a big incentive to access outside expertise and technology for discovery and development--particularly given the steep rise in drug targets and compounds that need to be screened for therapeutic activity. Some see the stage set for big pharma to start using outsourcing, contract services, and partnerships to gain serious competitive advantage.

But Caudill and others say this isn't happening. Despite developments in recent years, outsourcing, for the most part, is still pursued tactically, much in the way that Glaxo sought to fill gaps while it built its own facility in 1987. While the auto, electronics, and apparel industries make strategic use of outsourcing--signing on expert contractors to do just about everything but sell products--the traditional pharmaceutical companies have resisted contracting core research, manufacturing, and other functions to outsiders.

Nevertheless, some fine chemicals companies have responded to the tough market for contract manufacturing of intermediates and APIs by moving into early-stage services in hopes of landing future API contracts through long-term partnerships.

Kevin Lesnewski, senior manager for marketing and business intelligence at DSM, looks at the earliest stage of development and sees a drug industry pipeline that is far from dry. "There are 3,000 to 4,000 new compounds that need to be evaluated," Lesnewski says. "And compounds currently on the market can apply to other diseases. Where do you get the body of science to evaluate all of this?"

DSM has been trying to provide an answer in recent years by adding nonchemical manufacturing services in drug discovery and development to its offerings. It began in 2000 with the acquisition of Catalytica, which added drug development and dosage formulation. More recently, the company purchased a 30% stake in the Dutch contract research firm Syncom.

Add its growing biologics operation--a $750 million investment in a new fermentation plant is under way in Montreal--and Lesnewski says the firm can offer a full range of services from postdiscovery to commercial production. "Pharmaceutical companies are looking for strategic partners [that can cover this range], and we are targeting the end-game API manufacturing contracts," he says.

PREPARED Specialists like Pharm-Eco tout the technology and know-how to accelerate early-stage drug development. PHARM-ECO PHOTO

SIMILARLY, Cardinal moved on several fronts to extend its leadership position beyond distribution. The acquisition of RP Scherer Corp. in 1997 made Cardinal the world's largest contract manufacturer of dosage-form drugs. The Magellan acquisition and a partnership with the Swiss API manufacturer Helsinn announced last fall were recent milestones in expanding its range of contract services. Last year, the firm opened an $80 million facility in Somerset, N.J., dedicated to pharmaceutical development and clinical-scale manufacturing.

Companies adding early-stage services have done so largely to secure downstream contracts, according to Caudill.

Time-to-market continues to drive outsourcing in major pharmaceutical companies, where the cost of R&D is a major concern, Caudill says. He notes that Pharmaceutical Research & Manufacturers of America members' R&D spending increased from $8 billion in 1990 to $32 billion in 2002, a period during which drug approvals remained flat, Caudill says.

The level of research service outsourcing is largely limited by the expertise of service suppliers, Caudill says--just as it was in his Glaxo days. "If we could have found a service company with the same infrastructure, know-how, and talent that you can find inside big pharma, basically we could have taken out all facets of drug development," he adds.

Cardinal claims that it can match major pharmaceutical companies' research infrastructure. More important, Caudill says, Cardinal can offer an integrated chain of services, including drug development, formulation, manufacturing, packaging, and distribution, a combination that he says speeds products to market at a lower cost.

To DSM and Cardinal--and to most other large outsourcing firms--size is paramount. The counterargument, coming from smaller firms, is that world-class expertise matters most.

James C. Miller, president of consultants PharmSource Information Services, cautions that the one-stop shop pursued by large suppliers has never won over pharmaceutical companies. "The decisionmakers for chemistry and lead optimization outsourcing are not the same people making the manufacturing and process development decisions," he says. Service partnerships stretching from discovery to launch would probably entail equity in the form of milestone and royalty payments. "By no means has anyone shown this will work," Miller says.

However, the push to develop new drugs has led to solid growth for small specialized firms. Most have no interest in commercial-scale manufacturing and readily hand over intellectual property to their clients.

Solvias, the former central R&D group for Ciba-Geigy and Novartis, does no significant manufacturing, according to Marion Misun, product manager for contract synthesis. "We have critical mass in chemical, physical chemical, analytical, and drug development services," Misun says. "All activities are geared to developing drugs or troubleshooting the process for a drug and to getting a new drug on the market successfully and quickly."

The company has all the strengths of major pharmaceutical R&D because of its 30-year experience as an R&D arm of Ciba, where it developed asymmetric catalysis, fluorination chemistry, nucleoside chemistry, and polymorphism techniques, Misun says. The firm is recognized for its groundbreaking work in asymmetric catalysis and carbon-carbon and carbon-nitrogen bond formation in developing pharmaceutical chemicals, he says.

By not tying work into manufacturing deals, Misun explains, the company is able to accelerate the pace of innovation. "One of the biggest hurdles to innovation and the improvement of processes is the fear of a lock-in situation or bad licensing deals on technologies owned by third parties."

Misun says the company's focus allows it to maintain a staff of expert problems solvers, creating a high barrier of entry to potential competition. "You can buy the instruments, that's fine," he says. "We built several of the instruments."

Solvias reached $29 million in sales last year, a 20% increase. This year, it established a U.S. sales arm, Solvias Inc., in Fort Lee, N.J., near most of its major pharmaceutical customers.

AVANTIUM Technologies, an Amsterdam-based contract research firm targeting process development and crystal analysis, uses a robotics-based high-throughput screening technology originally developed by Shell Chemicals for its catalyst division. Avantium, which was spun off from Shell in 2000, has several pharmaceutical and chemical industry investors, including Pfizer, GlaxoSmithKline, Eastman Chemical, Shell, and Akzo Nobel. Tom van Aken, vice president for business development, says 70% of Avantium's work is for pharmaceutical and biotechnology companies.

Van Aken says Avantium's robotics infrastructure for process development and R&D and its software for managing experiments can reduce time and risk in crystallization and polymer screening. "On solid-state work, it could take a pharmaceutical company 18 months to look at 60 different ways to crystallize APIs," van Aken says. "We do over a thousand small-scale crystallizations in four weeks." He claims the firm's sales increased 20% last year.

Neil D. Murray, marketing director for Solutia's three-year-old pharmaceutical services unit, says the fact that drug companies have in some cases pulled commercial manufacturing back in-house--or have at least run out of new drugs to manufacture under contract--indicates that they are not in the market for broad-based, start-to-finish outsourcing services. "They may want support in particular areas, such as process development or analytical services," he suggests.

Tailoring its approach to meet that need, the company has established four "centers of excellence": chromatography, fast-track manufacturing services, containment services, and analytical services. Murray says Solutia can offer fully integrated services, "but we recognize that the market is increasingly looking for support in specific small areas to supplement companies' own internal resources."

Johnson Matthey bought into the pharmaceutical services market in 2001 with the acquisition of Pharm-Eco, a contract synthesis company founded in 1972 and a pioneer in outsourcing, according to S. A. Zahr, executive vice president and general manager of Pharm-Eco. The company is part of Johnson Matthey's pharmaceutical materials division, along with Macfarlan Smith, Johnson Matthey USA, and Cascade Biochem.

Pharm-Eco, which is counting on steady growth in drug development services, is building a new facility for scale-up work in Devens, Mass. The company currently operates 37 kilo labs and will add five labs in the new facility, which is sized to accommodate a total of 24 more, says Emile Farhan, director of chemistry and scientific affairs. Pharm-Eco's services include process development, route scouting, and commercial scale-up.

The services market is also filling with biotechnology firms such as Lipomics, which offers its ability to measure lipid metabolism as a drug discovery service, and Microbia, which engineers fermentation strains to improve process efficiency for small-molecule therapeutics. Microbia recently announced new contracts with Ranbaxy and Teva Pharmaceuticals.

Exelixis, a start-up biotech drug firm that collaborates with large pharmaceutical companies on drug discovery and development, focuses on the sheer volume of target and compound analysis necessary at the outset. The company, which began working in monosystem genetics based on the fruit fly Drosophila in the 1990s, expanded its "gene-to-drug" discovery services from a staff of 10 to a staff of 200 over the past three years, according to Michael Morrissey, senior vice president of discovery research.

Exelixis has more than 3 million compounds in its library, which it can screen in a matter of weeks, and has developed technology and automation that can make 50,000 compounds a week for lead discovery and optimization, Morrissey says. Last October, the firm announced a partnership with Glaxo under which it plans to discover, develop, and commercialize novel therapeutics in the areas of vascular biology, inflammatory disease, and oncology.

Other biotech firms target process development and optimization work for pharmaceutical companies. Directed evolution firm Codexis sees Phase II and III clinical trials as "the sweet spot" for process design services. "That is when the drug company starts to care about what the process looks like," says Tassos Gianakakos, vice president of finance and corporate development. Codexis is also pursuing work on improving manufacturing processes for drugs that have been on the market for five or six years.

Gianakakos notes that the biocatalysis groups that have worked on process optimization within major pharmaceutical companies have been scaled back significantly in recent years--Glaxo, for example, recently disbanded its biocatalysis operation in Stevanage, England. Codexis, on the other hand, has invested $170 million in its technology platform over the past 10 years, he says. While process development for clinical trials is still a small part of Codexis' business, Gianakakos sees it as a strong growth market for outsourcing services.

Gianakakos says drug companies are beginning to think strategically about outsourcing, but for the most part, the practice remains tactical. Pharm-Eco's Farhan says pharmaceutical companies need to develop new management systems that maximize use of outside resources for R&D.

THE CHANGE is under way at some of the major pharmaceutical companies, notably Glaxo. "We've reshaped R&D in the past two years to make it more productive," says Richard Koenig, vice-president of R&D communications with Glaxo. The company has broken research into six divisions called Centers of Excellence for Drug Discovery (CEDD), each with a staff of 250 to 400 people and each focused on a particular therapeutic area. Each CEDD is intended to act as an entrepreneurial business unit, free to use outside services.

Glaxo has also reorganized business development; it now reports to the director of R&D rather than to managers in the finance or legal departments, Koenig says.

Elaine V. Jones, vice president of S. R. One, an investment subsidiary of Glaxo that has made investments in technology start-ups and other companies since 1985, says there is a growing emphasis on linking drug discovery to the best available technologies outside the company. Glaxo's investment in Avantium is an example, she says. "There is a definite shift to looking externally and an awareness of the need to be opportunistic" in investing in outside technologies and services.

Still, industry watchers wonder whether the pharmaceutical industry is doing enough. "The question is whether big pharma is setting itself up for a paradigm shift in terms of how it goes about the R&D part of the business," Cardinal's Caudill says. "Right now, big pharma is keeping 80% of R&D spending inside. If they move it to 20% inside, outsourcing would become strategic--essential to their survival. That's the paradigm shift I'm talking about." Cardinal, he says, is betting that the shift is under way.

Chemical & Engineering News
Copyright © 2003 American Chemical Society