Playing the economics game with outsourcing
Divestments resulting in the dismantling of integrated production empires in industries such as petroleum, pharmaceuticals, automobiles, and steel are producing accelerated gains in productivity and performance. In the chemical and allied products (C&AP) industries, the headlines are grabbed by megamergers that have reduced Chemical & Engineering News’ top 100 chemical companies to 75. However, these mergers are often accompanied by divestments that narrow the merged firms’ focus. For example, Hoechst and Rhone-Poulenc both shed their chemical operations before merging to form pharmaceutical giant Aventis. And as part of the upcoming merger of Pharmacia & Upjohn with Monsanto, Monsanto’s large agribusiness is being divested. Service “empires” have also been reduced as companies increasingly outsource services as well as production to the most efficient suppliers. Companies now outsource a wide range of services that were once performed by full-time employees. What are the reasons for the increased cost-effectiveness often associated with outsourcing? R&D outsourcing The Centre for Medicines Research International (Epsom, Surrey, U.K.) surveyed 36 pharmaceutical companies and found results consistent with those of the NSF (Figure 2). Midsized pharmaceutical firms tend to outsource clinical studies more than either smaller or larger firms. Smaller firms are more likely to outsource pharmacology and toxicology studies, required by regulatory agencies, and chemical manufacturing than are midsized and larger firms. Worldwide, more than 600 CROs exist. Contract research and testing laboratories perform an increasing proportion of many companies’ R&D and analytical work. Petrocelli observes that as CROs have grown larger and proven their capabilities, drug companies have accelerated their use of them. The U.S. Bureau of Labor Statistics predicts that the employment of chemists at R&D and testing laboratories will increase 60% to more than 28,000 between 1996 and 2006 in the United States. By comparison, the bureau predicts that chemists’ employment in the C&AP industry will grow only 6.7% to 30,298 in the same period, which suggests that the outsourcing trend will affect many chemists’ employment opportunities. Christopher Jock, a regional director of Kelly Scientific Services, views a company’s use of temporary and contract employees to supplement its regular workforce on a project basis (as opposed to serving as short-term replacements) as outsourcing. This type of outsourcing is occurring at Shell Chemical Co. in connection with the sale of 40% of its chemical businesses. When collection and organization of the intellectual property associated with the sale of one of these business units began taking too much staff time, this project was outsourced to a chemist who recently retired from that business unit. With the completion of this work, the chemist’s employment by Shell will terminate. Pharmaceutical industry outsourcing Large pharmaceutical companies outsource chemical R&D functions to CROs to increase their productivity, accelerate drug discovery and development, and expand their research capabilities, according to the consulting firm Strategic Research Institute (New York, NY). Boston-based consulting firm Advancetech Monitor estimates that outsourced 1999 pharmaceutical R&D spending was about $5 billion and predicts that about 20% of the total pharmaceutical R&D dollars will be spent on research alliances in 2000, compared with 4% in 1994. By 2004, nearly 42% of all pharmaceutical drug-development expenditures ($38.4 billion) will be spent on outsourcing to alliance partners, according to a forecast from consulting firm Frost & Sullivan (New York, NY). A Centre for Medicines Research International survey of 36 pharmaceutical companies (Figure 3) forecasts that outsourcing will increase 68% overall between 1997 and 2002, with the greatest increases predicted for clinical studies and regulatory pharmacology (79%) and toxicology (80%). With combinatorial chemistry and HTS techniques rapidly increasing the number of new lead compounds, outsourcing is increasingly necessary to scale up and evaluate new compounds. In response to this demand, CROs continue to offer new services and upgrade research capabilities (and hire more research scientists). Today’s CROs have the capability of providing services such as early- or late-stage discovery, preclinical testing, all stages of clinical testing, postmarketing surveillance trials, manufacturing, sales, and marketing. Some large pharmaceutical companies are making strategic shifts away from full integration—moving toward outsourcing for lower costs—to gain access to expertise and production capacity or to shorten the time to market. However, some mergers and acquisitions by large pharmaceutical companies are creating global companies with extensive, often underutilized, manufacturing infrastructures. These companies often have less short-term need to outsource production. With the market approaching $1 billion worldwide, the outsourcing of biopharmaceutical manufacturing is increasing. Biotechnology companies need to be fast and flexible, and outsourcing represents an important part of this flexibility. The unique requirements for the production of biopharmaceuticals and the cost of building and maintaining production capacity make outsourcing an important manufacturing strategy. Today, most biotechnology and pharmaceutical companies outsource at least part of their analytical laboratory or manufacturing requirements. In the chemical and pharmaceutical industries, the ability to determine which manufacturing steps should be outsourced and to select the best outsourcing partner for the job often provides significant competitive advantages in the marketplace. Mary Kachinsky, director of materials at Genzyme Corp. (Cambridge, MA), observes that selecting suppliers wisely from the very beginning can speed up the FDA’s approval of New Drug Applications. “Partnerships between suppliers and the end user, with input from academic research, have become an important methodology for moving the technology of scale-up biopharmaceutical manufacturing to the next level of efficiency,” says Sandra Fox, president of HighTech Business Decisions, a consulting firm in Moraga, CA. “These collaborations are key in the development of biopharmaceutical manufacturing best practices,” she says. Outsourcing allows biotechnology companies to be fast and flexible while avoiding the risk of investing in facilities and employee expertise. Fox observes, “Outsourcing is attractive because it provides the flexibility needed, whether a product fails in clinical trials or proves to be a tremendous success.” Teamwork has replaced the old approach of simply handing chemical manufacturing off to a contractor. For example, at Genzyme, there are monthly cross-functional quality team meetings designed to focus on supplier selection and development. The team includes members of materials purchasing, R&D, and operations, as well as members of departments that perform quality and regulatory functions. To foster teamwork, Ms. Kachinsky says that Genzyme will try to use current suppliers for new outsourcing needs if they have the necessary capabilities. Today, many purchasers continually review the contract manufacturer’s processes and overall ability to meet project goals. SEE sidestory "Why outsource?" Roger Shamel, president of Consulting Resources Group (Lexington, MA), a market analysis firm, says that U.S. and European pharmaceutical companies may increase their custom manufacturing in countries such as the former Soviet Union, where salaries are low. Some pharmaceutical manufacturers are taking advantage of Ireland’s tax incentives to pharmaceutical manufacturers and building multimillion-dollar facilities there. The United States also may begin to see more competition from China in the areas of intermediates and generic drugs. The greatest new product opportunities for bulk pharmaceutical chemical manufacturers will continue to emerge from human pharmaceutical dose-form products losing patent protection. An estimated $20 billion (1994 dollars, dose-form level) of prescription pharmaceuticals lost patent protection between 1994 and 1999. As many of these off-patent drugs “go generic”, some drug companies will purchase the services of bulk pharmaceutical chemical manufacturers to produce them. Some pharmaceutical firms are even outsourcing drug sales and marketing Outsourced services include drug educational programs targeted at physicians, specially designed strategic marketing plans, and sales utilizing the outsourcing firm’s own network of sales representatives. One example of the services that CROs provide is Ventiv Health, Inc., which has entered into a 28-month agreement with Novartis Pharmaceuticals Corporation to provide Novartis with a field force of 100 full-time sales representatives to serve the cardiovascular therapeutic market. “The cardiovascular market is highly dynamic,” says Eric Talbott, Novartis’s vice president of sales. “We recognized the opportunity to enhance our sales force efforts and maximize the return on these key products by increasing our reach through the Ventiv Health field force.” Services outsourcing Steven Tarnoff, managing partner of the Franklin Group consulting firm (Somerville, NJ), observes that the use of outsourced contract sales force firms by the pharmaceutical industry has grown from 2.6% of total sales representatives in the field in 1994 to 11.2% in 1997. Factors driving this growth include the general prosperity of the pharmaceutical industry, fewer possible copromotion partner companies due to mergers and acquisitions, the need for companies to shift fixed costs to variable costs, and the steady stream of new drug approvals. The wide variety of outsourcing services and the increasing use of these services by the chemical manufacturing, pharmaceutical, and biotechnology industries mean that outsourcing will become more common in the near future. The growth of outsourcing provides new employment opportunities for scientific professionals and will no doubt change their employment patterns.
John K. Borchardt is a research chemist who has published more than 100 technical papers and has been awarded 30 U.S. patents. He holds a Ph.D. in organic chemistry from the University of Rochester. Comments and questions for the author may be addressed to the Editorial Office by e-mail at mdd@acs.org, by fax at 202-776-8166 or by post at 1155 16th Street, NW; Washington, DC 20036. Top || Modern Drug Discovery Home Page
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More and more, big companies regard a diverse range of operations as a handicap in today’s increasingly competitive, rapid-response global business environment. Paralleling the collapse of communist states, most big companies have abandoned the strategy of economic self-sufficiency. Instead, they use three strategies—divestment, outsourcing, and mergers—to focus on the core activities that are their primary source of profits.