finding alignment: opportunities and obstacles in the pharma/cro relationship

Finding AlignmentOpportunities and Obstacles in the Pharma/CRO Relationship A report from the Economist Intelligence UnitSponsored by Agilent Technologies

© Economist Intelligence Unit Limited 2012

Finding AlignmentOpportunities and Obstacles in the

Pharma/CRO Relationship

1

Preface 2

Interviewees 3

Executive summary 4

About the survey 4

Introduction: rapid growth, evolving challenges 6

The rise of a bifurcated market and its strategic implications 8

Disruptive innovation: are CROs agents of change? 9

Making the most of new relationships 12

Information technology will be part of the evolution 13

Conclusion 15

Appendix: survey results 16

Contents


Finding AlignmentOpportunities and Obstacles in the Pharma/CRO Relationship

2

Finding Alignment: Opportunities and Obstacles in the Pharma/CRO Relationship explores the increasingly critical role of contract research organisations (CROs) in the transformation of the drug discovery and development (D&D) process at pharmaceutical and biotechnology companies.

The Economist Intelligence Unit conducted the survey and analysis and wrote the report. The fi ndings and views expressed in this report do not necessarily refl ect the views of the sponsor. The author was Paul Kielstra. Gilda Stahl edited the report, and Mike Kenny was responsible for layout. We would like to thank all of the executives who participated in the survey and interviews for their valuable time and insight.

January 2012

Preface




3

Karin Wingstrand

Vice-president and Head of Clinical Development

AstraZeneca

Kiran Mazumdar-Shaw

CEO

Biocon

John Watson

President of Strategic Partnering

Chief Commercial Offi cer

Covance

Dr Jason Hwang

Executive Director of Healthcare

Innosight Institute

Tycho Peterson

Industry analyst

JP Morgan

Richard Connell

Head of External Research Solutions CoE

Pfi zer

John Ratliff

President

Chief Operating Offi cer

Quintiles

Dr Ajit Nair

President, India

SIRO Clinpharm

Dr Robert Ahlbrandt

Senior Vice-president

Global development operations for the Pharmaceutical Development Division

Takeda International

Interviewees



4

A fter years of painfully diminishing return on investment (ROI) from discovery and development (D&D) programmes, pharmaceutical and biotechnology companies are taking a calculated risk at the heart

of their businesses with the production of their most valuable asset—intellectual property. Within the last decade, outsourcing to contract research organisations (CROs)—companies that offer the industry a wide range of research services—has grown to such an extent that it now encompasses over 40% of the entire sector’s D&D. More than one-half of drug makers conduct their Phase I, II and III trials primarily through CROs.

This is no longer outsourcing at the margins, but a fundamental shift away from the industry’s tradition of strong vertical integration. In making this change, however, biotechnology and pharmaceutical companies are betting on a model that is not only unproven, but is still being defi ned. The ability of this approach to deliver improved innovation at a reduced price will require strategic vision rather than simple cost cutting.

Finding Alignment: Opportunities and Obstacles in the Pharma/CRO Relationship, an Economist Intelligence Unit report sponsored by Agilent Technologies, draws on a survey of 251 senior executives from the life sciences industry, as well as in-depth interviews with corporate leaders and industry experts. Its key fi ndings include the following:

l The interest of biotechnology and pharmaceutical companies in global alliances with contract research organisations has reshaped an important part of the CRO market. Pharmaceutical and biotechnology companies are increasingly entering into global alliances with CROs as they seek to improve their ROI in D&D; in the last two years, 22 such major alliances have been formed.

Executive summary

About the survey

A total of 251 senior executives from the life sciences industry participated in the September 2011 survey, including respondents from pharmaceutical companies (44%), biotechnology fi rms (22%) and contract research organisations (15%), with others in the industry comprising the remainder (19%). In terms

of seniority, 51% of respondents are members of the C-suite, with the remainder drawn from senior management positions. Thirty-fi ve percent are based in North America, 28% in Asia-Pacifi c, 27% in Western Europe and the others in the Middle East, Africa, Latin America and Eastern Europe. Forty-eight percent of participants represent companies with more than US$500m in annual revenue; 26% work for companies with more than US$2bn.




5

According to Economist Intelligence Unit survey respondents, although the most common client-CRO relationship remains one that involves ad-hoc contracts, the preferred relationship on both sides would be global alliances or partnerships that are regional or disease-specifi c.

Yet smaller biotech and pharma fi rms—defi ned here as those with annual revenue of less than US$100m—lack the volume of business to make such arrangements worthwhile. These fi rms prefer continued arm’s-length relationships with CROs with local operations. John Ratliff, president and chief operating offi cer (COO) at Quintiles, an integrated biopharmaceutical services company, says, “You almost need two different types of service for two different types of client.”

l CROs and their potential clients have different expectations of the shape of partnerships. A striking perception gap exists between CROs and their clients as to the direction of the market in future. In order to become more attractive partners and tap into the potential market such relationships provide, many CROs are expanding services across the D&D spectrum, particularly in the earlier stages. Forty-eight percent of CRO respondents, for example, intend to begin or expand assay development services and 64% screening services. Other companies in the life sciences industry, however, expect to increase their use of CROs largely in fi elds in which they are already most frequently used, such as drug trials. It appears that the dominant model in the industry has yet to be defi ned.

l CROs will continue to consolidate and gravitate towards becoming either all-purpose partners or niche specialists. Contract research remains a fragmented industry ripe for further consolidation: 74% of CRO survey respondents say that the trend towards alliances with biotechnology and pharmaceutical companies will drive consolidation in the short term. Moreover, 41% say that in the next three years they will expand their range of services to become better potential partners. Highlighting the industry’s duality, the same percentage will focus on a small number of specialised areas (29%) or a single niche (12%).

l All sides still have work to do in shaping partnerships and alliances to their own broader interests. As the nature of alliances and partnerships is redefi ned, CROs will need to demonstrate to biotechnology and pharmaceutical companies the value of working with the former as partners rather than as sources of cheap labour. John Watson, president of strategic partnering and chief commercial offi cer at Covance, a US-based CRO with global operations, says, “Supplier consolidation can create short-term value. It is up to the CRO industry to put forward a broader value proposition.” Pharmaceutical interviewees indicated that companies within the industry are open to new ideas. Such fi rms, however, need to approach the use of CROs as an opportunity for strategic renewal rather than mere cost cutting.

A striking perception gap exists between CROs and their clients as to the direction of the market in future



6

Contract research organisations (CRO) are an integral part of drug development. According to Contract

Research Annual 2011, a yearly study of the pharmaceutical industry, the market for CRO services increased to US$28bn in 2010. This represents over 40% of the approximately US$68bn the industry spent on D&D that year.

CROs have attained this position only recently. In 2000 the market for their services was US$5.2bn and in 1993 a mere US$1.6bn. During these years spending on internal pharmaceutical and biotech D&D also grew, albeit more slowly. The Tufts Center for the Study of Drug Development (TCSDD) notes that spending on CROs over the last decade increased on average by 13.4% per year, while global D&D spending rose by 9.1%.

The CRO market looks set to continue to grow. The reason is straightforward. Kiran Mazumdar-Shaw, CEO of Biocon, an India-based biotechnology company, says that a lack of productivity is creating “serious concern about return on investment in R&D”. Respondents to an Economist Intelligence Unit survey of senior industry executives worldwide conducted in September 2011 agree: 71% of non-CRO respondents say their companies will increase the use of CROs in the next three years, against just 7% who foresee a cutback.

Even while the industry grows, client-service provider relationships are changing. Previously, sponsors would typically contract out specifi c work to CROs on an ad-hoc basis. Such arm’s-length relationships offer fl exibility but they also have drawbacks. For example, the purchaser of services may not be able to draw on the CRO’s expertise in shaping the requested service, eg, helping to design a trial strategy. The sponsor also might not be able to benefi t directly from the specifi c knowledge of a compound a CRO may have gained as the drug underwent the development process.

Increasingly, therefore, pharmaceutical and biotech fi rms, especially the largest ones, seek closer links with CROs in alliances or strategic partnerships. These involve, in some cases, provision by the CRO of a wide range of D&D services for all of the sponsor’s products globally, or may be restricted to certain types of disease or geography. The relationships require much closer integration of the CRO with the sponsor, providing the former with a steady stream of work and the latter with ongoing access to the CRO’s expertise, potentially across the D&D spectrum. In the last two years, 13 big pharmaceutical companies have announced 22 such pacts with CROs, such as Pfi zer’s agreement with ICON and PAREXEL and Sanofi ’s with Covance.

Although the focus is on big pharma’s adoption of these arrangements, John Watson, president

Introduction: rapid growth, evolving challenges




7

of strategic partnering and chief commercial offi cer of Covance, expects mid-sized pharmaceutical companies to favour alliances as well, to avoid being frozen out by larger competitors. “There is a limited amount of high-quality services from stable, fi nancially sound CROs,” he says.

While the number of fi nancially secure CROs may be small, the industry is experiencing intense competitive pressures. goBalto, a global directory of CROs, lists 1,122; the total number may run higher. The industry is concentrated at the top—the leading ten companies boast a 75% market share. However, fragmentation is affecting profi ts even at the biggest companies, where overcapacity has squeezed margins. In 2009, JP Morgan estimated that excess physical capacity in certain preclinical areas had reached 20-25%. Since then toxicology in particular has seen signifi cant facility closures and price discounting.

“We expect further consolidation,” says Tycho Peterson, an industry analyst at JP Morgan. “It is still a fragmented industry.” The number of mergers and acquisitions (M&A) is growing, with the biggest recent example being INC Research’s purchase of Kendle for US$232m in July 2010. However, Dr Jason Hwang, executive director of healthcare at Innosight Institute, a social innovation think-tank, warns that consolidation will be diffi cult. With low barriers to entry, new companies may come into the market as quickly as old ones disappear.

“We expect further consolidation. It is still a fragmented industry.” Tycho Peterson, Industry analyst, JP Morgan



8

Headline-grabbing global alliances are only part of the evolving CRO marketplace. The strategy is most appropriate for big pharmaceutical and biotechnology companies: indeed, 66% of CROs polled say

their relationships with large and small clients are increasingly differentiated. Ajit Nair, President Global Operations at SIRO Clinpharm, an India-based, multinational CRO, sees “two major markets. Big pharma will go towards preferred relationships, but mid-size and smaller pharma and biotechs will look towards working with partners that can do so in a cost-effective manner and provide individualised attention.”

Smaller biotechnology and pharmaceutical companies—those with annual revenue of less than US$100m—lack the volume of business to make broad alliances attractive to both sides. Facing greater resource constraints, these companies are more likely to list low costs as a leading attribute when selecting a CRO (47%) than are larger companies, those with annual revenue over US$2bn (38%). The opposite is true of global reach: 47% of larger companies say this is among the top attributes they look for in a CRO compared with 27% for smaller companies.

CROs still have a large market with smaller pharmaceutical and biotech companies, many of which may be virtual. Ms Mazumdar-Shaw says that Biocon’s two CROs—Syngene and Clinigene—seek to create a “hybrid” model that meets the differing needs of both types of clients. Worldwide partnerships, though, are the bigger prize, bringing a steady stream of potentially high-margin work. CROs in our survey are even more interested in pursuing global alliances than are pharmaceutical and biotech respondents (26%). Only 9% of CROs prefer arm’s-length arrangements.

To tap into the growing partnership market, CROs should make a strategic decision: expand so as to engage in wide-ranging partnerships or focus on one or several niche areas. Mr Peterson of JP Morgan predicts “a bifurcated market. At the high end a handful of large global CROs with a substantial geographic presence and, at the low end, niche providers (in areas such as oncology) should be OK. Those in the middle tier that are not unique enough or do not have appropriate breadth or scale will have difficulty.” Profitability is feasible using either approach. Indeed recent research conducted by the TCSDD found that small, niche providers experienced higher average growth over the last five years than other CROs.

When asked directly about their strategy, CRO respondents are divided: in the next three years 41% will expand their range of services, while the same percentage will focus on a small number of specialised areas (29%) or a single niche (12%). A closer look at the findings, however, shows that companies that speak of specialisation will not shed certain capabilities to focus on others. Only a small number (14%) intend to reduce their service provision on any part of the discovery and development spectrum, while

“Big pharma will go towards preferred relationships, but mid-size and smaller pharma and biotechs will look towards working with partners that can do so in a cost-effective manner and provide individualised attention.”Ajit Nair, President Global Operations SIRO Clinpharm

The rise of a bifurcated market and its strategic implications




9

Disruptive innovation: are CROs agents of change?

The life sciences industry, and big pharma in particular, has long favoured an integrated approach to D&D because of the importance of intellectual property to the company. In moving rapidly towards outsourcing, is it possible they are actually enabling future competitors rather than partners to grow up around them?

The possibility certainly exists. Forty-fi ve percent of survey respondents believe the largest CROs are developing suffi cient competencies to become competitors of traditional pharmaceutical businesses in the near future; only 37% disagree. Moreover, 40% of respondents from potential CRO clients believe that a signifi cant risk of outsourcing is that it allows a potential competitor to develop capacities; only 16% think this risk is not signifi cant.

Life sciences companies are not the fi rst science-based business to outsource important functions and the PC industry offers potential lessons. In The Innovator’s Prescription, Jason Hwang, Clayton Christensen and Jerome Grossman explore the parallels of transformation in life sciences to other technology industries that experienced what the authors call “supply chain disruption”. In this process, sectors with highly integrated production—such

as traditionally practised by big pharma—outsource more and more functions because, once such activities can be commoditised, buying in makes more economic sense than retaining them in-house.

One danger of this process is that, by outsourcing enough functions, a company might create a competitor. The Innovator’s Prescription describes how PC-maker Dell contracted out more of its operations to the Taiwanese manufacturer ASUSTek, which assimilated these skills and began producing its own machines, thus becoming a direct competitor to Dell.

The authors see CROs as a potential source of supply chain disruption in the life sciences industry. As they develop integrated capabilities across the entire D&D value chain—and as margins on their existing work are squeezed—some will move into higher-margin areas, thereby becoming competitors of biotech and pharmaceutical companies.

How likely is this, though? Currently, only 18% of CRO respondents say their companies plan to create and market their own pharmaceutical products. Almost all of these companies have annual incomes under US$500m. These seem to represent small CROs transforming themselves into biotechs rather than ones that have grown substantially and are disrupting the supply chains of former clients.

Bigger CROs do not appear interested in making this shift. Mr Peterson of JP Morgan warns that such a move is “very risky. This is what happened to several CROs in India

that moved into generics. They burned a lot of bridges, and you can’t necessarily go back.” Similarly, John Watson, president of strategic partnering and chief commercial offi cer at Covance, acknowledges that his company is about the same size as the D&D function of a major pharmaceutical fi rm. Yet Covance has consistently said “it is not in the best interests of our shareholders to compete with our clients. We’ve seen it backfi re on some of our competitors.”

Dr Hwang, who was also interviewed for this study, stands by his position. On the one hand, “it is still a bit early to see the disruption we describe,” he says. “The waves of consolidation in the last decade indicate an industry that is ripe for disruption, but the prevailing business model is still trying to consolidate its power and there are still plenty of pharma players in the industry.” On the other hand, he continues, whether in alliances or not, pharmaceutical companies are turning to CROs to do low-margin work that is “a very commoditised form of R&D. If traditional pharma passes on its cost pressures to CROs, they will eventually seek higher ground.”

The threat of disruption lingers, not because of current intentions, but because of how other industries have evolved. Dr Hwang therefore advises CROs to consider how they will adjust if margins become unsustainably squeezed. He also suggests that life sciences companies retain in-house the likely core competencies of tomorrow rather than those of today.

86% intend to expand their existing offerings and 31% will enter D&D areas where they do not yet provide services. Apparently the major emphasis among CROs will be the expansion of services in order to become more attractive partners.

Yet a shift towards partnerships also brings challenges. Dr Nair notes that, except for one or two companies, the CRO business is largely segmented between discovery and clinical development. “The two require different skill sets,” he says, and different types of capital investment. “I think that if a company



10

can cover the entire spectrum from the lab to the patient, it will be a big advantage.” Risks can also increase with partnerships. Mr Ratliff of Quintiles says, “[in partnerships, CROs] are in the middle of what they [clients] are attempting to do in terms of drug development. You have the heart of their portfolio in your hands. If one CRO fails, we all get tainted.”

Ms Mazumdar-Shaw points to a more fundamental issue: the industry is betting on an untried approach. “CROs have aspired to move up the value chain from services to product development,” she says, “and pharma looks at alliances in order to reduce risks and costs, but still retain commercialisation rights. On the face of it, it sounds like a great model. Yet it remains to be seen how long it can deliver on cost and performance efficiency.”

Not only is the model unproven, our survey indicates CROs and their clients have mismatched expectations. The CRO industry as a whole will expand its capacity across the D&D spectrum, hoping to lure clients into more integrated partnerships. Respondents from the rest of the life sciences industry, however, may have different ideas. Although a majority say they will expand their use of CROs, only 37% say they will do so “greatly”. Moreover, most of this increase will be in the areas where CROs are already frequently used, such as pre-clinical and phase I through III trials.

More often than end-to-end partnerships, which are certainly being created, pharmaceutical and biotechnology firms expect to partner with CROs on development, not discovery. Potential clients do not appear to be looking to depart from their current D&D strategy: only 11% say they will use CROs to restructure how they engage in drug discovery and development. Moreover, companies that are looking to use CROs more in the area of discovery tend to rank their financial performance as poorer than those that are not. This suggests that successful firms see less need to evolve in that direction.

Internally

By CROs

Other

Target discovery

Target validation

Assay development

Screening

Lead optimisation

Pre-clinical testing

Phase I & II testing

Phase III testing

D&D overall

At your company, which of the following stages of D&D are conducted primarily internally, primarily by CROs, or primarily through some other means? Please select one for each row.(% respondents)

68 11 22

62 18 20

63 18 18

59 20 21

61 19 20

34 47 19

26 55 18

20 59 21

55 22 24

Source: Economist Intelligence Unit survey




11

Does the trend towards alliances represent merely a wave of supplier consolidation and is some of the capacity expansion of CROs misguided? That is possible, but so too is the likelihood that some biotechnology and pharmaceutical companies do not understand the implications of the path they have chosen. Dr Hwang of Innosight Institute explains that when talking about suppliers in most industries companies “would never believe that they are fundamentally changing their model”. The dominant shape of the CRO-client alliance is still malleable as both sides learn how best to work together.

Greater proportion done internally

Greater proportion done by CROs

Greater proportion done in other ways

No change

Target discovery

Target validation

Assay development

Screening

Lead optimisation



Phase III testing

D&D overall

Do you expect a shift in the next three years so that a greater proportion of work in these areas will be done internally, by CROs, or through some other means? Please select one for each row.(% respondents)

33 15 8 43

30 19 5 45

31 20 7 42

35 19 8 37

33 19 9 39

17 36 7 39

14 39 7 39

13 39 9 38

29 21 11 39




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What should companies do as these increasingly common relationships evolve? For clients of CROs, the fi rst step is to see an alliance as a strategic opportunity rather than outsourcing writ large. For

example, AstraZeneca has developed data-management partnerships with information technology (IT) experts that previously would not have played such a role in drug development. Similarly, Richard Connell, head of external research solutions CoE at Pfi zer, believes that although some companies may initially look at CROs purely in terms of cost reduction, “if the pharma clients don’t think about transforming the work fl ow around the outsourced activity, they may not get the full benefi t of the outsourced transaction.”

Indeed, one of the dangers facing the industry is confusing alliances with supply chain simplification: 57% of survey respondents say big pharma too often sees CROs as necessary sources of cheap labour rather than valuable partners. Mr Ratliff warns that “the term ‘strategic partnership’ is overused. Some customers still want to use companies for pure outsourcing.” Mr Watson adds, “There is a difference between alliances or partnerships and supplier consolidation. The latter, when heavily driven by procurement and a focus on price, has not necessarily been good for either company because it does not allow the creation of additional value possible when focusing on other aspects than cost.”

Pursuing supplier relationships strategically requires, at a minimum, gaining the attention of management. Robert Ahlbrandt, senior vice-president, global development operations for the Pharmaceutical Development Division of Takeda Pharmaceuticals International, says that in the past “we didn’t have strong enough senior management ownership of CRO relationships, both internally as well as from the CRO.” One of his roles is now to focus on these partnerships.

To take full advantage of CRO partnerships, pharmaceutical and biotechnology companies should also think about reshaping the way they conduct D&D internally to remove redundancies that can remain after outsourcing. Mr Connell says, “When you outsource an activity that is central to the value stream, if you don’t restructure the overall workflow, you get legacy activities that add nothing but cost to the overall process. Those looking to transform need a more strategic perspective.”

While internal shifts need to be informed by company strategy, pharmaceutical and biotechnology firms should also allow relationships to evolve where useful. Pfizer previously outsourced the synthesis of high-volume chemistry, leading to huge numbers of compounds being shipped to the company from the supplier for testing. When it became clear that the provider could also test the compounds in question and immediately send just the resultant data—a considerably less expensive proposition—it made sense to allow the CRO to do so.

Making the most of new relationships

“If the pharma clients don’t think about transforming their work fl ow around the outsourced activity, they may not get the full benefi t of the outsourced transaction.” Richard Connell, Head of External Research Solutions CoE, Pfi zer




13

Equally important, with alliance partners increasingly at the heart of what life sciences companies do, it is crucial that the fit be right. Karin Wingstrand, vice-president and head of clinical development at AstraZeneca, says that in addition to a CRO’s technical capacity, “when you enter into a relationship, you need to make sure you evaluate the cultural fit with a partner. If you don’t have that, you won’t be able to get the full benefit of process, quality and cost improvements.” Our survey findings bear this out: respondents that have been involved on one side or the other of an unsatisfactory client-CRO relationship cite cultural barriers as one of the leading difficulties.

Once these relationships are formed, they require tending. Pfizer has appointed alliance management professionals within the company, as has AstraZeneca. Ms Wingstrand says this involves not just focusing on the “hardware” of the alliance, but on the experience of staff and whether those on both sides are

Information technology will be part of the evolution

Contract research is an information-intensive business. As John Watson, president of strategic partnering and chief commercial offi cer at Covance, puts it, “At the end of the day everything we do is to generate data and provide it to the client. Our fi nished product is data.”

According to survey respondents, investment in the technology to exploit these data will grow over the next three years. Sixty-fi ve percent of CROs will expend resources on improved analytical capability and 62% on data management capability. As the chart shows this is part of a broader trend of investing in a range of IT capabilities that will be far more widespread than seen in the previous three years.

This shift partly refl ects a need to keep up with the requirements of clients. Dr Ahlbrandt notes that in its data interfaces with CROs, Takeda seeks “transparency and to move towards a seamless interchange. This is partially in place, but remains an area of signifi cant focus.” A substantial number of survey respondents from the rest of the life sciences industry are also investing in IT, and they will expect CROs to do the same.

Faced with intense competition, however, CROs are also looking to their IT investments to differentiate themselves in several ways. The fi rst is to provide faster, more accurate services and better communication with their customers. Quintiles, for example, has spent extensively on a range of hardware and software, including data factories and client dashboards that provide real-time information simultaneously to the company and its client. President and COO John Ratliff says, “We have been investing in IT with a particular mission over the last fi ve years. More than infrastructure and applications, we have tried to put our money in places that allow for differentiation [from other CROs] based on data and analytics. You have to have that in mind.”

Some CROs are also looking to use their IT investment to expand into new services, in particular management of clinical data. The market may be more diffi cult than CROs expect: IT companies with little previous pharmaceutical experience have been expanding into this market as well. Ajit Nair, President India SIRO Clinpharm, explains, however, that his company is “very bullish on working with data services. As a CRO we have a clinical edge: IT companies deliver from a data perspective, we deliver from a clinical data perspective.”

In which of the following areas has your company increased investment in the last three years? In which of the following areas will your company increase its investment over the next three years?(% CRO respondents)


Technology to better manage data and information

Technology to improve analytical capabilities

Attracting talented scientific researchers

Technology to help speed screening for drug candidates

Staff training relevant to managing partnerships

Access to a wider variety of information

Technology to automate capture of data at more points in development process

Networking capacity to create a more virtual D&D organisation

Allow easier sharing of data within and between companies

Technology to automate more decisions in development process

Technology to integrate diverse data types to better analyse or mine

35 62

43 65

24 62

30 57

24 54

24 60

22 43

16 54

19 54

19 41

19 46



14

treated with respect and equality. “CROs need to move away from a service-provider mindset, and the challenge for us is to move from a buyer mindset,” she says.

The challenges are different for CROs. They need to find and sell services their clients do not yet know they want. Mr Connell says, “For the astute CRO that identifies opportunities, there is the chance to expand the business.”

While doing so, CROs must also remember what attracted clients in the first place: services provided competently and quickly at a cost lower than could be done in-house. According to survey respondents, the leading attributes potential clients look for in a CRO are talented staff (49%), ability to deliver at low cost (44%) and speed (42%). In a slightly different order, CROs consider the following attributes as leading differentiators from the competition: low cost (49%), experienced staff (43%) and speed (31%).

Looking ahead, only 20% of CRO respondents expect the ability to keep costs down to be a leading differentiator. Instead, respondents think that expertise in specific areas of drug development will become far more important (34%), while having experienced staff in general will come in second (29%). This does not mean CROs believe cost will cease to be a major factor. Dr Nair of Siro Clinpharm says, “Having low costs is definitely going to be important in the years ahead. Big pharma is cutting jobs. That work will be done by somebody else, and the expectation is it will be done at a lower price.”

In an ongoing alliance, however, the initial low cost is not as attractive as the ability to keep innovating. Mr Ratliff of Quintiles notes that once you have won the contract, “two years down the road, they want you to be innovative. If you aren’t changing, getting to a faster commitment and to a better probability of success, then you have failed.” All this obviously requires talent. Both Covance and Quintiles say that one of a handful of key ways they are preparing for the future is hiring a significant number of experts across the range of D&D. They are not alone: 62% of CRO respondents say they will invest significantly in attracting talented scientific researchers, up from 24% in the last three years.

CROs also recognise the importance of alliance relationship management: over the next three years 54% will invest in staff training in partnership management, against just 24% in the last three years. The survey suggests that poor communication between parties is a particular weakness: 40% of those who experienced an unsatisfactory client-CRO relationship cited this as the leading problem. An oft-repeated complaint among interviewees is the failure of CROs to alert partners when trials experience problems.

Covance takes a comprehensive approach to alliance management with a formal group of senior executives overseeing all partnerships. Its detailed alliance model covers a number of areas—from human resources to operations. Covance seeks to interact with the partner in all these areas. The company also has change management specialists to help clients institute the internal changes necessary to take advantage of greater outsourcing. Mr Watson, though, cautions that this remains a work in progress: “The industry is in the infancy stage as it relates to building these [relationship management] tools. It is a new area for us and for pharma.”

“CROs need to move away from a service-provider mindset, and the challenge for us is to move from a buyer mindset.” Karin Wingstrand, Vice-president and head of clinical development, AstraZeneca




15

B iotechnology and pharmaceutical companies are laying a big bet on the future of drug D&D. CROs are already taking on a substantial percentage of this work and that proportion looks set to grow.

Although a move away from integrated, in-house D&D represents a historic shift for the pharmaceutical world, outsourcing on its own is not enough. Both CROs and their sponsors need to determine the type of relationship that will be most benefi cial to both parties.

The evolution has begun, with a growing number of alliances starting to replace simpler fee-for-service models. CROs and their clients, however, have different views of where these developments could or should lead.

Here the automotive industry provides a cautionary tale. Car makers famously fl uctuate between programmes to treat suppliers as valued partners and unilateral cutbacks that make it diffi cult for their suppliers even to survive. This is ultimately self-defeating. Most automotive industry research indicates that developing more trusting relationships with suppliers leads to lower costs as well as enhanced communication and innovation.

This holds an important lesson for biotechnology and pharmaceutical companies, which must decide whether their interests in suppliers—CROs—primarily involve cost reduction or improved innovation, twin challenges confronting the industry. Life sciences companies face other strategic challenges. Extensive outsourcing requires a company to decide on its own core competencies—which it should retain—and to restructure other parts of the company in order to shed legacy structures that are no longer necessary. Moreover, when a fi rm brings outsiders into so central and sensitive an operation as D&D, ongoing relationship management—beginning with fi nding partners with compatible cultures—must be a priority.

The challenge for CROs is to shape the relationships to suit their strengths. The ability of these companies to provide new, higher-value services will not be self-evident to the client. Instead, while continuing to provide ever-improving, high-quality, lower-cost services that led to the relationship in the fi rst place, CROs should identify new areas where they can do work and convince clients of the benefi ts. Alliances and partnerships provide the ideal forum for such an expansion of sales, but it is up to CROs to seize the opportunity.

The stakes are high for both sides. If the growing number of alliances evolves into little more than cost-focused outsourcing of commoditised D&D, pharmaceutical and biotechnology companies are likely to fi nd that their innovation problems remain, albeit at a lower price. They may also fi nd disgruntled suppliers with squeezed margins that have no alternative but to become competitors. Meaningful partnerships, in contrast, hold out the promise of the kind of change needed to restock diminished pipelines.

Conclusion

16 © Economist Intelligence Unit Limited 2012

AppendixSurvey results


Appendix: survey resultsPercentages may not add to 100% owing to rounding or the ability of respondents to choose multiple responses.

Well above average

Above average

Average Below average

Well below average

Don’t know

Revenue generated per capital invested

Efficiency of drug discovery and development (D&D) in terms of new molecules developed per money spent

Ability to engage in successful partnerships

Ability to create innovative products

Ability to innovate D&D processes

Ability to adopt and use latest technology effectively

How does your company compare with its peers in the following areas? Please select one for each row. (% respondents)

18 31 28 5 3 15

13 23 24 11 3 26

15 41 29 7 3 6

26 30 23 8 2 11

19 26 26 9 3 17

18 38 28 8 3 5

Arm’s-length business relationship (ie, outsourcing of specific work on an ad-hoc basis)

Global alliance

Non-exclusive partnership

Partnership that is exclusive for a given disease area or geography

Joint venture

Members of same corporate group

We are not involved in any such relationship

Considering the biggest relationships in which your company is involved between CROs and pharmaceutical or biotechnology companies, what form do these take in practice?(% respondents)

21

17

17

16

10

7

13

Global alliance

Partnership that is exclusive for a given disease area or geography

Arm’s-length business relationship (ie, outsourcing of specific work on an ad-hoc basis)

Non-exclusive partnership

Joint venture

Members of same corporate group

We are not involved in any such relationship

Considering the biggest relationships in which your company is involved between CROs and pharmaceutical or biotechnology companies, what would be your preferred form?(% respondents)

27

17

16

16

8

6

10

Agree strongly

Agree Neither agree nor disagree

Disagree Disagree strongly

The largest CROs are developing enough competencies that they could become competitors of traditional pharmaceutical and biotechnology companies in the near future

The shift towards “virtual” organisations among pharmaceutical and biotechnology firms remains more hype than substance

The reduction in technology costs is removing the advantage that big pharma once had in data availability and analytics

It is difficult to differentiate medium to large CROs on any criteria other than price

Too often, large pharma companies see CROs as necessary sources of cheaper services at a difficult time rather than valuable partners that they would be approaching regardless of circumstances

Please indicate your level of agreement with each of the following statements. Select one for each row. (% respondents)

11 34 18 31 6

7 37 32 18 6

10 43 27 17 2

6 26 25 36 8

8 49 27 12 4





17












In which of the following areas has your company increased investment in the last three years?(% respondents)

48

44

40

37

33

32

32

32

31

25

22












In which of the following areas will your company increase its investment over the next three years? Select all that apply.(% respondents)

55

53

53

49

47

47

45

45

45

43

41












In which of the following areas has your company decreased investment in the last three years?(% respondents)

17

16

16

16

16

15

15

14

14

14

12












In which of the following areas will your company decrease its investment over the next three years? Select all that apply.(% respondents)

14

14

14

14

13

12

11

11

11

10

9




33

49

18

Yes

No

Don’t know

Has your company been involved in an unsatisfactory relationship between pharmaceutical/biotechnology companies and CROs in the last three years?(% respondents)

Poor communication

The culture of one or both companies impeded necessary information sharing/co-operation

Lack of technical ability by one or both sides

Lack of skills in maintaining partnership

Lack of clarity in the terms of the agreement

One or both sides was unable to manage the internal changes necessary as a result of the partnership

Incompatible technology

Excessive expectations by one or both sides

What were the biggest barriers to success in the unsatisfactory relationship? Please select up to three.(% respondents)

40

35

32

28

24

22

18

17

Poor communication

Excessive expectations by one or both sides

The culture of one or both companies impeded necessary information sharing/co-operation

Lack of skills in maintaining partnership

Lack of technical ability by one or both sides

Incompatible technology

Lack of clarity in the terms of the agreement

One or both sides was unable to manage the internal changes necessary as a result of the partnership

We have not engaged in such a partnership

What were the biggest challenges for successful relationships between pharmaceutical/ biotechnology firms and CROs? Select up to three.(% respondents)

46

29

25

22

19

18

13

10

23

1 Very important

2

3

4

5 Notimportant

Don’t know

Global reach of CRO

Presence of CRO near to pharmaceutical and biotechnology companies’ operations

Presence of CRO in least-costly country

How important are the following for biotechnology and pharmaceutical companies in considering the location of CROs with which to partner? Rate on a scale of 1 to 5, where 1=Very important and 5=Not important.(% respondents)

22 31 20 7 11 8

15 21 28 15 15 6

17 15 28 13 19 8





19

Internally

By CROs

Other

Target discovery

Target validation

Assay development

Screening

Lead optimisation



Phase III testing

D&D overall

At your company, which of the following stages of D&D are conducted primarily internally, primarily by CROs, or primarily through some other means? Please select one for each row.(% respondents)

68 11 22

62 18 20

63 18 18

59 20 21

61 19 20

34 47 19

26 55 18

20 59 21

55 22 24

Greater proportion done internally

Greater proportion done by CROs

Greater proportion done in other ways

No change

Target discovery

Target validation

Assay development

Screening

Lead optimisation



Phase III testing

D&D overall

Do you expect a shift in the next three years so that a greater proportion of work in these areas will be done internally, by CROs, or through some other means? Please select one for each row.(% respondents)

33 15 8 43

30 19 5 45

31 20 7 42

35 19 8 37

33 19 9 39

17 36 7 39

14 39 7 39

13 39 9 38

29 21 11 39

Begin to offer

Expand Reduce No change/we already offer

No change/ we don’t offer

Target discovery

Target validation

Assay development

Screening

Lead optimisation



Phase III testing

D&D overall

In which areas do you expect to begin to offer, expand, or reduce service provision in the next three years? Select one for each row.(% respondents)

9 26 6 29 29

41 3 18 38

9 39 6 18 27

9 55 3 12 21

15 41 3 9 32

9 44 21 26

9 46 6 23 17

11 49 6 17 17

6 50 21 24




We will seek to develop our own pharmaceutical products and produce and market them through partnerships

We will seek to expand the variety of services that we offer in order to become a more attractive research partner

We will focus closely on a number of highly specialised areas

We will seek to become a leading provider of a single, specialised service

Which best describes your company’s strategy over the next three years?(% respondents)

18

41

29

12

It will expand greatly as part of a restructuring of how we engage in drug discovery and development

It will expand greatly, but our drug discovery and development model will stay fundamentally the same

It will expand somewhat

It will stay the same

It will decrease somewhat

It will decrease noticeably as we bring more research in-house

Which best describes your company’s strategy in using CRO services in the next three years?(% respondents)

11

26

34

22

4

2

Currently

Next three years

Ability to deliver lower cost

Global reach

Speed in completing studies/contracts

Range of services provided

Experienced, talented staff in general

Expertise in specific areas of drug development

Willingness to engage in risk sharing

Provide access to specialised, cutting-edge technology

Provide access to high-quality data and advanced data-integration capacity

Ability to focus on target populations, conditions

Which of the following attributes does your company currently use to differentiate itself from competitors in attracting business from pharmaceutical and biotechnology companies? Select up to three.(% respondents)

49 20

29 23

31 20

11 20

43 29

26 34

9 9

20 23

14 20

11 3

Experienced, talented staff in general

Ability to deliver lower cost

Speed in completing studies/contracts

Global reach

Expertise in specific areas of drug development

Range of services provided

Provide access to specialised, cutting-edge technology

Willingness to engage in risk sharing

Provide access to high-quality data and advanced data-integration capacity

Ability to focus on target populations, conditions

What are the most important attributes that you look for in selecting a CRO with which to do business? Select up to three.(% respondents)

49

44

42

35

34

20

16

15

14

7





21

Agree strongly

Agree Neither agree nor disagree

Disagree Disagree strongly

Low barriers to entry and a large number of small CROs mean that the industry will likely need to see consolidation in the near to medium term

The search by big pharma for partners rather than dispersed outsourcing will drive consolidation in the short term

The rapid growth in business from pharma in recent years has left our company struggling to keep up with the opportunities

The ease of attracting business in recent years has dampened the drive for business model innovation within the CRO sector

Finding a way to differentiate our offerings in a crowded market is a growing challenge and crucial to business success

We increasingly have a different type of relationship with large and small pharmaceutical and biotechnology companies

Please indicate your level of agreement with each of the following statements. Select one for each row. (% respondents)

11 43 23 23

6 69 14 11

6 11 60 23

6 21 26 44 3

6 60 11 14 9

14 51 20 11 3

1 Very significant

2

3

4

5 Not at allsignificant

CRO services will be of unsatisfactory quality

Leakage of our intellectual property

Outsourcing could lead to loss of internal capacity necessary to our organisation

Outsourcing will help develop capacity within a CRO that could make it a competitor

Cultural clashes and other partnership management issues

Loss of tight control over drug development process, costs and time line

How significant are the following risks in the greater use of CROs for your company? Rate on a scale of 1 to 5, where 1=Very significant and 5=Not significant.(% respondents)

36 21 26 10 7

34 27 22 12 6

13 22 34 19 11

11 29 27 17 15

9 28 33 18 11

14 34 28 13 11

Pharmaceutical

Biotechnology

Other life sciences

Contract research organisation (CRO)

Generic drug maker

What is your primary industry sector? (% respondents)

44

22

19

15

0

United States of America

India

Germany

Canada, China, France, United Kingdom

Singapore

Switzerland, Nigeria

Malaysia, Spain, Philippines, Saudi Arabia, South Africa

Australia, Italy, Finland, Hungary, Pakistan

In which country are you personally located? (% respondents)

29

12

8

5

4

3

2

1




North America

Asia-Pacific

Western Europe

Middle East and Africa

Latin America

Eastern Europe

In which region are you personally based? (% respondents)

35

28

27

8

1

1

36

16

16

6

8

18

Under $100m

$100m to $499m

$500m to $999m

$1bn to $1.9bn

$2bn to $4.9bn

Over $5bn

What are your company’s annual global revenues in US dollars?(% respondents)

Board member

CEO/President/Managing director

CFO/Treasurer/Comptroller

CIO/Technology director

Other C-level executive

SVP/VP/Director

Head of business unit

Head of department

Manager

Other

Which of the following best describes your job title? (% respondents)

3

27

8

4

9

17

6

6

17

4

Strategy and business development

General management

Marketing and sales

Drug discovery and development

Operations

Finance

Data management

IT

Customer service

Human resources

Supply chain management

Risk

Manufacturing

Legal

Procurement

Other

What are your main functional roles? Choose up to three.(% respondents)

48

47

22

17

15

14

9

8

4

4

4

3

3

2

2

4

© Economist Intelligence Unit Limited 2012 23

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finding alignment: opportunities and obstacles in the pharma/cro relationship

Business

pharmaceutical companies

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pharmacro relationship1preface

survey results

senior executives

biotechnology rms

preferred relationship

industry experts