P's and Q's
If the "low-hanging fruit" of plant closings, sales-force reductions, and Asia sourcing have been harvested, where can pharmaceutical
companies turn to reduce costs? Pharmaceutical executives will do well to remember that costs are driven by two factors: the
amount of resources being used and the price of those resources. In other words:
Cost = (Q)uantity × (P)rice
Plant closings and sales-force reductions have been obvious opportunities to reduce the Q, but future cuts will start getting closer to the bone. Companies will have to take a closer look at their research and development
operations, despite their critical role in revitalizing pipelines. These new efforts are widening the view to see what is
being done and who is doing it. One consequence, undoubtedly, will be a continued growth in the volume of activity being outsourced
to both CROs and contract manufacturing organizatons (CMOs).
As I noted last month, industry is starting to see some examples of extreme outsourcing initiatives such as Eli Lilly (Indianapolis)
outsourcing most of its animal toxicology to Covance (Princeton), and Novartis (Basel, Switzerland) outsourcing its biologics
development to Lonza (Basel). Because of their business model, CROs and CMOs have an incentive to manage the quantity of resources
used to earn profits. These organizatons are more effective than pharmaceutical companies at managing the Q side of the cost equation, and have been early adopters of resource-saving innovations such as electronic data capture.
A more profound change will come, however, as major pharmaceutical companies rethink their entire drug development model,
especially with regard to the amount of work they undertake during each stage of drug development. A prime example of this
model change is industry's focus on achieving "proof-of-concept" before investing substantial resources in a new drug candidate.
However, achieving significant cost savings will require a major rethink of the early development model in particular. In
an eye-opening article in the March 2008 Harvard Business Review, the founders of Lilly's Chorus virtual drug-development initiative argue that getting to proof-of-concept involves asking
a very different set of questions from those asked when moving a drug to commercialization. As they note, early development
is about "seeking truth" not about "seeking success," and should be conducted through a series of short, targeted experiments
aimed at discovering the "intrinsic attributes" of the candidate. The authors claim this approach has helped reduce early
development times by half and early development costs by two-thirds.
Heavy-handed tactics have enabled major pharmaceutical companies to achieve a first tranche of cost reductions. But deeper
cuts are needed, and the next round will require much more innovative thinking to determine how to drive down the amount of
resources used in drug development.
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, firstname.lastname@example.org