Minding Your P's and Q's - Pharmaceutical Technology

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Minding Your P's and Q's
As offshore savings decline, pharmaceutical companies still have a lot of work to do to reduce costs.


Pharmaceutical Technology
Volume 32, Issue 10, pp. 104

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,
http://www.pharmsource.com/.


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