Implications for the business model
One of the most interesting aspects of the growth of these strategic sourcing arrangements is the impact on business-development
activities at the large CROs. Senior executives at the major CROs believe that no more than half of the potential deals for
clinical services have been done, and less than that for preclinical services. The greatest fear among these companies is
that if they lose out on a strategic opportunity with a bio/pharma company, it will be a long time before they get to do business
with that company again. As a result, the CROs are being aggressive in going after these deals. They are bidding them at fairly
low prices to lock in relationships with the hope that lower sales expenses, greater visibility to workflows, and opportunities
for add-on work will boost their margins over the longer term.
Table I: Major preferred-provider relationships in clinical research.
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The big CROs also believe that the ability to offer a broad range of integrated services is important to winning strategic
deals. The initial preferred-provider contracts often involved primarily data-management and site-management activities, but
companies realize that being able to offer a broader range of services can make them more competitive. This increase in services
has driven acquisition and alliance activity to add crucial services, such as bioanalytical testing, and to broaden geographic
coverage.
Going beyond clinical research
Preferred-provider deals have primarily been struck (or at least announced) in the clinical-research arena (see Table I), but they are beginning to spread into other R&D activities. In a recent presentation at the JP Morgan Healthcare Conference
in San Francisco in January 2013, the CEO of Charles River Laboratories, James Foster, said that strategic sourcing activity
had "reached an inflection point" in the preclinical research area. Charles River had secured several such deals recently
and has seen more such deals in the pipeline. Activities supporting drug discovery, which by most accounts have been only
minimally outsourced to this point, is another area on the verge of considerable growth.
In the areas of developing and manufacturing APIs and drug products, few preferred-provider relationships have been established
thus far. Outsourcing trends in these areas have traditionally lagged those in clinical research by as much as five years,
and are complicated by the vast array of process and delivery technologies that are required to support a typical global bio/pharma
company's portfolio. There have been a few noteworthy successes, especially in clinical packaging, where as many as half of
global bio/pharmaceutical companies have established preferred relationships with one of the three major clinical packagers.
Bio/pharma companies are also showing increased interest in models that hand-off all aspects of product development, from
clinical through commercial, to a single CDMO.
This is a time of great experimentation with new business models at global bio/pharma companies, and we are likely to see
many variations on the preferred-provider model in coming years. This new environment will call for a combination of vision
and operating skill on the part of CRO and CMO executives as they help define the bio/pharma business model of the future.
Jim Miller is president of PharmSource Information Services and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, info@pharmsource.com
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http://www.pharmsource.com/.
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