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Summer deals struck by Novartis and Lilly point to an evolution in contract services.
Major pharmaceutical companies have talked a lot about the need for a new business model, one that is lower cost, more flexible, and more reflective of the risks in drug development. Outsourcing has been cited as a critical strategy element of the new business model, but most outsourcing deals have been too tactical to be thought of as truly innovative. However, deals announced over the summer involving Novartis (Basel, Switzerland) and Eli Lilly (Indianapolis) demonstrate ways in which outsourcing can become a truly strategic element in the new business model.
Lilly announced three deals with major preclinical and clinical contract research organizations. In its biggest deal, Lilly contracted with Covance (Princeton) for clinical and preclinical research services, valued at a minimum of $1.6 billion over 10 years. As part of the deal, Covance will acquire Lilly's preclinical research campus in Greenfield, Indiana, for $50 million. Covance's services to Lilly will include GLP- and non-GLP toxicology, clinical pharmacology (Phase I), central laboratory, and Phase II–III clinical research.
The other two deals were for clinical research services. Lilly will outsource all of its clinical monitoring work in the US and Puerto Rico to Quintiles Transnational (Research Triangle Park, NC). The company's data management operations in the US will go to i3 Global (Ann Arbor, MI), a unit of UnitedHealth Group.
In another big summer deal, Novartis announced a long-term relationship with Lonza (Basel) for development and manufacture of biopharmaceutical candidates in Novartis' pipeline. Under the agreement, Lonza will provide process development, manufacture clinical trial materials, and manufacture commercial launch quantities for all biologics in the Novartis pipeline. In addition, Lonza will provide engineering and other assistance to help Novartis build its own commercial manufacturing infrastructure. Lonza CEO Stefan Borgas indicated that the relationship could last 10 years or more.
Of the two deals, the Novartis-Lonza deal is probably the most innovative because of its risk-mitigation aspects. By having Lonza manufacture clinical supplies and commercial-launch quantities, Novartis is avoiding one of the major risks in biopharmaceutical development (i.e., investing in enormously expensive biomanufacturing facilities that could become white elephants if their intended products don't succeed).
The Lilly deals don't have the same risk-mitigation elements, but there are similarities to the Novartis-Lonza deal in other respects. All four deals make costs more flexible and seek to assure the pharma company partner that it will have access to the contractor's capacity when needed (although the Lonza deal doesn't appear to entail annual "take-or-pay" contract minimums the way the Lilly deals do). Most importantly, in all four deals, the Big Pharma partners are seeking access to the superior technical and/or operational expertise of the contractor partner.
Dedicated to transformation
Lilly's involvement in such broad-ranging outsourcing arrangements is consistent with its stated goal of transforming its business model in the face of looming patent expirations. The company was one of the earliest to set up research operations in China, establishing an innovative model with its ChemExplorer venture in Shanghai. And several years ago, it established a new operating unit, Chorus, to accelerate and lower the cost of drug development using a virtual business model.
The Novartis-Lonza deal is more surprising because Novartis has considerable experience and manufacturing capacity in its Sandoz generics unit. Headquartered in Holzkirchen, Germany, Sandoz was one of the first companies to launch a biosimilar product in the European market (the human growth hormone "Omnitrope") and has been actively selling contract biomanufacturing capacity for many years.
A major lesson of these two summer deals is that it takes more than capacity to become a strategic partner of a major pharmaceutical company. These decade-long service relationships require operational and technical excellence, global scale, financial heft, and creative deal-making skills. As more agreements like this are put together (Lonza claims to have five more in negotiation similar to the Novartis deal), industry will need to redefine what constitutes a major player in the services industry.