Scrip's Practical Guide To Pharmaceutical Outsourcing

Scrip's Practical Guide To Pharmaceutical Outsourcing

In the face of a huge range of pressures, from patent expiry on best-selling drugs to reduced resources for R&D, pharmaceutical companies are turning increasingly to outsourcing key functions in order to meet the expectations of their shareholders.

Written by Dr Frank Mangan - a world authority on pharmaceutical outsourcing - this report provides you with comprehensive analysis and practical advice on every aspect of outsourcing R&D activities. It offers precise guidelines on a range of key issues including auditing a CRO, negotiating the contract and managing the relationship on an ongoing basis.

The report offers penetrating analysis not only of the contracting industry itself, but also of the increasingly complex relationships between pharmaceutical companies and the CROs they turn to.

In addition to the analysis, statistics and charts, the report provides contact information and company profiles for 24 top CROs and 19 SMOs and lists further sources of information on locating CROs to aid further research.

PUBLISHED: JULY 1999
REF: BS999E
PAGES: 130+
PRICE: �695/$1,460/�167,000

CONTENTS
LIST OF TABLES
LIST OF FIGURES
EXECUTIVE SUMMARY
SCOPE AND METHODOLOGY

S.1 Scope
S.2 Terminology
S.3 Methodology and sources of information

ACKNOWLEDGEMENTS
ABOUT THE AUTHOR
ABBREVIATIONS AND GLOSSARY

CHAPTER 1 INTRODUCTION
1.1 The rising demand for contract services
1.2 Merger and acquisition activity
1.3 The changing relationship
1.4 The development of site management organisations
1.5 The development of the sponsor
1.6 The development of electronic data capture
1.7 Future prospects

CHAPTER 2 CONTRACTING OUT - A PRACTICAL GUIDE
2.1 Why outsource?
2.2 What to outsource
2.2.1 Drug discovery research
2.2.2 Preclinical safety assessment
2.2.3 Clinical R&D
2.2.3.1 Using developing countries for clinical assessment
2.2.3.2 Studies in the Far East
2.2.3.3 Studies in the rest of the world
2.2.4 Sales and marketing
2.3 Preparations prior to selecting a CRO
2.3.1 Determining budget availability
2.3.2 The responsibility checklist
2.4 CRO selection - the decision-making process
2.4.1 Prequalification questionnaire
2.4.2 Drawing up a shortlist
2.4.3 Presentations
2.4.4 Site visits and audits
2.5 Contracts
2.5.1 Types of contracts
2.5.2 Payment schedules
2.6 Special considerations when using CROs for preclinical assessment studies
2.7 Project management
2.7.1 Completion or termination of a study
2.8 Using site management organisations for clinical R&D
2.8.1 Types of site management organisations

CHAPTER 3 OUTSOURCING SALES AND MARKETING ACTIVITIES
3.1 Introduction
3.2 Sales teams: why increase outsourcing?
3.3 What to outsource?
3.3.1 Vacancy management
3.3.2 Customer managed project team
3.3.3 CSO managed project team
3.3.4 Syndicated teams
3.3.5 Speciality contract sales forces
3.4 Fee structure
3.5 When to outsource
3.5.1 Launch
3.5.2 Peak sales
3.5.3 Maximise lifetime value
3.6 The marketplace
3.6.1 Developments in the marketplace
3.7 Marketing services
3.7.1 Companies offering marketing services

CHAPTER 4 NEGOTIATION STRATEGY AND TRAINING
4.1 Overview
4.2 Response of the pharmaceutical industry
4.2.1 Doubters and wreckers
4.3 Process for purchasing
4.3.1 Positional bargaining
4.3.2 Principled negotiation
4.4 The ACCORD model
4.4.1 Agree aims and objectives
4.4.2 Conditioning
4.4.3 Creating options
4.4.4 Strive for open behaviour
4.4.5 Rigorous approach
4.4.6 Focus on specific deliverables
4.5 The focus of negotiation effort
4.5.1 Value
4.5.2 Cost
4.5.3 Cash
4.5.4 Risk
4.5.5 Legal and contractual
4.6 Supplier relationships
4.7 Conclusion

CHAPTER 5 LEGAL ASPECTS OF WORKING WITH CROs
5.1 Confidential information
5.1.1 Disclosure and willingness to receive information
5.1.2 Non-disclosure and use of the information
5.1.3 Marking of information supplied
5.1.4 Binding agreement
5.1.5 Exclusions from confidentiality
5.1.6 Return of confidential information
5.1.7 Obligations
5.2 Contract documentation
5.2.1 Parties and definitions
5.2.2 Performance of services
5.2.3 Transfer of obligations
5.2.4 Price and payment
5.2.5 Confidentiality
5.2.6 Publication and intellectual property
5.2.7 Compensation and indemnity
5.2.7.1 Responsibilities of the investigator
5.2.7.2 Responsibilities of the sponsor
5.2.7.3 Responsibilities of the CRO
5.2.8 Term and termination

CHAPTER 6 COMPANY PROFILES
6.1 Adelphi Group of Companies
6.2 Applied Analytical Industries Inc
6.3 ClinTrials Research Inc
6.4 Covance Inc
6.5 DDS Medicines Research Ltd
6.6 Genzyme Corporation
6.7 Hammersmith Medicines Research
6.8 Huntingdon Life Sciences
6.9 IBAH Inc
6.10 ICON Clinical Research plc
6.11 IMRO TRAMARKO
6.12 INC Research
6.13 Inveresk Research Ltd
6.14 Kendle International Inc
6.15 Kern McNeill ClinPharm
6.16 Libris Discovery
6.17 MDS Harris
6.18 Oxford Health Management Ltd
6.19 Oxford Molecular Group plc
6.20 PAREXEL International Corporation
6.21 Pharm-Olam International (UK) Ltd
6.22 Phoenix International Life Sciences
6.23 Pharmaceutical Product Development (PPD)
6.24 Quintiles Transnational Corporation
6.25 Vujaklija CRO

CHAPTER 7 HOW TO FIND INFORMATION ON CROs
7.1 Industry associations
7.1.1 Association of Clinical Research for the Pharmaceutical Industry
7.1.2 Pharmaceutical Contract Managers Group
7.1.3 Pharmaceutical Outsourcing Management Association
7.2 Publications
7.2.1 European Pharmaceutical Contractor
7.2.2 KYM Directories
7.2.3 LARKA Directory of Contract Research Organisations
7.2.4 Pharma Business
7.2.5 Technomark Registers
7.3 Databases
7.3.1 Pharmaceutical Contract Support Organizations Register
7.3.2 DataEdge LLC

APPENDIX 1 MAJOR SMOs IN EUROPE AND THE US
A.1 Europe
A.2 US
APPENDIX 2 MAJOR CROs IN JAPAN
APPENDIX 3 FORM OF INDEMNITY FOR CLINICAL STUDIES

REFERENCES

LIST OF TABLES
Table 2.1 Activities which may be contracted out during preclinical safety evaluation
Table 2.2 Total population for some Central and Eastern European countries
Table 2.3 Approvals features for some Central European countries
Table 2.4 Responsibility checklist A - study preparation
Table 2.5 Responsibility checklist B - study initiation
Table 2.6 Responsibility checklist C - study conduct
Table 2.7 Responsibility checklist D - data analysis and reporting
Table 2.8 An example of a budget projection spreadsheet
Table 2.9 CRO site visit checklist
Table 2.10 Major commercial SMOs in the US
Table 2.11 Major commercial SMOs in Europe

Table 3.1 US sales and marketing spend by global pharmaceutical companies, 1995-2000
Table 3.2 Contract representatives as a proportion of total pharmaceutical representatives by country, and the projected growth rate to 2000
Table 3.3 Market share of some leading US CSOs
Table 3.4 Top 10 pharmaceutical companies in the UK in terms of sales force size and change in headcount during 1997/1998

Table 4.1 Customers involved in negotiations for a typical clinical study
Table 4.2 Features of effective and less effective principled negotiators
Table 4.3 The focus of the effort in negotiation and the goals to be aimed for
Table 4.4 Major areas of focus during strategic negotiations
Table 4.5 Benefits to be derived from performance partnerships and strategic alliances
Table 4.6 Planning and commitment by three companies entering into preferred partnership agreements
Table 4.7 The benefits gained from the preferred partnership by companies A, B and C

Table 6.1 Leading CROs based on revenue, 1996-1998

LIST OF FIGURES
Figure 3.1 R&D requirements for a medium-sized pharmaceutical company to maintain a 10% growth rate
Figure 3.2 Product lifecycle management and deployment of contract sales forces
Figure 3.3 The fruits of fast market penetration

Figure 4.1 Options in supplier relationships
Figure 4.2 Using a structured approach to developing an outsourcing strategy - an example from PAREXEL Consulting Group

EXECUTIVE SUMMARY
Healthcare spending continues to be the focus of government attention throughout the world, and is rising because of a combination of factors, including increasing demand by patients for new treatments, an ageing population needing more care and treatment, and advances in medical technology. The total value of the global healthcare market has been estimated at $3,000 billion (Oxford Molecular Group plc, 1998), of which pharmaceuticals account for about 10%, the market being heavily focused on the US, Europe and Japan.

Leading pharmaceutical companies spend 10-20% of sales revenue on R&D. 1997 R&D spend figures for the ten largest pharmaceutical companies ranged from 7.1% for Merck & Co to 18.5% for Pharmacia & Upjohn (Pharma Business, 1998a). In dollar terms, this spend ranges from $1.2 billion for Pharmacia & Upjohn, to $2.5 billion for Novartis.

In a report addressing the problems currently besetting the pharmaceutical industry, PricewaterhouseCoopers (1999) suggest that current sales projections indicate that the industry's turnover will grow by 7% a year. If the top 20 companies are to achieve this growth, they will each need, on average, to generate $28.9 billion in sales between 1999 and 2005. But, in order to do this, they must boost quite dramatically the number of drugs coming out of their pipelines. Leading companies, including Glaxo Wellcome, SmithKline Beecham and Pfizer, have promised that the increased R&D spend will produce three new chemical entities (NECs) a year. However, current output from the top 12 pharmaceutical companies is only 0.8 NECs per annum, although Professor Stuart Walker of the UK Centre for Medicines Research predicts that this figure could soon double (Dr P Brown, Scrip Magazine, January 1999).

To be in the top 100 selling drugs, a product now has to generate annual sales of $364 million, and although there have been a number of spectacular new entrants in the past few years, it has been estimated that only about 30% of the prescription medicines on the market today will generate enough sales to recover their R&D costs. The pharmaceutical industry has also faced loss in revenue as patents have expired on major drugs, and at the same time, the effective patent life of a new product has continued to decline as regulatory demands and testing becomes more stringent, costly and time consuming.

The pharmaceutical industry, therefore, has been forced to become more innovative, productive and efficient. The spate of mergers and acquisitions (M&As) during the 1990s has transformed the industry, enabling the leading companies to be able to spend massively on R&D in an attempt to discover and develop the innovative drugs required to sustain the growth expected from their management, employees, shareholders and the investment community. More NCEs than ever before must be discovered and developed, but following M&As, this must be achieved with fewer staff at less cost. More drugs in the pipeline means more costs, and unless drugs are produced which enable the companies to maintain double-digit sales growth, they will be forced to merge, be taken over or compelled to retrench as a niche player.

Advances in drug discovery centred on drug design technologies such as computer aided molecular design and combinatorial chemistry, and the identification of new drug targets by genomics and proteomics, is providing millions of new compounds for pharmaceutical companies to evaluate. Coupled with developments in IT for handling the generated data, and high-throughput screening, these techniques currently form the basis for the search for novel drugs. It has been estimated that by 2000, more than 60% of drug targets will be derived from genomics (Andersen Consulting, 1997).

Clinical R&D is the cornerstone for the development of a new drug and in most companies measures to reduce time to market have been targeted at this area. Some major companies have stated their intentions to shorten significantly their drug development time: '2,000 days by 2000' being SmithKline Beecham's motto, whereas Eli Lilly's stated goal is to shorten its R&D process from 4,800 days to 3,000 over the near term.

These changes have been the background for the development of the contract research organisation (CRO) in the 1990s. Consequent on the changes forced on the pharmaceutical industry, companies are universally outsourcing services to third parties, and made pharmaceutical outsourcing services one of the fastest growing sectors in the healthcare arena in the 1995-1999 period. Drug development outsourcing has been growing annually at 20-25% over the last 5 years, with some of the major CROs experiencing growth rates, based on revenue generated, in excess of 40%, mainly as a result of pharmaceutical companies taking the strategic decision to switch more fixed costs to variable costs. Many companies expect the portion of outsourced R&D to rise from 20% to 30% or even 40% over the next few years.

With an increasing move towards outsourcing clinical R&D, and the expanding use of sophisticated information management systems, there is evidence that these goals are being realised. However, there is still scope for major reductions in wasted effort in clinical R&D. Too many sponsors, who either conduct the trials themselves, or who contract out the conduct of a study to a CRO, still complain that within every trial they encounter clinical centres which are poor recruiters of patients against numbers promised, that trials finish late and over budget, and that data quality is poor. New drug discovery and changing healthcare priorities are influencing clinical trial recruitment in ways that are making conventional clinics, especially in the US and Western Europe, poor recruiting grounds for many protocols. Sponsors and CROs have responded by evaluating new territories to conduct studies with the benefit of committed and trained investigators, together with the availability of the required patient populations, notably in countries of Central and Eastern Europe (CEE), the Pacific Rim, South Africa and South America.

Recently there has been a move towards the use of site management organisations both in Europe and the US, which offer dedicated facilities and staff committed full-time to the conduct of clinical studies, thus providing effective and timely patient recruitment and quality data. Their use by sponsors and CROs will undoubtedly increase if they deliver as promised.

Despite the premise that the most efficient way to manage outsourcing is the formation of a centralised contracting group serving different functional areas, it has been reported recently that from a survey of 36 responding pharmaceutical companies, there was little evidence for such groups being formed (The Pharmaceutical R&D Compendium: CMR International/Scrip's Complete Guide to Trends in R&D, 1999). Indeed, in many companies centralised contracting groups do not exist for any functional areas. It is the author's experience that even in some of the leading pharmaceutical companies which have established centralised contracting groups there are strict geographical boundaries to their sphere of responsibility. The pharmaceutical industry may have to review the geographical and functional responsibility of its contracting groups if it is to gain the maximum benefit from them.

The growth in contracting out may expand further as pharmaceutical companies continue to examine fixed costs and review what they perceive as core competencies to be retained within the company, and then take the decision to contract out all those activities which they consider to be outside of these. For example, pharmaceutical companies continue to spend a considerable portion of their budgets promoting, marketing and selling their products - the New York-based financial analysts, Dain Rauscher Wessels (1998), estimate a spend of $7 billion in the US alone for 1997.

However, in contrast with clinical R&D, only a relatively low portion of sales and marketing activities (about 12%) is currently contracted out. Activities in some of the large CROs, notably Quintiles Transnational Corporation with the acquisition of Innovex, and PAREXEL International Corporation with the acquisition of Medical Marketing Services, suggest that this situation will change, and analysts and those in the industry are forecasting that outsourcing in this area will grow 20-30% over the next few years.

M&As in the CRO industry have been common, the majority being by US-based companies wishing to expand their services in Europe, and there are now a number of leading CROs offering full preclinical safety assessment and clinical R&D services worldwide which generate annual sales of over $1 billion. Some of the traditional clinical R&D CROs have moved into sales and marketing, eg Quintiles and PAREXEL, whereas others, for example Pharmaceutical Product Development Inc (PPD), have moved into discovery research, and Covance has entered into contract biomanufacture. Some of the major CROs now offer clinical R&D facilities in CEE, China, Japan, the Pacific Rim, South Africa and South America.

The CRO industry has certainly matured over the past few years and is beginning to be dominated by a relatively small number of large, multinational, full service providers. However, there are still a number of relatively small Europe-based CROs, with and without US partners, competing for business with the large international companies. As decision-making becomes more centralised within the merged pharmaceutical companies, and unless they wish to remain committed to local studies alone, many CROs will come under increasing pressure to enter into mergers or association with other CROs, particularly those capable of offering services in the US. There will, however, always be a place for the true niche player, and companies that can offer a high quality specialist service will continue to thrive.

Another feature of the CRO marketplace over the past few years has been the investment into CROs by large corporations providing other healthcare services, for example the acquisition of Harris Laboratories in 1996 by MDS Inc, Canada's largest technology-based health and science company; the acquisition of IBAH Inc in 1998 by Omnicare Inc, the largest US provider of professional pharmacy and management services to the long-term care market; and in 1999, the acquisition of ClinPharm International Ltd by Ingenix Inc, a subsidiary of the UnitedHealth Group, providing clinical, financial and cost management solutions to governmental agencies, pharmaceutical companies, providers and employers.

As we enter the new millennium, we can look back on a decade of major developments in the relationship between the pharmaceutical industry and CROs. With some of the major CROs, positioning themselves to offer services across all aspects of R&D, sales and marketing, and renaming themselves contract pharmaceutical organisations, the next 10 years should be just as exiting, and surprising, as the last 10.