KEYWORDS: Outsourcing; innovation; lean; drug; research; discovery

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1 CHEMSITRY TODAY Vol 31(4) P / CROS/CMOS Strategic outsourcing of pharmaceutical R&D - Bringing pharma and drug discovery into the information age KEVIN LUSTIG Assay Depot, Inc Corresponding Author KEVIN LUSTIG: Assay Depot, Inc, klustig@assaydepot.com KEYWORDS: Outsourcing; innovation; lean; drug; research; discovery ABSTRACT: The centralized model of pharmaceutical development that was used successfully through most of the last century is no longer a good fit. Advances in modern molecular research have changed the playing field to such an extent that the old model is no longer viable. If drug companies can solve the problems of pre-clinical development and deliver a steady stream of new, highquality compounds to the clinic, then the challenges currently facing pharma will become a thing of the past. The single most likely route to success is through the application of strategic outsourcing, which if done correctly, can dramatically reduce research costs while simultaneously improving research quality. Utilizing new online tools such as research exchanges, a lean pharmaceutical company can find and manage a large number of specialist scientific service providers and experts that can bring exactly the right skill set to bear at the right time in the project cycle. INTRODUCTION Few would argue that the Pharmaceutical Industry has been languishing in the doldrums now for well over a decade. Pharmaceutical companies are having to face three major issues involving drug approvals, development costs and patents expirations. Any of these alone would prove a tough nut to crack, but the fact that they are all converging at the same time is creating a perfect storm! A paucity of new drug approvals: 2010 was one of the worst years on record, with the European Medicines Agency showing only 41 finalized applications, compared to 125 in Applications were up in 2011, but still a long way off from the steady stream of new approvals that the industry needs in order to remain viable (1). Spiraling drug development costs: an analysis of 1,200 drug approvals dating back to the 1950s tells a grim story. The amount of money a company had to invest per drug in 1970 was around $100 million; by 1990 that figure had increased to $500 million; by 2009 it had reached $4 billion; and it is now heading towards $10 billion (2). The proverbial patent cliff : an unusually dense constellation of best-selling drugs whose patent protection period is running out. From , an

2 estimated 110 pharmaceutical products are losing patent protection, including 14 blockbuster drugs (3). AstraZeneca is a good example of a company facing the dreaded patent cliff. Nexium, a gastro reflux drug with annual revenue of $5B, comes off patent in Two years later the patent on Crestor, a cholesterol-lowering drug, expires; this product generated $6B of revenue last year. If one of the world s best-selling drugs Plavix, a blood thinner from Sanofi is anything to go by, revenue loss of >90% can be anticipated upon patent lapsed, due to stiff competition from generic manufactures. In light of all this, it is not surprising that stocks of some of the industry s biggest players including Pfizer and Merck are down 40 per cent from a decade ago, and that the industry as a whole has cut 200,000 jobs in the last five years alone. It is clear that the current model of drug discovery is not sufficient to dig the industry out of this hole. As Corey Goodman, a former Pfizer executive and the founder of Exelixis, put it: We don t just need a Band-Aid, we need transformational change. No single solution is going to cure the industry s woes and put it back on a path to profitability. Rather, a set of solutions will be required that together address the key issues confronting R&D. Reduced costs, combined with a more innovative approach to drug discovery, are likely to form part of the new model. The industry can no longer support huge internal R&D groups, nor can it maintain scientific expertise along every step in the discovery pathway, from target discovery to hit identification to genotoxicity testing. Biology is too complicated for any one company, commented Stephen Friend of Sage BioNetworks. The problem for the pharmaceutical industry is that the world has changed. The pace of change in the biological sciences over the last few decades rivals anything we ve seen in science at any point in our history. In the space of a decade we have sequenced the human genome (along with the genomes of countless other species) and seen the tools to perform such tasks reduced from being a mammoth enterprise costing billions of dollars and requiring the cooperation of governments across the globe to a routine task that one lab technician can perform in less than a week for a few thousand dollars. The problem that has undermined the industry is that Biology is now too big for any one company to master. Unfortunately the model that still persists across the industry today is one of centralization, a model in which all of the skills required to take a new drug candidate from concept to clinic are maintained under one roof. Biology in essence has outgrown the Pharma industry and the 20th century model of drug discovery. Drug discovery in the 21st century will require a new mind-set and a dramatically different way of doing research. The real kicker here is that the very problem we face today, the centralized R&D model, is what made big Pharma such a powerhouse of innovation and prosperity for the last forty years. As anyone involved in change management will attest, it can be very difficult to relinquish the culture, the norms, and the practices that made us what we are today, even if it is now evident that they are

3 no longer working in our favour. THE HEART OF THE PROBLEM The cost of clinical trials is often singled out as a major factor in the industry s woes, and while clinical development costs have risen dramatically over the last decade they are not the real problem. The real issue is that 12 of 13 drug candidates that enter clinical trials ultimately fail. This statistic points directly to a major problem early in the research pipeline, well before clinical trials are initiated. So, although clinical trials account for two-thirds of the cost of drug R&D, the problem lies further upstream. The real issue faced by the industry is an inability to deliver a steady stream of high quality candidates from drug discovery into the clinic. Few people would argue with the idea that if the industry could create a robust drug discovery pipeline and bring a steady stream of high quality compounds to the clinic, all of other industry problems would fade into the background. It is at this pre-clinical stage of drug discovery where the old model haunts us. Pharma companies still perform most of their discovery work internally; the global 2011 spend on Pharma preclinical R&D was $35 Billion, of which only $9.6 Billion was outsourced (5). WHY THE CURRENT SINGLE SERVICE PROVIDER MODEL WON T SAVE US Pharma companies have for a decade outsourced clinical development, typically partnering with one or two of the largest CROs (Contract Research Organizations) that specialize in running clinical trials. If 12 of 13 drug candidates entering the clinic fail, however, the real problem lies not in the clinic but in the work that leads up to it; the four to six years of laboratory research that typically precede IND submission to the FDA. Outsourcing research at this early stage is far more challenging than outsourcing a clinical trial for the simple reason that every early stage research project is completely different, requiring a unique project plan that will change during the life of the project based on the on-going research results. Clinical trials lend themselves to a single service provider model because the trials themselves follow a highly defined and regulated protocol that does not vary. Strategic outsourcing is essential during the discovery and preclinical stages of drug development because of the need to access hundreds of different research assays and services in a wide range of scientific disciplines. Nowadays, no single CRO can possibly carry out all the required lab work for more than a handful of drug research projects. Value at this early stage is derived from finding the best individual supplier from the multitude available in the global marketplace. Luckily, over the last decade there s been an explosion in the number of small, nimble research suppliers, each with a deep skill set in a narrow range of skills. This multitude of small suppliers allows us to neatly side-step the problem of biology being too big for any one company. Under this model no pharma is master of it all. Instead researchers find and engage the very best service providers at every step along the drug discovery pathway, remaining nimble and

4 flexible and able to embrace whatever latest technology is available to help solve each specific problem, rather than being shackled to the set of tools and techniques available in house, or accessible through a single large CRO. TOWARDS A NEW MODEL Over the last decade we have seen big Pharma embracing external innovation, spending ever more to acquire an increasing proportion of their pipeline from outside sources. Some funds that would previously have supported internal R&D, are now being used to fund research at promising new start-up companies. GlaxoSmithKline (GSK) recently committed $465M to a partnership with Avalon ventures that will fund 30 start-up biotechs, with GSK retaining first rights to acquire anything that comes from the venture (2). GSK is not alone in its thinking; Johnson & Johnson and Sanofi have entered into similar (albeit smaller) arrangements with other venture capital groups in recent years. While funding external start-up companies is a reasonable approach to innovation, it does nothing to address the extremely poor productivity of the internal R&D engine, a metric that must be fixed if the industry is to return to prosperity and growth. The secret according to many industry thought leaders such as Bernard Munos (2) is for the Pharma industry to outsource more of its work to small nimble external organizations, to replace the high fixed cost of maintaining huge internal R&D capabilities with the lower variable cost of bringing on outside help only when it s needed on a project. Several pharmaceutical companies (including some of the very largest) are already experimenting with an increasingly outsourced research model, creating their own virtual drug discovery groups with a lean internal staff, and relying on external service providers to do the bulk of the heavy lifting. Other industries have already made a similar transition from internal focus to external collaboration. In consumer goods Whirlpool quite literally wrote the book (7) on game changing use of external innovation, and in the process achieved industry-leading levels of growth and profit. The challenge within our industry, particularly at the pre-clinical stage of development, has been a logistical one. For every assay we might like to outsource there undoubtedly exists a supplier with world-class skills, but finding that supplier from among the thousands of small specialists is a significant challenge. Indeed so great are the logistical problems involved that until recently the effort involved in finding and managing external vendors in this fashion has outweighed the benefit. The result has been that pharma drug researchers are often forced to use internal resources or a preferred CRO with a long-term contract, despite the fact that they could obtain a higher quality service at lower cost on the open market. Ultimately, as this process is repeated, it leads to a reduction in the quality of the data and ultimately to bad decisions about which drug compounds to pursue. Since we already know that 12 of 13 compounds developed under the current model fail in the clinic, it seems folly to tie the hands of our research scientists and prevent them from applying their best skills to their projects at every step.

5 LEAN PHARMA: DRUG DISCOVERY IN THE INFORMATION AGE Think of Lean and most people s minds automatically go to Six Sigma, manufacturing, and success stories such as General Electric and Toyota. But the Pharma industry is different. With Pharma, manufacturing and cost of goods make up such a small part of the overall cost structure, that lean (in the traditional sense) can never have the same impact as it has had for the automotive and consumer goods industries. In Pharma, R&D, clinical trials and marketing, drive costs. Lean Pharma in this sense has a different connotation. The idea here is to use strategic outsourcing to strip away the high fixed costs associated with internal R&D and replace them with lower variable costs. The good news is that many of the benefits can be obtained without drastic organizational change. Increased innovation, an acceleration of the pre-clinical phase of drug discovery, and an increase in the quality of the compounds entering clinical trials can be realized by providing our research scientists with easy access to the research providers and experts they need and by creating an environment of scientific empowerment in which researchers are able to make their own decisions about what is best for their project, unencumbered by bureaucracy and policy. There is still a logistical problem to contend with in finding and managing a large group of research suppliers, but in the last few years online systems have been built that allow research groups to easily work with tens or even hundreds of external service providers at the same time. Research exchanges (aka online science marketplaces), which can be thought of a combination of Google and Amazon for research services, have the potential to transform pharmaceutical drug discovery by addressing strategic outsourcing head on and making Lean Pharma a reality. Research exchanges enable a lean approach to strategic outsourcing, enabling research scientists to rapidly drill down through thousands of global vendors to find the handful that can provide the exact custom service they need, when they need it. When logistical barriers are removed, the benefit of online tools and an open research platform become clear and easily obtainable. In fact using these platforms a researcher can take a compound from idea all the way through to the clinic, outsourcing every step in the process. It is for the first time possible to find a cure for cancer from your laptop computer without ever setting foot in a lab (8). Research exchanges that enable strategic outsourcing provide scientists with a leaner and more efficient platform for drug discovery. Ultimately, they can enable scientists to bring higher quality compounds to the clinic in a shorter period of time. In the modern pharmaceutical industry that is the very definition of innovation. REFERENCES AND NOTES 1. Where will new drugs come from? Editorial, The Lancet 377(9,760): p97, January Munos B, Nature Reviews Drug Discovery 8, , December (2009) CMR International Pharmaceutical R&D Factbook, Thomson Reuters,

6 London 4. Novartis set to remain top spender as R&D investment dips. June Outsourcing in Drug Discovery: The Contract Research Organization (CRO) Market, 4th Edition. June McBride R., GlaxoSmithKline and Avalon Ventures forge $495M biotech startup alliance. Fierce Biotech. April 22, Strategic Innovation. Embedding Innovation as a core competency in Your Organization. Snyder NT., Duarte DL. Make your own cancer diagnostic. Purvesh Khatri Stanford Medicine