Reg-ing them over the coals

When you get right down to it, there is no real mystery about why pharmaceutical and biotechnology companies have increasingly turned to outsourcing more of their functions both to domestic and foreign companies—be they research and development work, testing, clinical trial design, manufacturing or other services.
It's about money. Contract research services (CRS), contract research organizations (CROs), contract manufacturing organizations (CMOs) and all the rest have something in common that is as ubiquitous as the word "outsourcing"—and that is the word "contract." Pharmas and biotechs contract with them to get services with a better cost-benefit ratio than they feel they can do in-house.

But knowing that money is at the root of it all is a rather general thing, so it's worth looking at what specific fiscal factors have changed in the marketplace as outsourcing has grown, and that might be drivers of outsourcing. Big-headline issues right now—panic over looming patent expirations and the fallout from global economic meltdown—certainly play a role, but they are relatively recent arrivals, while outsourcing growth was years in the making beforehand.

One of the things that grew steadily during that same period as outsourcing has been regulatory burdens—both as a result of government wanting to oversee the pharma and biotech world more thoroughly and as a consequence of public pressures, as class-action lawsuits over adverse effects mount and bring ADME-Tox and other issues ever more strongly to the forefront.

While not everyone agrees that regulation itself is a major driver of increased outsourcing, most would agree that it is a factor that can influence decisions to use CROs and might impact the costs and risks of outsourcing down the line.

Into the matrix

Regulatory forces are most certainly one of at least three key pressures that are forcing pharma and biotech companies to look outward to get the job done, according to David Windley, a managing director with global financial advisory and investment firm Jefferies & Co. The first and primary driver for job cuts and outsourcing, he notes, is cost pressure—from R&D costs, legal costs, marketing and all the other myriad expenses in drug discovery and development.

The second pressure, he says, is "increasing geographies of interest," as companies look to do their drug development work in more and more countries around the works, both to lower patient access costs for clinical trials and to get a more established presence in developing markets where future drugs might be marketed.

"And then there is the regulatory matrix. Pharmaceutical companies are thinking about maintaining clinical operations departments and maintaining a certain level of expertise and knowledge base to do their work effectively internally, and yet they also have to have enough regulatory expertise to be ready for what the governments want," Windley says. "Just trying to have enough critical mass in all the different countries they want to operate in is tough enough; it starts to become an expensive proposition and you have to think about what you might be able to contract with someone else to do more effectively and cost efficiently."

So, one thing that outsourcing may allow is for companies to connect with organizations in other nations that can better understand and handle local regulatory issues. As such, biotech, medical device and pharmaceutical companies alike are increasingly turning to CROs to help design and conduct their clinical trials, many of which are being conducted outside of North America and Europe, in emerging markets that offer trial sponsors greater access to patients at a lower cost, notes Jeffery McMullen, CEO of PharmaNet Development Group, echoing Windley's thoughts.

"Over the past few years, we have seen a marked increase in trials taking place in emerging markets such as Latin America and Asia, where a solid understanding of patient safety, patient rights and regulatory requirements has become critical, not only to meeting study endpoints, but also to containing costs and managing sponsor reputation," wrote McMullen in April in this company's CRO industry blog, Clinical Conversations. "In today's environment, selecting a CRO means choosing a strategic partner that understands the nuances of operating in these markets, with the experience to navigate the local regulatory environment as well as patient recruitment hurdles."

Speaking the same language

However, while choosing the right CROs may help pharma and biotech companies get a better handle on overseas regulations as they also try to deal with home-grown regs, things could still be better. As global contract research company Quintiles Transnational Corp. notes in its 2010 white paper, Realizing the Promise of Asia-Pacific, harmonization of government regulatory schemes is an urgent issue in many parts of the world, particularly the Asia-Pacific region, which could become a key proving ground for the virtual drug development model that outsourcing helps facilitate.

"While some countries such as India may fare better than Eastern Europe or China in terms of a regulatory environment, the situation is hardly uniform across the region," wrote co-authors Dr. Ferzaan M. Engineer, CEO of Quintiles Research (India) Private Ltd., and Dr. Anand Tharmaratnam, senior vice president and head of clinical development for Quintiles' Asia-Pacific operations. "A more uniform approach to regulation of clinical studies and results could, over time, help create a pan-Asian pharmaceutical market large enough to encourage a range of biopharma companies to find their niches without having to reinvent the wheel in each new geography."

Regardless, though, outsourcing can relieve some of the cost pressures on pharma and biotech companies so they can keep certain expertise in-house and ensure that they remain fully versed in those knowledge areas, even in tight economic times. If they don't have to worry about every little regulation in other countries, for example, they can become more savvy in dealing with regulations closer to home, so they can address those government requirements more effectively.

In addition, that might allow them to better communicate the regulatory pressures they face to their CROs abroad, so those firms can give them what they need to answer questions at home and get products approved with minimal fuss—as well as avoid failing to meet required standards.

"The company is still responsible for meeting drug manufacturing regulations and other government requirements, so ultimately, the holder of the license—the pharmaceutical company or biotech—is the one who has to answer to the government or deal with lawsuits," notes Nigel Smart, managing partner and vice president of Smart Consulting Group LLC in West Chester, Pa. "As one goes farther afield from one's home country to outsource services—like a U.S. company outsourcing to Malaysia, for example—you have to deal with not only language barriers, but also differences in culture, and the potential for the ball to be dropped because something was miscommunicated or mislabeled increases."

Biting them on the hindquarters

Regulatory burdens—and the direct and indirect costs that go with them—may be part of the reason for increased outsourcing, but they also can be an impediment to outsourcing, or even a potential cause of higher-than-expected outsourcing costs, which at times might make CROs less of a bottom-line benefit than the pharmas and biotechs would like.
For example, regulations can negate some of the benefits of performing clinical studies in emerging markets and developing nations.

"Let's say you have a drug to raise HDL. You might want to simply use it alone, or at least do the trial with that drug alone, but the regulatory authorities in your home nation are of a mind that it is far more likely to be used with statin therapy," says Dr. David H. G. Smith, founding partner and chief medical officer of Integrium, a full-service CRO focused on the therapeutic areas of cardiovascular disease, metabolic disease and dermatology.

This is tied to the problem of regulatory agencies often designing their standards and policies based on the theory that all pharmaceutical companies are rich, which Smith points out isn't a valid operating theory with increasing virtual pharmas. Another potential problem with regulatory requirements and outsourcing is the complexity that can come with having multiple CROs.