When Big Pharma Outsources R&D
There are many issues affecting Big Pharma drug stocks, and some fresh news is highlighting a trend that you will start to see more and more of. You won’t just see it from Big Pharma traditional drug companies. You will see it from biotech companies and could even see it occur at generic firms.
Eli Lilly & CO. (NYSE: LLY) has signed an agreement with contract research organization (”CRO”) Covance Inc. (NYSE: CVD) which will transform Lilly’s current R&D model. Lilly is selling its Greenfield, Indiana early-stage drug development facility to Covance for $50 million, and Covance will offer jobs to about 260 Lilly employees.
In addition, Covance signed a 10-year pact worth $1.6 billion to provide drug development services to Lilly. This will include levels of research from initial stages to studies and will include clinical services for drug studies in Phase II-IV studies. Covance will take responsibility for the following:
- Lilly’s non-GLP toxicology,
- in-vivo pharmacology,
- quality control lab,
- and imaging services.
So what gives? Are drug companies saying they cannot develop their own drugs any longer? Are they running out of ideas? Are they unable to keep within regulatory requirements? Even if this may be the case(s) among isolated cases, the real answer is far more basic. Follow the money. With this move, Lilly will fix its costs and will be able to control the perpetually higher costs of developing drugs. Keep in mind that most drugs are estimated to cost anywhere from $400 million to well over $1 Billion to just bring the drug to market after years and years of studies, tests, adjustments, development, and more.
Using a firm such as Covance should also accelerate drug development timelines, and may also improve efficiencies as well.
Biotechs are starting to be worth more and more and business to CRO’s as well. While some figures vary on just how much, the going figure that seems to be used is that about 30% of CRO’s revenues come from biotechs. This is a trend that should only become more and more of the case. At least this is keeping the clinical research ‘outsourcing’ within the U.S. For those of you who worry about overseas quality control and jobs being sent overseas, much of this work is already being farmed out in various stages or in various forms to India, China, and elsewhere.
Jon C. Ogg
August 6, 2008