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The Grand Experiment

Drug companies’ reliance on outside firms to run complex R&D programs so far seems to work

by Jean-François Tremblay
October 25, 2010 | A version of this story appeared in Volume 88, Issue 43

Credit: Shanghai ChemPartner
Initially a provider of chemistry research support, Shanghai-based ChemPartner has turned itself into an integrated drug discovery and development organization. Shown here is a lab for drug metabolism and pharmacokinetics studies.
Credit: Shanghai ChemPartner
Initially a provider of chemistry research support, Shanghai-based ChemPartner has turned itself into an integrated drug discovery and development organization. Shown here is a lab for drug metabolism and pharmacokinetics studies.

Two years ago, Endo Pharmaceuticals began to transform itself into an innovation-driven drug company. The Pennsylvania-based firm, which until then was mostly a supplier of branded and generic pain-management drugs, now has eight drug discovery programs under way, and it expects to be running as many as 12 by next year. Yet the company has no laboratories of its own.

“We probably would not have started these programs if we had had to build our own capabilities,” says Ivan Gergel, Endo’s executive vice president for R&D. In lieu of labs, Endo is relying on the research capabilities of companies based in India.

Endo has hired eight senior research scientists in the U.S. to manage its relationships with those firms. In India, Gergel says, the company’s programs employ 70 to 80 scientists who work full-time in labs dedicated to Endo. Gergel reckons it’s doing all of this for about one-quarter of what it would have cost to set up corporate R&D labs in the U.S.

Outsourcing research work is nothing new for the pharmaceutical industry. For many years now, drug companies have relied on external service suppliers, based in the U.S. or abroad, to help them with compound library generation and other specific chemistry tasks. But recently, drug companies have started counting on outsiders to combine chemistry, biology, and other drug discovery skills to deliver clinical candidates—pharmaceutical molecules that are ready for testing on human patients. It’s a far cry from the master-and-slave approach of the early days of R&D outsourcing. “We don’t look at it as outsourcing but rather as partnering,” Gergel says.

A partnership can be initiated in any number of ways, Gergel adds. Sometimes Endo has a biological target for which it thinks a drug could be developed. At other times, ambitious service companies optimize a drug lead on their own and propose a partnership with Endo for further development work. “Some of our partners are motivated to work with us to fund the growth of their organization, and in time, they will bring their own molecules through,” he says.

Major drug companies have been testing this partnering model for fewer than five years, and it’s not yet clear whether it truly works. Still, the results so far are encouraging enough that several major companies plan to generate a substantial portion of their drug pipeline in this fashion.

Merck & Co. has publicly stated a target of developing 25% of its drug pipeline with external R&D. AstraZeneca is striving for 40%. In this grand experiment, drug companies are anticipating that external service providers will do a better job of delivering drug candidates than they can do themselves.

Among the big drug companies, Eli Lilly & Co. was a pioneer in harnessing the talent of outside firms to come up with drug candidates. The company started contracting out early-stage drug discovery in 2004, recalls Robert W. Armstrong, Lilly’s vice president for global external R&D. “We wanted to augment our internal capabilities and develop more medicines faster and at a lower cost,” he says. Around that time, several companies in India, China, and Russia to which Lilly had outsourced limited research projects had upgraded their capabilities to the point that “it was becoming possible to allow a group to work with us on a specific set of targets,” he adds.

Lilly started setting up new business relationships with these companies—firms such as India’s Piramal Life Sciences, China’s Hutchison MediPharma, and Russia’s ChemDiv—under which they would get milestone payments upon achieving specific goals, such as generating optimized drug leads or clinical drug candidates.

Because it takes 10 to 15 years to complete the discovery and development of a new drug, it’s too early to tell whether Lilly’s externally managed research initiatives will lead to new drugs, Armstrong says. But within Lilly, the experiment is already meeting, if not exceeding, expectations. “Our partners have reached research milestones like lead generation, candidate generation, or entry into clinical trials multiple times, and their achievements convince us that we will continue down this strategic path,” he says.

Big drug companies are not the only ones seeking outside collaborators for their research programs, says Nikolay Savchuk, chief executive officer of research services firm ChemDiv, which has operations in California and Moscow. A significant portion of the demand for integrated services comes from virtual drug companies that, much like Endo, maintain almost no in-house research capabilities. Biotech firms that have scientific know-how in only a few specific areas are also potential customers.

“The majority of newly funded drug discovery companies are virtual companies, either to some extent or to a full extent,” Savchuk says. “Venture capital firms are sensitive when it comes to building infrastructure because it’s so costly,” he explains, noting that drug companies that buy expensive lab instrumentation such as high-throughput-screening robots often end up using the equipment only 20% of the time.

Credit: ChemDiv
Research service providers are boosting their in-house capabilities. ChemDiv manages integrated programs at its Chemical Diversity Research Institute, in Moscow.
Credit: ChemDiv
Research service providers are boosting their in-house capabilities. ChemDiv manages integrated programs at its Chemical Diversity Research Institute, in Moscow.

The advent of virtual companies as originators of research projects has transformed a research landscape that in the past was dominated by major drug companies, says Steven Hutchins, senior vice president of strategic business development at Hamburg, Germany-based Evotec. “Talent has been redistributed to contract research organizations as drug companies have downsized and venture capitalists no longer need to invest in labs to test whether an idea works out,” he says. “There are many different models, and we’ll see what works best.”

Major pharmaceutical companies are contracting for integrated drug discovery services because they no longer house the high-level capabilities that they once did, says Yuguang Wang, senior vice president for integrated service and library generation at Shanghai ChemPartner. “R&D budgets are flat, resources are being reassigned, and the drug companies don’t have enough staff and instruments in-house to do the work,” he says.

In contrast, service providers such as ChemPartner have been steadily upgrading their capabilities by buying more scientific instruments and hiring more world-class scientists, Wang says. In fact, Wang joined ChemPartner last year after 18 years as a scientist with Schering-Plough in the U.S., where in the course of his career he won numerous corporate awards. He participated in the development of three drug candidates that went into clinical trials, including the company’s thrombin receptor antagonist, for which he won a Patent Award from the Research & Development Council of New Jersey in 2008.

As they invest in expensive instrumentation and hire veteran scientists to lead their labs, research service providers in China and India incur new costs. They can remain cost-competitive, Wang says, because the bulk of their scientific workforce is young and relatively inexperienced. “The senior scientists from abroad provide guidance, but the bulk of the scientific workforce is local,” he says.

A skeptic might argue that the practice of transferring critical research projects from seasoned in-house veterans to mostly inexperienced for-hire scientists is bound to fail. But according to Xiaochuan Wang, chairman and CEO of the Shanghai-based research service provider Sundia MediTech, that’s the wrong way of looking at things.

An overabundance of senior scientists can also be a problem in effectively managing drug discovery programs, says Xiao­chuan Wang, who earlier worked for three drug companies. “When I was leading teams in the U.S., most people had Ph.D.s, whereas most of the teams in China are younger and less experienced,” she observes. “But you can’t have only majors in the battalion; you also need soldiers.”

Sundia and other research service providers in China, she says, compensate for the youth and inexperience of their staff in several ways. For instance, she believes that her customers’ main concern is the background of her managers. “We hire high-level managers whose talent is recognized by the U.S.-based scientists who are our clients,” Xiao­chuan Wang says. “Within the U.S., they are considered top scientists.”

Working with a Chinese research service provider offers specific advantages, she says. For example, access to the animals needed for biomedical research is far easier in China than in the U.S., she claims. “For primate studies in the U.S., you face delays of six months to one year, whereas this is a lot faster in China,” Xiaochuan Wang says. Sundia maintains a rodent facility in-house and has access to leased space for studies on larger animals.

One of the benefits of relying on outside research partners, ChemPartner’s Yuguang Wang says, is the degree of focus that is brought to the task. At ChemPartner, project managers set up a timeline at the outset of every project. “Our work is better defined, so we spend more time on the actual project,” he says. This disciplined approach, Yuguang Wang believes, does not get in the way of the serendipity that may yield breakthroughs. “Focus yields solutions,” he says.

For established pharmaceutical companies, working on drug discovery and development projects with partners in Asia or Eastern Europe increases access to those markets, ChemDiv’s Savchuk points out. Governments in Russia, China, and India are all trying to boost national R&D capabilities, and Western companies seen as supporting those initiatives are likely to be received more favorably when they seek to expand operations or market new drugs.

One caveat of relying on outside organizations to run discovery programs, Savchuk warns, is that not all companies live up to their claim of being able to manage an entire program. “Some of the companies advertising integrated services have all the capabilities, but they’re not actually well integrated,” he says. ChemDiv, he notes, has worked with customers on 40 integrated research programs in 2008 and 2009, resulting in six molecules going into clinical trials in 2009 alone.

Setting up a research partnership with a company based in another country primarily to save money may not lead to the best possible outcome, cautions Hutchins, who had worked at contract research companies in Beijing and Shanghai before joining Evotec. Although scientific talent on the whole is plentiful in Asia, experienced medicinal chemists are still hard to find, he explains.

“Unlike us, the Asian firms can’t quickly hire 40 to 50 medicinal chemists locally when they need to,” Hutchins says. “They have to find some who are willing to move, and that takes time.” Evotec does have a chemistry lab in Mumbai that helps reduce the company’s costs. “Cost is on our partners’ list of criteria,” Hutchins says, “but they look more at our capabilities to deliver the right molecule.”

Furthermore, it’s only a matter of time before the cost differential between Asia and the West becomes almost inconsequential, says Rashmi Barbhaiya, CEO and managing director of the Bangalore-based research service firm Advinus Therapeutics.

Drug companies that focus on cost savings can end up building corporate R&D centers in Asia modeled after facilities in the West that fail to deliver enough promising drug candidates, Barbhaiya observes. “They will duplicate what they already have in Boston, California, or wherever,” he says. “You cannot achieve different results by simply following the same path.”

In contrast, letting another company manage drug discovery programs could lead to a different outcome, Barbhaiya claims. In India, for example, scientists may have less drug discovery experience than their Western counterparts, but that means they are open to trying new approaches, he says. The “young and extremely bright” local talents “have no biases when it comes to drug research, and they are led, for better or for worse, by managers who come from big pharma,” he says.

Major drug companies are fundamentally risk averse when it comes to supporting research programs, says Barbhaiya, who was vice president of Bristol-Myers Squibb’s Pharmaceutical Research Institute in the U.S. before launching Advinus. But if fully harnessed and given the right incentives, outside partners will take risks that drug companies might not take on their own, he says.

“At Advinus, we look at the preclinical data and may choose to take forward a program that a major drug company may not have supported,” Barbhaiya says. “We’re a smaller firm without multiple decision-making committees, and we have to take risks in order to establish ourselves.” The five-year-old company employs 500 people.


Advinus may be willing to assume more risk in running research programs, but when choosing partners the firm is circumspect, Barbhaiya insists. “We don’t talk to everybody in all therapeutic areas,” he says.

Other research service providers claim to be equally careful. For example, Xiao­chuan Wang says Sundia’s expertise lies mostly in oncology and neuroscience. Sundia may take projects in other therapeutic areas on a case-by-case basis, she says, but only if both the customer and Sundia are satisfied that the scientists in Shanghai are sufficiently competent. “If it’s a disease we know nothing about, we will certainly let the customer know,” she says.

Likewise, outsourcers are careful in choosing partners. One criterion is expertise. “We look at our portfolio needs,” says Lilly’s Armstrong, “and we match that to the expertise that is out there to allow both parties a chance that it will be a successful effort.”

Another criterion is the research provider’s ability to work independently, says Endo’s Gergel. “We’re highly dependent on the input of our partners to drive our programs forward,” he acknowledges. Endo works with four Indian companies—Aurigene Discovery Technologies, Jubilant Biosys, Syngene, and TCG Lifesciences. The first three are based in Bangalore, whereas TCG runs its operations in Calcutta and Pune.

To retain control over projects as they become more mature, Gergel notes, Endo does all of the regulatory and statistical work in-house. “When we believe that we have to develop scientific expertise internally, that’s what we do.” The company also retains all intellectual property rights for its discovery programs, he adds.

Western industrial scientists are no doubt disturbed that many U.S. and European drug companies have moved beyond simple chemistry outsourcing to the outsourcing of entire discovery and development programs. But Evotec’s Hutchins, who has worked both for pharmaceutical firms and for their outside research contractors, believes that the new model will endure. “The number of projects we’re working on is increasing,” he says. “It’s not irreversible, but drug companies have reduced their staff, and it’s hard to resource projects with less infrastructure.”


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