Oct 1, 2007: Western pharmaceutical and biotechnology companies are faced with increasing costs for new drug development, along with a rising frequency of drugs failing during clinical development.  In order to better manage drug development costs, these companies are increasingly looking to outsource development efforts to lower-cost geographies.

These mounting pressures on western drug companies, combined with changes in intellectual property laws in emerging market countries, have resulted in a growing number of Asian companies offering drug development outsourcing services. These services cover the spectrum of drug development, from lead identification to pre-clinical animal studies through clinical trials to manufacturing.

Companies offering these services generally fall into one of two business models—pure services or a blended model.

Pure services: Companies that are fully focused on being service providers.  Some work in a focused area (such as clinical research) while others offer a full range of services, from lead identification through manufacturing for the market.

A blended model: Companies do contract service work which helps support other business activities, which may include internal drug development and marketing efforts.

Overall, the outsourcing services segment has been growing rapidly, with growth estimated at 20 percent per year. But despite this rapid growth, there are challenges on the horizon, both for established companies and for those looking to enter this business segment. 

The first of these challenges is the result of success attracting new competition. 

New companies are entering the arena from the more established outsourcing countries of India, China and Singapore as well as from Taiwan and Korea.  In addition, Thailand, Malaysia, Indonesia and Vietnam are also looking at the outsourcing market opportunities. And with an increasing number of market entrants, as we are now seeing, there is the risk of a supply/demand imbalance.  For example, there is increasing anecdotal evidence of some Asian clinical research companies having significantly more capacity than contracts.

Increasing competition (both regionally and globally) and the need to increase capacity utilization will require that Asian services companies differentiate themselves from their competitors and define their unique value proposition in the market. Some companies will emphasize their full range of drug development services, while others will focus on their depth of expertise in a specialized area.  In all cases, successfully identifying, developing and promoting this unique positioning will cost companies both in terms of money and management
attention.

Another challenge comes from the western client companies themselves. Increasingly, these companies are looking for service companies that can provide material and data that can be used directly in regulatory filings.  This, in turn, requires service companies to work in compliance with US FDA and/or EMEA-dictated GLP, GCP and/or GMP standards.  These standards require significant investments by service providers in terms of equipment, facilities and personnel, not only to achieve compliance, but also to maintain compliance on an ongoing basis.

The demand for GxP compliance and the need for increased marketing in an increasingly competitive environment will combine to squeeze the margins of those companies that choose to continue pursuit of the lucrative western markets.  As a result, one might expect to see the price arbitrage between Asia and the west, which has been a big driver of service industry growth in Asia, to diminish over time.  This reduction in price differentials makes it even more important for the Asian companies to offer services that are at least equivalent in terms of quality to services available globally.

While these challenges will be faced by all Asian companies that provide drug development services, perhaps the most difficult strategic questions will be faced by those companies that are following a business model in which services work helps to support other internal business initiatives.  Do they make the large and ongoing investments required to differentiate themselves from the competition and provide the GxP quality that western companies are demanding, or do they exit the services market and look for other ways to financially support their other business initiatives?  It is important to note that staying in the services sector will not only require increased expenditure, but also increased managerial attention. For some companies, this could lead to a lack of sufficient managerial attention to other high-value internal development efforts. 

As a third option, these companies could consider staying with the services market, but not making the large investments in marketing and quality controls.  In this case, they could see greatly reduced growth in their services business, or they could find that their business is increasingly limited to clients in the less-regulated (and less lucrative) markets.

The Asian drug development outsourcing industry has shown remarkably strong growth over the past several years.  But now this industry is moving towards a more mature business model.  Increasing competition and demands for GLP/GCP/GMP compliant services means that simply opening the doors of a new service business is no longer enough for success. A company needs to define itself beyond being simply a low cost service provider:  Management needs to identify and define the company’s unique value offering for potential clients.

Determining the best positioning for a company is not an easy task, and should be done as part of a long-range strategic plan. Commercial success is still possible and there is still space for new market entrants. But the market is changing, and companies need to evolve with the market.