The Productivity Opportunity that Biopharma is Missing

Is the drug discovery and development industry missing a significant opportunity to increase R&D productivity? Biopharma headlines are buzzing with pricing uncertainty news and M&A speculation. Less frequently discussed is that half of R&D budgets are spent on outsourced research and companies are not prioritizing management of this spend.

R&D productivity and efficiency are key measures for evaluating the prospects of biopharma companies. The metrics answer: is R&D investment effectively contributing to growth? Unfortunately, the answer to that question has been less than positive. Even worse, traditional approaches to address R&D productivity are becoming less reliable, which is especially problematic in an era of pricing uncertainty. 

Recently, pharma companies have sought to enhance R&D productivity by filling and diversifying pipelines

through acquisitions. However, M&A valuations are increasing to the point of diminishing returns. And there are not enough new molecular entities available to sustainably plug pipeline gaps.

Since the 2000s, companies have also tried to optimize operating structures to increase R&D productivity and financial returns. Internal pipeline management and restructuring (including layoffs) have been attempted to focus investments and manage costs. After repeated restructuring, few opportunities to continue this approach remain.  

One effect of layoffs and restructuring is that companies increasingly outsource R&D functions. As of 2017, nearly half of R&D budgets are spent on outsourced scientific services; however, managing this spend has received only a fraction of executive mindshare. Optimizing this investment could positively impact individual companies and the industry overall.  

By outsourcing, companies can manage fixed costs while accessing specialized technologies, particularly in complex R&D areas (such as biologics). An expert contract laboratory can often complete projects in less time, at less cost than developing expertise and performing the project in house. 

One byproduct of industry-wide layoffs has been an enrichment of scientific expertise within contract research organizations (CROs). 

Several challenges prevent companies from realizing returns on their outsourcing investments. First, there is significant friction in accessing innovative service providers. Outsourced projects are often delayed by time spent identifying the most qualified providers. To avoid delays, organizations trend toward using providers they have used before, even if the provider may not optimally fit their research need. Second, projects are delayed by price discovery processes to ensure that services are quoted at fair market value. Often, sponsors overpay, lacking time to obtain multiple quotes or evaluate market value.

Third, contract negotiations may delay project initiation and increase transaction costs. While contracts are needed to maintain confidentiality, protect IP, and ensure compliance, they can slow down outsourced projects, particularly if contracts involve new service providers or complex studies. Fourth, R&D organizations spend resources managing increasingly complex outsourced projects and measuring performance against costs, which frequently lack transparency. 

Hence, the missed opportunity for biopharma is to strategically optimize outsourcing performance.  Outsourcing process improvements include:

Biopharma companies that succeed in these efforts will be best positioned to reduce administrative waste, reduce cycle times, and ultimately deliver R&D productivity.