By David Chapman
Quintiles recently announced a risk-sharing deal with Eisai Co. on the development of six potential oncology products. These types of deals, characterized by risk sharing between a CRO or other service provider and a pharma company, are becoming increasingly common. As the drug development chain fractures into thousands of little companies, such tight relationships between customers and suppliers will become more prevalent and more important.
Characteristics of the pharma sector
The drug development sector is characterized by many factors, including (but not limited to):
high cost of development for a finished product
presence of significant regulatory oversight
limited lifespan for any one product
increased outsourcing to suppliers
increased worldwide competition
contraction of the major players.
The automobile sector
There is another sector, the automobile industry, which is characterized by these factors, and there is an interesting analogy between the two. Just as the major drug companies used to control development from the initial stages of R&D through final marketing, so too did auto manufacturers when they used to build the entire car, from mining the ore through final assembly. When Henry Ford began making cars, vertical integration was one of the few ways to control the quality of the final product. The Ford Motor Company even farmed sheep to make the wool used in the seat covers.
Since then, increasing competitive pressures have forced the auto manufacturers to focus exclusively on their core competencies. The manufacture and assembly of most subcomponents have been spun off to more capable, more specialized suppliers. The major automobile companies do not now build alternators, or seats, or ride control systems, or even a majority of the car’s components. They focus their activities on the design, assembly, and marketing of vehicles, leaving most of the remaining tasks to suppliers. Competitive pressures have forced suppliers to specialize in doing only a few things well. Success for these suppliers involves specialization, innovation, cost control, and tight integration with their customers. Business innovations, such as JIT (just-in-time) manufacturing, which are modified forms of risk sharing, are prevalent.
Making an analogy with the automobile industry is not very flattering at this point in history, because Chrysler and GM both have one foot in the grave. However, these similarities between the pharma and automotive sectors still exist, and it is not hard to find others.
The logical prediction from this analogy would be the following situation: continued consolidation in the pharma sector until all that remains are a very few major drug companies, no midsized players, and fierce competition among a very narrow field of suppliers. While consolidation of major pharma companies is occurring, the number of suppliers is not decreasing, so this scenario will not develop in the pharma sector to the extent it has happened in the automotive sector — at least not for quite a while yet. There are many reasons, but here are two: the disintegration of the blockbuster model as the only definition of success in drug development and the incredible, as yet largely untapped, potential awaiting researchers in the many “omics” (e.g., genomics, proteomics, cytomics, eposomics, kinomics, lipidomics, metabolomics, etc.).
Even though there is still plenty of room for research innovation to change the market dramatically, the increasing importance of suppliers and a tightening integration among companies all along the drug development chain is a trend that will continue. These changes will require the business-to-business marketing efforts of companies along the chain to adapt to an evolving marketplace.