Outsourcing Outlook

Price Matters

Jim Miller is the president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.914.1203, fax 703.914.1205, info@pharmsource.com, www.pharmsource.com

At a widely anticipated and closely scrutinized presentation to analysts in April, Pfizer announced that it will cut $4 billion out of its cost structure during the next four years. The company said the restructuring is required in the face of an anticipated revenue weakness resulting from the loss of patent protection for several key drugs, plus the decreased performance of its COX-2 inhibitors, Celebrex and Bextra. The announcement was preceded two days earlier by the withdrawal of Bextra from the market at the insistence of FDA. The size of the cost cuts was nearly double what Wall Street analysts had been expecting, but the company provided few details to analysts or its employees regarding where the cost reductions would come from. More insight came the next day at this year’s “Partnerships with CROs” conference in Dallas, where Pfizer’s (New York, NY, www.pfizer.com) Chief Finance Officer Alan Levin talked about efforts the company is making to rein in R&D expenses. Levin said that in Pfizer’s new CRO selection paradigm, competition is the norm and price is an explicitly considered and heavily weighted factor. Quality, which traditionally was a key decision criterion in CRO selection, is now the price of entry into the vendor pool. In other words, a CRO is allowed to submit a proposal only if its quality is acceptable. Competition among accepted vendors is used to drive down prices, with the help of e-procurement tools such as online reverse auctions (a real-time bidding process in which vendors compete by besting each other’s posted price). Levin also said that Pfizer is turning increasingly to offshore locations such as India and China to source R&D services and conduct studies. Mark J. Guinan, CFO for Johnson & Johnson’s (New Brunswick, NJ, www.jnj.com) R&D operations, copresented with Levin and emphasized the theme of competition. Guinan announced that Johnson & Johnson has established a central services group to support clinical trial activities for the company’s constituent R&D operations, including Johnson & Johnson, Alza, Centocor, and Scios. The central services group will bid against CROs to provide services for the company’s clinical studies. The goal, said Guinan, is to drive down costs while increasing the quality of services provided. Wyeth (Madison, NJ, www.wyeth.com) representatives told the conference about the company’s latest effort to control costs—a strategic sourcing deal with RPS to provide field monitoring staff. This is the second year in a row in which Wyeth has showcased an innovative approach to outsourcing. This past year, company representatives described an initiative to outsource all clinical data management activities to Accenture. According to the company’s presentation, that initiative has been very successful at lowering data management costs. Big Pharma’s admission that it is making decisions on the basis of price should be a wake-up call to the entire contract services industry, including contract manufacturers. For a long time, contractors have convinced themselves that quality (among other factors) trumped price as a decision criterion. Now major pharmaceutical companies are saying that quality and compliance are necessary for doing business with them, but not sufficient. Of course, price is not the same as cost. Wyeth’s efforts with Accenture (www.accenture.com) and Research Pharmaceutical Services (Plymouth Meeting, PA, www.rpsweb.com) are a recognition that operational efficiency, combined with an appropriate level of offshoring, may deliver significant cost savings. The concern for the industry should be that the focus on price will drive out truly cost-saving innovations. (continued)