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Increasingly bold outsourcing will help big pharma cut costs

By Nick Taylor , 01-Feb-2011
Last updated the 01-Feb-2011 at 10:21 GMT

Big pharma outsourcing will become much bolder in the next 12-18 months as companies attempt to “dramatically attack cost structures”, according to the Covance CEO.

The patent cliff has almost arrived and big pharma will, and has to, respond by reducing fixed costs, said Joe Herring, CEO of Covance. By inking deals with Eli Lilly and Sanofi-aventis Covance began a strategic alliance trend that it expects to grow in coming years.

It’s going to be a ‘newsy’ 12 to 18 months”, said Herring. Covance is discussing a broad range of strategic alliances, including asset or staff transfers, but transactions are on everyone’s agenda and Herring expects other contract research organisations (CRO) to make similar deals.

C-suite executives at top biopharm now understand CROs, recognise services have eclipsed in-house capabilities and have seen asset transfers work, said Herring. Armed with this knowledge, and faced with the need to “dramatically attack cost structures”, biopharm is keen to make deals.

Success of previous strategic alliances has been particularly important, said Herring. Many people thought the Lilly deal would fail, said Herring, but two years on both companies are happy with the transaction.

Similarly, Sanofi offered its Porcheville, France and Alnwick, UK sites to 30 companies, said Herring, but it was Covance that could make the deal work. “It’s a fabulous deal for Covance and Sanofi”, said Herring.

Having made deals with Sanofi and Lilly, as well as Merck & Co, Covance is now the CRO people think of when considering making a strategic transaction, said Herring, and this will help it secure business.

Previous strategic alliances

Since acquiring the Greenfield, Indiana, US site from Lilly Covance has added a number of capabilities while keeping costs down. Furthermore, the deal gave Covance the employees and capabilities to enter the drug discovery support sector which Herring predicts will grow.

Expanding capabilities has helped Covance secure work with 50 clients, plus Lilly, at Greenfield. Revenues from non-Lilly clients at Greenfield, plus non-Merck work at Seattle, Washington, US, totalled $50m (€37m) in 2010.

Covance acquired the Seattle genomics laboratory from Merck in July 2009. Since then Covance has added 15 clients, said Herring, and every major pharmaceutical company has visited the site.

The Seattle site offers genomics services, such as genotyping and gene sequencing, and Herring said pharma must learn how to buy these services that have traditionally been performed in-house.

Covance expects the Sanofi deal to account for much of its 2011 revenue growth and 85 per cent of income from the alliance will come from early stage. Late stage work for Sanofi is expected to generate meaningful revenues from 2012 onwards.

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