When Gurus Get It Wrong - Pharmaceutical Executive


When Gurus Get It Wrong

Pharmaceutical Executive

Outsourcing is a sin

The apostle of disruptive technologies is Clayton Christensen. He has shown through dramatic examples the consequences of new technologies taking over from old, such as the wiping out of Kodak by digital photography.

But Christensen has a bee in his bonnet about outsourcing. He believes that when companies outsource, they risk teaching future potential competitors how to enter the market. This risks companies letting know-how out of their grasp and fosters a situation where the vendor becomes their future competition, according to Christensen.

Clayton Christensen has a very broad education and wide experience: he has a medical background but has metamorphosed into a management guru. While his first, highly popular publications in the United States took examples from a variety of industries, he subsequently wrote a book specifically on healthcare. It was in The Innovator's Prescription, which he co-authored in 2009, that Christensen came out against outsourcing. He based this advice on evidence from industries including pharmaceuticals: "Pharma will find a decade on that they have outsourced their core competencies."

Perhaps Christensen was influenced by some big companies such as Pfizer. During the early days of outsourcing—20 years ago—Pfizer took a corporate-wide decision not to outsource any work in drug discovery. The company was then indeed concerned about loss of intellectual property and considered that core competences should be developed in house.

In 2012 Christensen returned to his theme: "We now understand that managing clinical trials is an indispensable element of drug discovery. And so if you outsource that, then you're outsourcing the activities that in the future will be the critical capabilities."

Outsourcing has been going on for many years, and at a significant level since the early 1980s at least, when the first contract research organizations were set up—for example Kendle in 1981, Parexel and Quintiles in 1982, and PPD in 1985. By 2010, outsourcing accounted for over a quarter of all pharma R&D expenditures. PricewaterhouseCoopers found in 2012 that 43 percent of all pharma and life sciences CEOs had outsourced a business process or function in the previous 12 months.

Yet what progress have pharma CROs made in the past 30 years to make inroads into the pharmaceutical industry? The answer is relatively little: certainly, none have made very great progress in developing their own intellectual property. None are close to becoming anywhere near fully fledged pharmaceutical companies. And I doubt whether many of them even have the ambition now to do so.

Generally CROs have only stood a chance of acquiring intellectual property when the bargaining power of the partner has been weak. They have sometimes been able to offer a means of financing projects which start-up companies have had difficulty financing otherwise. It is hardly surprising that none of these deals have so far led to CROs developing products with major commercial potential.

To avoid this potential problem that Christensen is so concerned about, pharma companies outsourcing to CROs or any other type of contract organization only have to ensure they retain their intellectual property. Also, contrary to the situation between start-up companies and CROs, pharma companies have strong bargaining power relative to any CRO and do not need to concede intellectual property rights. Most pharmaceutical companies are also experienced and efficient in putting effective contracts in place and are unlikely to slip up on intellectual property matters. And so the dangers which Christensen is imagining, in an industry which he has recently rather refreshingly admitted he does not fully understand, are in my view illusory.

Pfizer eventually began outsourcing certain R&D functions in the late 1990s. Now they are firm enthusiasts. For example, since 2000 the company has been steadily increasing a variety of preclinical activities it has been setting up with the Chinese company WuXi. Christensen has failed to understand that in pharmaceuticals outsourcing not only works, but it is favored increasingly by pharmaceutical companies who have seen over three decades now how it can work for them. It does not lead to the problem he raises because intellectual property rights for pharmaceuticals under active development will be strong—and pharmaceutical companies will continue to ensure that they keep hold of those rights.


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