This Trendy Pharma Is Making a Stylish Move

With its latest move, Merck (NYSE: MRK  ) combined two hot trends in the pharmaceutical industry -- outsourcing to clinical research organizations (CROs) and development of biosimilars -- into one deal yesterday.

The drugmaker has signed up Parexel (Nasdaq: PRXL  ) as a partner to help it develop biosimilar drugs. Terms weren't disclosed, but the deal doesn't appear to be as big as fellow CRO Covance's (NYSE: CVD  ) deals with Eli Lilly (NYSE: LLY  ) and sanofi-aventis (NYSE: SNY  ) . In both those cases, the drugmakers outsourced so much work that they sold buildings they owned to Covance to do the research in. Parexel will establish a unit within the company dedicated to helping Merck on biosimilars, but this seems more like an expansion through outsourcing rather than moving jobs there.

Merck could have just hired experienced people to help it get through its manufacturing and regulatory process, but hiring Parexel will likely be cheaper in the long run. There's bound to be ebbs and flows in the process, which Parexel is better suited to handle since it can switch people between projects it has with other drugmakers.

Developing biosimilars -- copycats of protein-based drugs -- is a lot harder than it is for small-molecule drugs. Merck's move to develop biosimilars started back in 2008, but the company doesn't expect to launch a biosimilars product until the middle of the decade. The regulatory pathway for approving biosimilars in the U.S. hasn't even been established yet, so it's not exactly clear what drugmakers will need to do to gain approval.

It may take a large pharma with resources to burn like Merck or Pfizer (NYSE: PFE  ) , which has also jumped into the mix, to scale the manufacturing and regulatory hurdles. It's too early to know for sure, but little biotechs like Spectrum Pharmaceuticals (Nasdaq: SPPI  ) may end up having trouble competing in the space.

For now, Merck will have a while to wait for its biosimilars to progress through development. Patience may not be in style right now, but it could prove rewarding for shareholders eventually.

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