It hasn't been a good couple of months for employees at major drug companies. Pfizer
While the companies could pocket all the cash saved from not paying the extra salaries, investors should hope that they don't give up all the spending. Drug companies live and die by their pipeline, and if they stop spending on research and development, those pipelines will eventually dry up.
It seems more likely that the companies will continue to use at least some of that money and try to get more bang for their bucks by spending them on research and development done outside the company.
Outsourcing, health-care style
Drug companies can outsource practically everything these days. That includes all the stages of drug development, from making chemical libraries to preclinical tests in laboratories all the way through to phase 3 clinical trials. The advantage for the drugmakers is that this gives them a lot more flexibility. If a project needs to be trashed because it becomes clear the drug doesn't work, the pharmaceutical company isn't sitting around with employees waiting for the next project to appear.
Outsourcing companies like Parexel and Pharmaceutical Product Development, called clinical research organizations (CROs), can make money and deal with the changes that come from failed projects, because they have the flexibility to switch from one drug company's project to another. Other companies, such as China's WuXi PharmaTech, are able to perform tasks more cheaply than pharmaceutical companies can because they carry out preclinical research overseas, where scientists are often willing to work for less.
But even in the U.S., CROs can do what pharmaceutical companies do for cheaper. Last year, Eli Lilly
It's not just research and development that gets outsourced; there's even outsourcing available for marketing once the drugs get past the Food and Drug Administration. inVentiv Health
CROs in disguise
Development-stage drugmakers have always been a vital part of pharma's R&D plans, but over the last few years, it seems things have been accelerating considerably. For instance, Exelixis
It seems to me that pharmaceutical companies are essentially turning into holding companies that license or purchase drug candidates, escort them through the regulatory maze, and produce and hock them once they get past the FDA.
I'm not sure that's such a bad business model. The pharmaceutical companies get to use their regulatory and marketing knowhow and leave the rest to companies that can do it more efficiently and for less. It's a win-win situation that should give CROs and small drug developers a boost in the coming years.
More forward-looking Foolish commentary:
inVentiv Health is a Motley Fool Hidden Gems pick. GlaxoSmithKline is a current recommendation of Income Investor, and Pfizer is a former recommendation of the service. Pfizer is a Inside Value selection. The Fool owns shares of Exelixis, which is a Rule Breakers pick. Try any of our Foolish newsletters today, free for 30 days.
Fool contributor Brian Orelli, Ph.D., wonders whether there's a market for bumper stickers that read, "CROs do it for less." He doesn't own shares of any company mentioned in this article. We tried to put the Fool's entire disclosure policy on a bumper sticker, but it wouldn't fit.