"Here's the key to the front door, and here's a billion or two to do the research. Thanks for saving us some money."
That's basically the sentiment from an announcement made by drugmaker sanofi-aventis (NYSE: SNY) and clinical research organization (CRO) Covance (NYSE: CVD) today. Sanofi is outsourcing its drug development -- from preclinical through clinical trials and even manufacturing and marketing -- to Covance for the next 10 years. Over that time, Sanofi expects to spend between $1.2 billion to $2.2 billion on the research, which is presumably less than Sanofi would have spent had it kept the research and development in-house.
Much of the research will actually remain in-house; it just won't be Sanofi's house anymore. The drugmaker is selling two research facilities to Covance for approximately $25 million.
The deal mirrors a similar agreement that Covance and Eli Lilly (NYSE: LLY) struck in 2008. Lilly sold Covance a research site and offered a 10-year deal to buy services from Covance.
These deals are really a win-win for both sides. As pharmaceutical companies expand, there's bound to be bloat -- yeah, I'm looking at you Pfizer (NYSE: PFE) and Merck (NYSE: MRK). By moving the research and development out of house, the drugmaker doesn't have to worry about finding work for people when projects end. CROs like Covance, WuXi PharmaTech (NYSE: WX), and Charles River Laboratories (NYSE: CRL) can work more efficiently because they have other clients that they can shift their resources to.
While it sounds great for the bottom line, investors do have to worry about whether this virtual drug development is the most ideal setup for pharma in the long run. The people left at the company are like the quarterback, just distributing the ball from one player to the next. Will the skills of reading the situation and making adjustments during development get lost?
In the end, the obvious good outweighs the potential bad, especially since big pharma's track record for drug development hasn't exactly been superb over the past few years.
Stocks on the rebound? Buy this company that will surely benefit.
