Time to market is the major driver for strategic sourcing decisions

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Time to market is the major driver for strategic sourcing decisions (Cooney, 2005). Being first to market with a pharmaceutical drug is critical for capturing market share and revenue. Any delays in the drug development process are directly correlated to lost revenue; any reduction in the time to market can result in significant savings of revenue and potential market share gains.

In this fast-paced Pharma market, efficiency in identifying viable new compounds is not just a means of achieving growth, but is also a key to survival. The company to first market a new drug can enjoy a virtual monopoly for years, generate tremendous profits, and transform the lives of millions of people. The second company receives very limited benefits. Companies run the clinical trial race by starting with approximately 10,000 compounds, and then refining and testing them over an average duration of 15 years before the FDA approves a single, final drug (Journal of Health Economics, 2003). Crossing this FDA finish line requires passing key milestones throughout the various clinical trial phases and approval processes of the Investigational New Drug (IND) Application and the subsequent New Drug Application (NDA). The regulation and control of new drugs in the United States has been based on the NDA; the application is the vehicle through which drug sponsors formally propose that the FDA approve a new pharmaceutical for sale and marketing in the U.S. The data gathered during the animal studies and human clinical trials of an IND become part of the NDA.

To better understand the potential cost savings of reducing time to market, consider the following example: Assuming that a drug generates $100 million in peak sales per year and has a gross profit margin of 20%, then the biopharmaceutical firm will generate $20 million in profits over one year. If the time to market is reduced by one month, the company can expect additional earnings of $1.66 million over the drug’s market lifetime. Taking into account the probability of success, whereby only approximately 10% of drugs in drug development reach the market, the potential expected additional earnings drop to $166,666. Though this number may seem low at first, the results can be significant for drugs with higher peak sales and higher profit margins. It is in the company’s best interest to reduce the time to market to see greater potential earnings. Often, outsourcing to contract research and manufacturers can reduce the time to market because these firms are specialized and already possess necessary equipment and trained employees.

Blockbuster drug discovery is costly and risky (Tsao, 2002). Changing process management and introducing new technology carries additional uncertainties that pharmaceutical companies may not want to bear, such as time lost in launching a new product to market. If a company delays a launch by a single day, the potential costs can be significant. The Journal of Health Economics calculated that the cost of drug development was $30,000 per day in 2003, which was expected to increase by 10-12% each year. The clinical trial process can take many years, and the timeline for readiness to submission for market approval varies with the efficiency of the clinical trial process. Once a product has reached the market, the research on that product can continue, encompassing studies around additional safety and efficacy profiles, new indications and the effects on patient sub-populations