In-house vs. Out-source; Vertical Integration vs. Vertical Disintegration

The resource for each discipline may reside within a single company or several-to-many companies.  In-house location of resource simplifies coordination, fosters synergy, but increases fixed cost.  Historically, Big Pharma tended to execute all stages in-house.  Such an organization engages in Vertical Integration.

As fixed cost becomes a burden to Big Pharma outsourcing becomes attactive.  They are moving towards Vertical Disintegration, following the trend in the automotive, IT and aerospace industries.  Outsourcing resource may lower cost with similar quality (?), but can add contract issues (e.g. need to pay for contracted work even if a project terminates).  Big pharma are presently moving to out-source; while small pharma and  Contract Research Organizations (CROs) move to add staff.  CROs tend to specialize in no more than a few stages.

Particular in-house expertise may be lacking in any sized company.   Expertise is roughly proportional to staff size – knowledge, experience, talent, flexibility, and ability to handle all work.  Tracking the use of resource is essential (see Resource Tracking), but challenged by outsourcing.

An important consideration in weighing which areas of expertise to outsource, are those areas where close collaboration is required.  Below are two examples in Drug Discovery.

Protein Reagent Providers with Assay Developers.   Rarely is the full-length human protein used in the primary assay for intensive screening and profiling.  The assay developers will work closely with the reagent providers to determine where to place a fluorescent tag, whether to modify sequence to improve stability or solubility, or to remove domains that are not the binding or catalytic domain.  If reagent provision is outsourced, the time to assay development completion could lengthen considerably.

Compound Profilers with Synthetic Chemists.  Lead optimization should involve a tight loop of interaction between the compound profilers and the synthetic chemists.  If either group is outsourced, the time to candidate selection could lengthen considerably.  If the chemists are outsourced the company risks future patent issues.

Dixon, Lawton and Machin argue that “insufficient overall investment is available today to support the growth of new vertically integrated companies from a research base, as occurred in past decades” and that “the process of creating and selling a drug can no longer be optimally accommodated within one vertically integrated business, and that vertical disintegration into ‘discovery’, ‘development’ and ‘marketing and sales’ businesses is needed.” 1

Clearly the business factors that favored vertical integration are no longer operating in the bio/pharmaceutical industry.

  1. J. Dixon, G. Lawton and P. Machin, Nature Rev. Drug Disc. 8, 435, 2009.