In the early 1990s, the big pharma companies - the multinational pharmaceuticals - faced an innovation crisis. Having largely failed to embrace the emergence of biotechnology, their drug development pipelines were in danger of running dry. To cope, the industry decided to buy in promising compounds.

Around a third of the drugs they have launched were actually discovered by outsiders. And many are top sellers such as lamivudine, the Aids drug that Glaxo Wellcome licensed from Canadian biotech company BioChem Pharma.

As the 1990s draw to a close, the pharmaceutical industry faces a new research and development challenge. The genomic revolution - which maps out the relationship between genes and diseases - has broadened the discovery horizon still further. All the drugs on the market today interact with around 400 molecular targets. The human genome project is likely to give researchers somewhere between 3,000 and 10,000 genes that are functionally involved in disease.

Where once the problem was a lack of leads it is now the quality of leads.

Pharmaceutical companies are turning to toolbox companies such as Oxford Asymmetry, a university spin-out that makes bespoke libraries of drug-like chemicals, and Cerep, a French company that alters and screens libraries to find the compounds with the best chance of making effective drugs.

In an effort to root out the toxic compounds before they even get near a laboratory rat, R&D departments are turning to bioinformatics specialists, such as Oxford GlycoSciences (OGS), another university spin-out, which specialises in proteomics, databases of proteins from healthy, diseased and drug-treated cells.

Companies test compounds on cultured cells, then trawl the OGS database, hoping to spot the tell-tale markers of liver damage that could spell disaster in clinical trials. "Getting to know faster is the key. It means you can put more money into the winners," says Michael Kranda, chief executive of OGS.

But all is not well among the platform companies - the biotech companies that specialise in enabling technology. They are almost all losing money.

Even Incyte, the genomic database company that has contracts with 19 of the top 20 pharmaceutical companies, struggled to make profits of $3.5m last year and move back into the red in the first quarter of 1999, as it poured resources into genomic mapping and sequencing. Henri Termeer, the Dutch chief executive of US biotech company Genzyme, likens the biotech industry to a herd of cows, becoming ever skinnier because the pharmaceutical industry refuses to pay a fair price for their milk.

Cerep has already felt increased price pressure on its combinatorial chemistry business. Thierry Jean, Cerep's chief executive, is moving the company away from fee-for-service work towards partnerships structured around R&D milestones and royalty payments.

Like many other small biotechs, it has also teamed up with other specialists to provide an integrated service to big pharma. But Roy Druckner from Technomark Consultants says this is a false trail. "Pharmaceutical companies are looking for sheer excellence. They are not likely to find it all under one roof."

The partnership founded by Incyte and Oxford GlycoSciences does not aim merely to provide a one-stop shop. They are keen to create a universal data standard. "We want to be the IBM, not the Apple of the industry," says Incyte's chief operating officer Roy Whitfield.

"When you're first in the field you need to get big quick to survive," adds Mr Kranda. By developing the technology just once, Incyte can offer it to big pharma for a fraction of the cost of developing it in-house.

Unlike the drug development companies that must chase high-royalty deals to make a return on their drug candidates, Incyte pursues a low-royalty strategy. "Outsourcing is a choice, so we must look for an economic driver," says Mr Whitfield.

While a biopharmaceutical company would normally ask 10 to 15 per cent royalties from a big pharma partner, Incyte charges a low single digit figure for the leads that drug companies find on its database, rising to mid single digits for those that go into development.

The strategy seems to be working. Incyte's partners account for 75 per cent of the industry's R&D spend, and none has yet refused to renew a contract.

NET RESOURCES: Outsourcing links

George Poste

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