May 16, 1999

Cost-Cutting Forges New Drug-Testing Industry

Drug companies used to supervise all their research, from the discovery of the drugs to the animal tests to the preliminary human tests to the large studies involving hundreds or thousands of patients.

No more. A multibillion-dollar industry has sprung up to take care of all that and more, including designing the studies, finding doctors and patients, analyzing the data, meeting with the Food and Drug Administration, writing the scientific papers and preparing the truckload of documents that must be submitted before a drug is approved.

These new companies have sliced the drug-testing business in every possible way. Some are little more than a Rolodex of the names of doctors willing to help test drugs. Others are major corporations, essentially drug companies without the drugs.

It is an industry that arose to fill a need: the enormous pressure that began around 1992 from managed care companies and health insurers on drug companies to hold down prices, according to industry analysts. Until then, the drug companies had been profitable, making money mostly by increasing prices, not by developing new drugs.

The companies now had to find a new way of generating profits. "Their vulnerability became transparent to the world," said James Patricelli, an industry analyst with Dain Rauscher Wessels in Minneapolis. "What you had was a drug industry that suddenly had to make investments in its future."

The companies' response was to search for blockbusters -- the Prozacs and Viagras hidden within the laboratory chemicals. The FDA gave the companies another incentive by speeding up its approval process, with the median review time for new drug applications dropping from more than 22 months in 1990 to just over 14 months in 1997, according to the FDA.

"The industry has flip-flopped," said Kim Lamon, corporate senior vice president with Covance Inc., a giant drug-testing and development company. "There is a push for novel, innovative, blockbuster drugs, and to be the first or second to market."

Drug companies found they had to put more effort and money into finding drugs while at the same time slashing their development costs. For many, their solution was largely to dismantle their divisions that ran clinical trials and to turn the work over to smaller companies that emerged to fill the need.

"Everyone had auditors, kids right out of college, telling us how to do it cheaply," said Dr. Cynthia Dunn, a former vice president for medical affairs at Fisons, a British drug maker later acquired by Rhone-Poulenc Rorer Inc., and now the director of the Clinical Research Institute at the University of Rochester. "They really pushed the outsourcing."

With the new companies came a variety of new names. Contract research organizations were composed of companies that ran parts or all of the clinical trials. Site management organizations -- groups of doctors willing to offer their services to conduct trials -- soon followed.

The growth in this sector has been enormous. Roughly $3.2 billion was paid to the contract research organizations in 1997, up 52 percent from just two years earlier, when payments were $2.1 billion.

Covance, one of the largest contract research organizations, doubled its staff and revenues from 1994 to 1998. Today, the Princeton, N.J., company is an industry giant, with 7,000 employees and more than $700 million in revenues in 1998.

"It's an industry that has been growing and growing and growing," said Ismail Shalaby, the chief executive of Nema Research Inc., a clinical research network based in Baltimore. "A drug company doesn't have to invest a lot of its own time and money to develop a drug anymore."

In fact, some industry experts said, a drug company barely even needs to be a drug company any more. For example, Neurobiological Technologies Inc. in Richmond, Calif., has no factories, 11 employees, three scientists and less than $1 million in cash. Yet it is using the new testing industry to conduct huge clinical trials, involving dozens of research sites and doctors around the country.

"You could have a company of one person, working out of their home, with no office, develop a drug," said Dr. Bert Spilker, a senior vice president of scientific and regulatory affairs with the Pharmaceutical Research and Manufacturers of America, a trade association. "You could have totally virtual companies."

Longtime members of the industry marvel at the change, which has occurred in just a few years.

"One called me. They had two employees," said Dr. Leigh Thompson, a drug-industry consultant in Charleston, S.C., who is a former chief scientific officer at Eli Lilly. "They have a molecule and hope but nothing else."

Copyright 1999 The New York Times Company