Outsourcing of research and development and efficiency: a DEA non-parametric analysis of the contract research organisations industry

Abstract

Outsourcing to Contract Research Organisations (CROs) has become a widespread practice by bio-pharmaceutical firms seeking to reduce the costs associated with the development of new products. This study empirically analyses the efficiency of the CROs industry by looking at a sample of firms operating internationally over 2012–2020. We compute Data Envelopment Analysis (DEA) efficiency scores for each firm and year. The average bootstrap efficiency in the sample is 0.665, robust across specifications and increasing over 2012–2020. The best performing firms are PPD Australia, Centre Recherches Biologiques and Oy Medfiles. Our results suggest that very large and very small companies outperform the rest in terms of efficiency, which points to the co-existence of increasing returns to scale and niche competitive advantages in the industry.

Keywords:

• Contract Research Organisations
• bio-pharmaceutical industry
• non-parametric efficiency
• data envelopment analysis
• R&D outsourcing
• Simar–Wilson

JEL CLASSIFICATIONS:

• I00
• O32
• L6
• C61

Disclosure statement

No conflict of interest has been reported by the authors.

Notes

1 Several factors explain this dip. First, the presence in the market of many high-quality drugs hindered the design of new, superior, remedies. Moreover, regulatory agencies became more and more demanding and required increasing amounts of trials and documentation for drug approval (Scannell et al., 2012).

2 Examples are combinatorial chemistry, computational drug design or DNA sequencing.

3 DEA estimates efficiency scores relative to units in the frontier, i.e., as ratios or proportions. Therefore it is not necessary to deflate nominal variables.

4 For example, protection of patient rights can be considered a desirable output while a measure of residuals produced in a year is an undesirable output.

5 A positive sign indicates that both types of efficiency enhance each other, while a negative association implies the existence of a trade-off. See Sanchez-Robles et al. (2022) for a discussion.

6 According to our experience, strategies intending to increase efficiency in firms usually explore ways to reduce costs, rather than to expand output.