Drug substitute in location: Bilbao's outskirts (7)
I believe the answer is:
placebo
'drug substitute' is the definition.
'location bilbao's outskirts' is the wordplay.
'location' becomes 'place' (a location is a place).
'outskirts' says to hollow out the word (remove centre letters) (I've seen 'outskirts of' mean this).
'bilbao' with its centre removed is 'bo'.
'place'+'bo'='PLACEBO'
'in' acts as a link.
(Other definitions for placebo that I've seen before include "memorial service" , "Medicine working by psychology only" , "Inert drug" , "Medicine with no therapeutic effect" , "Inert pill" .)