Drug substitute in location, outskirts of Bilbao (7)
I believe the answer is:
placebo
'drug substitute' is the definition.
'location outskirts of bilbao' is the wordplay.
'location' becomes 'place' (place is a kind of location).
'outskirts of' suggests removing the centre.
'bilbao' with its middle taken out is 'bo'.
'place'+'bo'='PLACEBO'
'in' acts as a link.
(Other definitions for placebo that I've seen before include "Medical treatment whose effect is psychological" , "Harmless substance as medicine to sooth patient" , "Inactive medicine" , "drug for clinical trial" , "innocuous dose" .)