This year has been a good one for development-services providers, especially those that support late development (i.e., Phase II–III). CMOs and CDMOs report strong demand for late-stage clinical-trial materials and clinical-development services, and our PharmSource surveys indicate that the industry could experience growth of 5–10% this year.

The buoyant conditions for late-development services may not last much longer, however, as there is growing evidence that discovery and early development activity may be declining. CROs offering preclinical-development services, such as animal toxicology testing, have reported soft market conditions and weak revenues throughout the year. CMOs specializing in process development for small-molecule APIs note that demand for process development and early-stage clinical supplies remains weak even as late-development demand has been strong. This situation is a big concern for late-development services, of course, because a weak early-development pipeline means fewer Phase II and Phase III candidates in coming years.

Much of the blame for this state of affairs can be placed on the highly uncertain and volatile global financial environment. Investors remain risk-averse and are less likely to embrace investments that require long gestation periods and have a low probability of positive outcomes. Late-stage development candidates have a greater probability of success than candidates in discovery or early development and are closer to a payoff in the form of licensing or outright sale to a global bio/pharmaceutical company.

EUROPEAN UNION ECONOMIC CRISIS

The EU financial crisis is another cloud on the bio/pharmaceutical R&D horizon. As part of austerity measures required to get their sovereign debt situation under control, many European governments are slashing expenditures on drugs. In countries such as Greece and Spain, governments have cut the prices they will pay for drugs by as much as 25% or more and are forcing a conversion to generic drugs from branded drugs. (The southern-tier countries that have the greatest debt problems have lower generic-drug penetration than northern European countries).

According to a report by the investment firm Jefferies and Company, the top-line squeeze is likely to force small and mid-size companies in Europe to cut their R&D expenditures as part of overall cost-cutting measures. A recent article in the Wall Street Journal cites Spain's Almirall and Greece's Alapis as mid-size companies that are facing R&D cuts as revenues fall (1).

If European revenues are severely affected, even the global bio/pharmaceutical companies could end up reducing their R&D spending in Europe. Although those companies try to maintain global R&D networks to tap into the broadest array of opportunities, their R&D activities have typically been matched to the regions with the greatest revenue and profit potential. Over the past 10-plus years, the locus has been in North America, where the high prices and margins in the US market have funded most of the R&D budgets at global bio/pharmaceutical companies. More recently, the focus has been shifting to the high-growth emerging markets. Even though some of the largest global bio/pharmaceutical companies are headquartered in Europe, continuing sales and profit pressures could force them to move more R&D activity to other locales.