BAD NEWS FOR CONTRACTORS?
Big pharma's willingness to license candidates from early-stage biopharma, and even buy them outright, should preserve
the flow of venture capital into the biopharmaceutical sector. While the returns on VC investments from these deals may not
be as lucrative as those of IPOs, they offer another exit strategy and greater liquidity.
However, as more biopharmaceutical companies and their new product candidates fall under the control of big pharma, things
could get rough in the contract services arena. The pool of projects that are "in play" for the broader universe of CROs
and CMOs is likely to shrink as acquired development programs are moved in-house or are channeled to one of the select few
preferred providers with whom major pharmaceutical companies have been consolidating their outsourcing activities.
Service Providers in 2004
In this scenario, hundreds of small (revenues under $50 million) CROs and CMOs will have an even harder time competing for
new business. Already, preferred provider programs and acquisitions have brought about a substantial amount of consolidation
in the pharmaceutical services industry. According to PharmSource estimates, the eight largest service providers already claim
over 60 percent of industry capital spent in the preclinical research, clinical research, and injectables manufacturing segments
of the contract services industry, and that will increase in coming years.
KEYS TO SURVIVAL
The PharmSource Contractor Database lists nearly 70 providers of cell culture and fermentation manufacturing services, and
another 70 fill/finish service providers in North America and Europe. Less than 10 companies in each of those segments would
be considered "major" companies, i.e., large, financially-stable, brand-name companies. Most of the others are small, entrepreneurial
companies with limited capital and capacity. Those companies are facing a tougher competitive environment, and many will fail.
Small CROs and CMOs that survive the shakeout will do so, in part, because of their ability to cater to profitable niches
that larger companies cannot or will not serve. Discovery and early development services for early-stage companies are likely
to experience strong demand as those companies become more "virtual."New financial dynamics will drive this development: venture
capital firms will focus more on building attractive product portfolios, which are mostly intellectual property, and less
on building companies, which require a lot of fixed assets such as buildings and equipment. Getting candidates to a proof-of-concept
stage sufficient to attract a buyer or licensee can be done using contracted testing and development services.
Surviving CROs and CMOs will also be more adept in the business aspects of their operations. They will find sources of capital
to fund their expansion, as Laureate Pharma, a provider of contract biomanufacturing and drug delivery services, did last
year when it was acquired by Safeguard Scientifics. They will also need to become more capable at new business development,
an area where they have been woefully inadequate, as they fight for a bigger share of a shrinking pie.
The shakeout of small CROs and CMOs in the biopharmaceutical services market is long overdue. The consolidation of the fragmented
biopharmaceutical industry through mergers, acquisitions, and in-licensing is likely to accelerate that process.
Jim Miller is president of PharmSource Information Services, Inc., 703.914.1203, fax: 703.914.1205, Jim.Miller@pharmsource.com