The Art of the Deal - CMOs should recognize that strategic outsourcing relationships must be based on more than just capacity. - BioPharm International

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The Art of the Deal
CMOs should recognize that strategic outsourcing relationships must be based on more than just capacity.


BioPharm International


A TOUGHER FINANCING ENVIRONMENT

Although Lonza has the commercial scale and financial heft to take on large clients and large commercial projects, most contract biomanufacturers are still focused on serving the clinical manufacturing needs of early-stage companies. Recent developments in funding for those early-stage companies have to be somewhat worrisome for much of the clinical biomanufacturing business.

A July report from the National Venture Capital Association (NVCA) and PriceWaterhouseCoopers showed that venture capital (VC) investment in US biopharmaceuticals has fallen for two straight quarters. Venture investing in biopharmaceuticals in the second quarter (Q2) of 2008 was $1.1 billion, down 11% from the first quarter, and down 18% from the fourth quarter of 2007. The number of deals in Q2 was down 15%, even more than the amount invested.

The drop in VC funding comes on the heels of a total collapse of the initial public offering (IPO) market. Only one biopharmaceutical IPO was completed in the US in the first half of 2008, raising just $6 million. In contrast, 16 deals raised $1.1 billion in the first half of 2007 and nine deals for $616 million were signed in the second half of 2007.

The decline in biopharmaceutical venture investing and IPOs is related to several factors, especially the increased conservatism because of the slow economy. Most venture investing veterans, however, are not overly concerned about the developments. They note that VC investing has always been cyclical, and that VC firms have large pools of money that they must invest. They also note that while the IPO market doesn't offer opportunities to cash out of biopharmaceutical venture investments right now, the aggressive acquisition and licensing programs of the major pharmaceutical companies provides many opportunities to realize the return on VC investments.

The weak financing environment has immediate implications for contract services providers. Venture capital for early-stage companies has helped fuel demand for early development services, including Phase 1 research, process development, and clinical manufacturing. Because most early-stage companies operate on a virtual model, the VC funding finds its way into services spending within a few months of being received, so any downturn is immediately felt by the CMOs. Lonza blamed a decline in its early development business on the VC downturn, and several CMOs we talked to admitted a decrease in the number of requests for proposal for clinical supplies in recent months.

The decline in early-stage financing is not precipitous, but its effects are being felt quickly in the contract services market.

Jim Miller is president of PharmSource Information Services, Inc. , Springfield, VA, 703.383.4903,


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