As 2013 draws to a close, the bio/pharmaceutical industry continues to be reshaped by changes in the business climate. Financial, political, and scientific developments that began 10 years ago continue to force the transformation of the bio/pharmaceutical business model. The bio/pharmaceutical contract services industry may have only begun to feel the effects--and reap the opportunities--of that transformation.
The expiration of patents on blockbuster drugs (i.e., the “patent cliff”) remains the predominant event reshaping the bio/pharmaceutical industry. Despite years of advance warning of the patent cliff’s approach, the global bio/pharmaceutical companies continue to indulge in waves of restructuring. Announcements of plant and laboratory closures, layoffs, and narrowed therapeutic focus still occur almost monthly, and it doesn’t look like they will end any time soon.
In recent years, the global financial and sovereign debt crises and subsequent government responses have cut both ways for the bio/pharmaceutical industry. On the negative side, governments and private insurers, especially in Europe but increasingly in the United States as well, have forced down the prices they are willing to pay for drugs and are refusing to pay for many new drugs altogether. These developments have placed bio/pharma company revenues under further pressure and have forced continuing cuts in R&D and manufacturing. Government budget cuts also threaten support for pharmaceutical research, especially the work of the National Institutes of Health in the US.
On the positive side, central bank efforts to hold down interest rates have led to increased demand for risky assets with the potential for high returns. This increased demand has fed the boom in initial public offerings that has provided opportunities for venture capitalists to realize large gains on their bio/pharmaceutical companies’ investments and encouraged investors to reenter the market.
As these forces reshape the bio/pharmaceutical industry, they are creating new opportunities for contract services providers. The following is a list of some of the developments that are most worth watching.
Flex time. Global bio/pharma companies continue to look for ways to reduce fixed costs and make their cost structures more flexible. That interest has generated big returns for those clinical CROs that have secured strategic supplier relationships. Most major bio/pharma companies have turned over virtually all of their clinical monitoring and data management activities and staff to major CROs.
On the manufacturing and product development side (i.e., formulation, analytical, and clinical supplies manufacturing), the effort to reduce fixed costs still promises significant opportunities to CMOs, CDMOs, contract laboratories, and packagers. Although a number of manufacturing facilities and labs have been closed, global bio/pharma companies are only just getting their arms around management of costs in the operations that remain open. Strategic partnering opportunities in analytical services, clinical trial materials (CTM) manufacturing and clinical supplies management are still in their early stages, and the larger analytical labs and CDMOs are positioning themselves for those opportunities.
Small is beautiful. Global bio/pharmaceutical companies have cut back on internal early development efforts and turned more to in-licensing of candidates from early-stage companies. Most early-stage companies are committed to getting a compound through early development to proof-of-concept rapidly and at low cost, with the intention of out-licensing their promising candidates and never progressing to commercialization. Global bio/pharmaceutical companies and investors are channeling funds to early-stage companies, especially those with more advanced candidates.
Because of the maturity of the bio/pharmaceutical services industry, and the insistence of the venture capital firms that back them, early-stage companies are wholly dependent on CROs and CDMOs. Their rise has helped CDMOs focused on Phase I and II development to recover from the global financial crisis, and the candidates that they have out-licensed have sustained the late development service providers. The virtualization of discovery and early development is a long-term benefit to the contract development industry.
Fork in the CMC road. The desire to reduce the cost and risk of R&D has led bio/pharma companies of all sizes to embrace the proof-of-concept (POC) model, which calls for minimizing development efforts until there is evidence of safety and efficacy in human subjects. POC is leading to specialization in the CMC (chemistry, manufacturing, and controls) development sector, with smaller CDMOs specializing in the ability to fulfill CTM requirements relatively quickly and at low cost while commercial-scale CMOs are investing in their development capabilities to satisfy post-POC demand for formulation and manufacture of Phase III and commercial requirements.
The differing requirements for pre-POC and post-POC are driving CDMOs and CMOs to build integrated offerings that cater to their respective segments. Early-stage CDMOs are enhancing their packaging capabilities to meet client needs for a “one-stop” service that can get them into clinics as quickly as possible. Commercial CMOs are recognizing that they must bolster their analytical and formulation development capabilities to meet the needs of clients that are beginning commercial development relatively late in the R&D process. Whether the restructured service offerings promise a new significant new revenue source, or just are a new requirement for staying in the game, remains to be seen.
European invasion. Europe is becoming an increasingly difficult market for contract services companies as declining revenues constrain the ability to invest in R&D and more bio/pharmaceutical companies consolidate their European R&D operations. The difficult business conditions are driving more European CMOs to establish a presence in the US. For most of them at this point, it is just a business development presence, but some European CMOs are looking to acquire manufacturing sites in North America. Their challenge is that the opportunity to acquire redundant facilities from global bio/pharma companies at favorable prices, which worked so well for them in Europe, is practically non-existent in North America. Further, business-development practices in the US differ from those in Europe, so European CMOs could face a long learning curve trying to get established in North America.
The European interest could be an opportunity for smaller CMOs and CDMOs in North America, which could be become acquisition targets for European companies trying to get established in North America. The recent acquisition of Cirrus Pharmaceuticals by Kemwell is an example of how a small North American CDMO could become a strategic opportunity for a company looking for a North American toehold.
History has shown that contract service providers must continually redefine themselves to remain competitive as their markets change. Clinical CROs morphed from temporary staffing agencies into information technology innovators as the nature of clinical research changed. Similar shifts are expected to make over the CDMO and CMO industry in the coming years.