Early-stage biopharmaceutical companies have become especially important to the small- and mid-size CROs as the major pharmaceutical companies consolidate their supply base and limit their sourcing to a few preferred providers. Most small CROs don't qualify as preferred providers because their capabilities, especially their limited service networks and narrow therapeutic experience, are not broad enough to serve the multidisciplinary and large-scale needs of the major pharmaceutical companies. However, the capabilities of the smaller CROs are adequate for early-stage biopharmaceutical companies, which generally run smaller studies spread across fewer sites in fewer countries. More importantly, perhaps, the smaller CROs are willing to provide the hand-holding and close support that the less-experienced smaller companies need to get through the development process.
This doesn't imply that large CROs ignore early-stage biopharmaceutical companies. Smaller companies account for 25–30% of the volume at most big CROs, and are valued because they offer better margins than big pharma projects while diversifying the client base. However, the major pharma companies are where the big money and largest pipelines are, and they are the principal targets of the largest CROs.VENTURE CAPITAL IS FLOWING
CROs are benefiting from the big jump in new drug candidates driven by early-stage biopharmaceutical companies. Over the last five years, the number of Phase 1 drug development candidates has grown nearly 50%, and the number of Phase 2 candidates has jumped 25%. The great enabler of this flow of candidates from early-stage pharma has been venture capital (VC).
The flow of venture capital has risen markedly in the past five years. Burrill and Company, the investment bank that specializes in the biotechnology industry, reports that VC investing in the biopharmaceutical industry reached $4.2 billion in 2006, up 50% from what it was in 2002. According to Ernst and Young, the biopharmaceutical industry now accounts for 18% of all VC investing, a level that has remained steady for the past three years.
Venture capital insiders say that the flow of funds into biopharma is likely to continue. To a large degree, this is driven by the large amount of money available for investment. According to Dow Jones Venture Capital, US venture capital firms raised $24.3 billion in new funds in 2006, just below the $24.9 billion they raised in 2005. These amounts are well below the record sums raised at the peak of the dot-com boom, but are still large by historical standards.
The mix of companies that get funded continues to evolve. In the late 1990s, venture capitalists favored companies offering genomic technologies and other discovery tools. In recent years, the trend has been toward companies with products in late development, including Phase 1 and 3. Those companies are attractive because they offer the most immediate promise of success, and because they can absorb larger amounts of capital.
According to Nick Galakatos, managing director at Clarus Ventures, the pendulum is now swinging toward companies with early development candidates. This reflects the increased willingness of major pharmaceutical companies to enhance their development pipelines by buying early-stage companies or in-licensing their candidates. According to Galakatos, competition among major pharmaceutical companies for early development candidates has raised valuations to very attractive levels, and offers a viable alternative exit strategy to the initial public offering.
CRO CAPACITY A PROBLEM
The strong support for early stage companies has been a boon for CROs; in fact, it's almost too much of a good thing. The growth in the pipeline is resulting in severe capacity shortages in early development services, especially preclinical toxicology testing and clinical pharmacology (Phase 1). The shortages are increasing drug development costs and delaying development timelines.