CROs under pressure as early-stage pipelines dry up
There was a sharp slowdown in pharmaceutical outsourcing in the last six months which "really caught a lot of people by surprise", according to Jim Miller of outsourcing consultancy PharmSource, in his annual review of the sector at the Interphex show in New York.
For the contract research industry, which spans clinical research and early R&D segments such as preclinical development and toxicology, 2007 had been a particularly robust year.
There were very substantial growth rates - often exceeding 20% for revenues - and this performance extended into the first quarter of 2008, Miller said. But it was followed by a continual decline throughout the remainder of 2008, with early-stage CROs such as those offering early-stage clinical and preclinical services bearing the brunt of the downturn. Behind this lay cuts in R&D spending across the industry in 2008 and particularly the fourth quarter, said Miller.
For big pharma the reason was largely restructuring - such as exiting poorly-performing therapeutic categories - and delays to R&D projects and spending in order to enhance earnings.
Among the top 20 companies R&D spending growth was a little over 5% in the first 9 months of 2008, down substantially on prior years, and it fell even further to around 1% in the last quarter.
Meanwhile, small and mid-scale enterprises (SMEs) have also been cutting back to conserve cash reserves, with the smallest public companies "really putting the brakes on", according to Miller.
This hesitancy had a direct correlation with the difficulties in accessing cash via the capital markets, with typical reductions in available funds of around 12%-20% over last six months of 2008.
Pipelines strong but projects shelved
Despite often-reported claims of an R&D productivity crisis in pharma, data from Pharmaprojects reveals a dramatic increase in pipeline growth between 1995 and 2008, particularly the number of projects in phase III testing. There was also a doubling in phase I and II projects over that period, and that in turn spurred growth in the CRO industry.
"What we're seeing now is an actual decline in the number of candidates in development," according to Miller, as a result of companies going out of business or projects being shelved. Even among injectables - a traditionally strong segment thanks to the growing investment of biological drugs - there has been a 15%-20% drop-off in the last 12 months, he said.
The restricted funding available to SMEs will have a "dramatic impact" on the industry, because while they only account for around 40% of the industry's total R&D spend, they supply around 80% of the total number of early-stage drug candidates.
"An awful lot of smaller CROs and CMOs are dependent on these companies, and as they run into financial problems and as the absolute number of compounds in development falls these providers will suffer," commented Miller. "And it will have a longer-term impact as the effect works its way through the pipeline over the next three to four years."
Late-stage development (phase II-III) continues to do well, said Miller, as pharmaceutical companies are still pushing these forward and are committed to funding them.
Clinical CRO backlogs - contracts that have been booked but not delivered yet - have continued to grow at a faster rate than revenues, particularly for those top-tier CROs that have the scale to win preferred-provider contracts with big pharma and seem to be gaining market share.
Looking to the future, Miller expects the R&D slowdown to continue, with a big drop off in preclinical work, toxicology, process development and small-scale manufacturing to provide clinical trial materials.
Big early-stage CROs see signs of recovery
Bigger early-stage CROs such as Covance and Charles River say there are glimmerings of a rally in the second-half of this year, albeit as a result of their preferred relationship with big pharma. But according to Miller smaller players are likely to continue to feel the pressure through 2010/2011.
Early-stage CROs will be affected by the filter-through from the preclinical slowdown, and in time this will also impact late-stage work. This will then be exacerbated by the recent consolidation seen in the pharma industry.
Consolidation will also be a feature of the CRO sector in the coming years as they compete for fewer drug candidates and R&D dollars and try to achieve the scale needed to secure preferred vendor strategies with guaranteed annual spend.
The top 10 clinical CROs probably already account for upwards of 75% of the market, and separation is now occurring among even these players, with the top 5 - Quintiles, PPD, Parexel, Covance and Icon - pulling away from the following pack.
"Companies in that top 5 enjoy not only higher revenues, but also bigger margins and growth rates," said Miller, and that gives them a lot of traction relative to the smaller companies, which are being forced into restructuring and being taken into private equity hands.
Clinical CROs with a strong record of performance, solid financing, global scale and specialty capabilities will be the winners in the coming years. Those too exposed to development-stage drugmakers and ineligible for preferred vendor agreements due to experience, scale and financing will fare less well, Miller concluded.
pharmafocus@wiley.com