CMOs are Planning for the Last War

CMO business models are out of touch with current pharma industry realities. It's time for new thinking.
May 02, 2008
Volume 32, Issue 5

Jim Miller
Contract research organizations (CROs) offering clinical research services had a terrific year in 2007. Revenues of the publicly-traded clinical CROs jumped 20% during the year, well ahead of the respectable 15% growth they achieved in 2006. What is really eye-popping is the phenomenal performance of some of the largest CROs. Kendle International (Cincinnati), which had 2006 revenues of $283 million, grew 40% in 2007 to $398 million. ICON (Dublin) grew almost as fast when it jumped to $631 million in 2007 from $455 million in 2006. Parexel (Boston) grew its revenues 25% to $741 million.

The large clinical CROs benefited from several favorable trends, including growth in the drug development pipeline and efforts by the major pharmaceutical companies to reduce the number of vendors they work with. At the same time, however, big CROs are reaping the benefits of important investments they've made in recent years in anticipation of changes in the pharmaceutical industry. These changes include:

  • Greater capabilities in electronic data capture and management are helping to feed back trial results faster
  • Expanding networks of offices and clinical site relationships in Asia, Eastern Europe, and Latin America are opening doors to more patients and establishing new markets
  • Increased clinical pharmacology capacity is serving the expanding Phase I pipeline and the emphasis on proof of concept
  • Scalable organizational models are enabling companies to improve service quality as they grow.

Tough going for CMOs

A look at the new pharamceutical environment
While it was a blow-out year for clinical and preclinical CROs (toxicology services grew 21%), the year was dismal for contract manufacturing organizations (CMOs). For the second straight year, the dose manufacturing and small-molecule active pharmaceutical ingredient (API) segments experienced overall growth of less than 5%. CMOs were hurt by a number of factors, including the shrinking number of new drug application and biologic license application approvals coming out of the US Food and Drug Administration, declining sales for key client products, clients repatriating products as utilization of their in-house manufacturing assets falls, and overcapacity that generates increased price competition. The two bright spots in the manufacturing universe were biomanufacturing (cell culture and fermentation) and manufacturing of clinical-trial supplies.

The immediate prospects for CMOs could improve if their clients are able to get more products approved in the next year or so. However, CMOs may be in trouble over the longterm because most of them continue to operate with business models and strategies based on old perceptions that don't reflect the current realities of the pharmaceutical industry. This is especially true in several key areas outlined below.

Market growth. Most CMO strategies were established in the early part of this decade, and included substantial capacity expansions and aggressive acquisition campaigns. This was a time when new product approvals were expected to be plentiful, and drug prices and unit volumes were rising. The assumption was that growth would continue, meaning there would always be a need for capacity and CMOs could expect annual price increases. It was also a time when industry assumed "price doesn't matter" (i.e., drug sales were so high and profitable that pharmaceutical companies were more concerned about assuring a dependable supply than they were about the cost of goods).

The pharmaceutical industry's growth prospects have changed considerably in the past few years. FDA approvals have continued a 10-year decline, governments and private insurers have fought back against drug-price increases, and safety concerns and utilization guidelines are limiting the growth of blockbuster drugs, especially biologics.

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