A slow recovery continues. Like the broader economy, the pharmaceutical services industry will continue to recover at a slow, steady pace, but a return to the halcyon days of the last decade is extremely unlikely. The good news is that many of the indicators are improving. Research and development (R&D) spending is growing, and financing from public equity markets and venture capitalists has improved. The large mergers and consequent integration efforts have been largely completed, and the global bio/pharmaceutical companies are again focused on pursuing compounds through their pipelines.
Still, there is a great deal of uncertainty clouding the picture. The big restructuring efforts may be over for now, but bio/pharmaceutical companies continue to cull their pipelines to focus their efforts on the most promising therapeutic areas and candidates. Mid-size bio/pharmaceutical companies are doing the same thing, as witnessed by Biogen Idec's (Weston, MA) decision late last year to exit all therapeutic areas except neurology. Further, although external financing has improved, much of that is going to late-stage candidates, so the efforts of early-stage bio/pharmaceutical companies are still hampered.Other complicating factors include government efforts in all Western countries to reduce spending. These potential cuts could hurt bio/pharmaceutical profits and potentially hit heretofore sacred cows such as the National Institutes of Health, which underwrites a great deal of bio/pharmaceutical research in the US.
The best news for the CDMO and CMO industry is that most major bio/pharmaceutical companies appear committed to outsourcing more of their development and manufacturing requirements. All of the companies have recognized the need to reduce fixed overhead costs and match spending to what is actually happening in their pipelines. So, while total R&D spending may grow at low single-digit rates, total outsourced spend should grow at a faster rate.
Contract services industry consolidates. Although the outsourcing pie will increase in size, it certainly won't be divided up evenly. As the pharmaceutical industry restructures, so will the contract services industry that supports it, and industry consolidation will be a principal result. That restructuring is well underway in the clinical and preclinical development arenas, where the five largest firms already command nearly 50% of the market and are picking up share at a rapid pace. As discussed in past columns, the market leaders have succeeded by building a track record of dependable performance for their clients and broadening their offerings to meet the needs of their increasingly global clients.
The same dynamic is taking place in the CDMO and CMO world, but at a slower pace. Outsourcing in this arena is slowed down by the considerable investment in manufacturing and laboratory assets that the global bio/pharmaceutical companies already have in place. Given the high costs of operating those facilities, companies are under pressure to keep them as highly utilized as possible. A growing number of global bio/pharmaceutical companies have even resorted to selling their excess capacity on the open market. Until the global companies are ready to face the considerable costs of closing down those underutilized facilities, the pace of outsourcing development and manufacturing activities other than packaging and laboratory services will be slow.
CMC arms race. We see the formulations development and manufacturing segment engaging in a technology arms race in which competitors seek to broaden their formulation and processing "toolbox." The goal is to build a service offering that is comprehensive enough to serve a large share of a major client's needs and/or address the requirements of a broad swath of the industry's development pipeline. CMOs are rushing to add such capabilities as dry granulation, solubility enhancement, and handling of high-potency compounds, as well as bolstering their preformulation capabilities. In addition, CMOs are building their analytical capabilities for large molecules, reflecting the nature of the candidates in the pipeline. This drive to acquire drug-delivery, processing, and analytical technologies is crucial to the effort to fain "preferred supplier" status with the global bio/pharmaceutical companies, which favor suppliers with broad capabilities in their drive to reduce the number of supplier relationships they maintain.