The first generation of strategic sourcing relationships in clinical research is coming up for renewal, and the CRO industry is watching carefully to see how they renew. Strategic sourcing relationships, which involve global bio/pharmaceutical companies contracting large portions of their clinical research programs to the largest CROs, have transformed the clinical research industry. CROs that have won strategic relationships, including Icon, Parexel, Quintiles, and Covance, now control substantial shares of the clinical research market while smaller CROs have been forced to fight over the “leftovers” from mid-size and emerging bio/pharma companies.
All indications are that clients are happy with most aspects of their strategic sourcing relationships. For the most part, these arrangements are delivering on their promise to the global bio/pharmaceutical companies, especially lower costs, better trial execution, and reduced staffing. Given their performance and the high costs that would be involved in switching vendors, it is likely that most (probably all) of these deals will renew.
That’s good news for the CROs that have been able to secure these strategic relationships. Not only have they received the project volumes negotiated in the original deals, they have received work well beyond the original scope, including projects in adjoining activities that were not part of the initial arrangement. As a result, their revenues have been growing at the annual rate of 15–20%. Profits have not grown as quickly due to the costs of expanding capacity to handle the burgeoning volume, but margins are expected to improve over time.
Suitable for CMC development?
Given the success of the strategic relationships in clinical research, CDMOs should be thinking hard about when and if that model will be adapted to chemistry, manufacturing, and control (CMC) services. If it can be ported into the CMC environment, the model could drive a radical restructuring of the industry by creating big opportunities for some CDMOs but also shutting out others, which would result in a flurry of acquisition activity. Whether the model can be fully adapted to the CMC world, however, is open to question.
Perhaps the biggest difference between clinical research and CMC development is that CMC development is all about creating knowledge, innovation, and intellectual property that ultimately differentiates a product in the market. CMC creates a lot of knowledge about the molecule, some of which is captured in laboratory data but much of which is generated and understood less formally, just by working on the process or product. Further, CMC development generates innovations such as more efficient processes for manufacturing APIs or improved formulations to aid drug delivery.
Bio/pharmaceutical companies recognize that knowledge and innovation creation is part of CMC development, and companies are understandably reluctant to give it up entirely. They want to retain the knowledge that is generated and want to own or protect the intellectual property (IP) that is created.
By contrast, clinical research is only about collecting and analyzing data on the effectiveness and safety of the product in the patient. It seldom leads to product innovation directly (the famous case of Viagra [sildenafil citrate], first discovered as a cardiovascular drug and later developed as a treatment for erectile dsyfuntion, is the rare exception), and the information technologies that clinical research leverages are not core competencies for bio/pharmaceutical companies.
Another major characteristic of CMC development that may mitigate against strategic partnerships is the diversity of technologies and know-how that are used to develop a drug. It would be uneconomical and infeasible for a CMC-services provider to acquire and maintain all of the technologies used to manufacture or deliver a drug. Think of all the possible types of reactions used to synthesize small-molecule compounds, and the way certain companies have carved out special niches for themselves for technologies such as high-energy reactions that are only appropriate in particular circumstances. Similarly, expertise and equipment for solubility-enhancing technologies such as spray drying or micronizing is concentrated in a few specialty CDMOs that can efficiently service the limited number of candidates that need that expertise.
The diverse range of technologies would seem to guarantee that bio/pharmaceutical companies will always need a wide array of CMC service providers to meet their development requirements.
The nature of CMC development would suggest that it may not be as suited to the strategic partnership model as clinical research. While there are some CMC activities that have gone a long way to adopting that model, namely clinical packaging and analytical testing, those activities have more in common with clinical research. Neither of those activities generates IP and both require more operational expertise than scientific expertise.
As the bio/pharmaceutical industry continues to adapt to a changing market and scientific environment, however, some of the forces that have driven strategic clinical research relationships may come to bear on CMC development as well. Consider global reach. CMC expertise is more widely available, especially for small-molecule API development and for basic formulations. As cost pressure increases, companies seem to be more open to exploring CMC development in lower-cost locations. Further, global bio/pharmaceutical companies recognize the need to develop products specifically for those emerging markets.
At the same time, information technology has made collaboration and knowledge-sharing possible over great distances, so the opportunity to disperse those activities may be increasing. CMC providers with truly global operations that can access and network lower-cost resources in emerging markets might be able to build favorable positions as strategic providers.
The other big opportunity for strategic partnerships may lie in integrated service offerings. Time and cost are of the essence in drug development today, and companies offering a combined service developing an API and drug product may be able to offer significant reductions in both. One-stop offerings have the potential to reduce the leakage of knowledge as projects are handled off from one provider to another, and they can eliminate or reduce the periods of inactivity between development activities. Delivering the promise of one-stop models, however, will require a level of operational excellence that few in the CMC industry have yet been able to achieve.
About the Author
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, Twitter@JimPharmSource, [email protected],www.pharmsource.com.