We are about nine months into the downturn in early drug-development activity and executives at contract services research
and manufacturing organizations (CROs and CMOs) are anxiously asking, "When will things get back to normal?"
More to the point, CRO and CMO executives should be asking themselves, "What will the new normal look like?" It is clear that
the biopharmaceutical and pharmaceutical industries are experiencing more than just a cyclical downturn in drug-development
activity like the one they endured in the early years of this decade. We are looking at a wholesale restructuring of the industry
that will leave the landscape looking very different than it has in recent years. The factors driving that restructuring are
well known—patent expirations, few new drug approvals, national efforts to control healthcare spending—and contract services
industry executives must prepare themselves for a new set of market dynamics.
While I don't have a crystal ball, I'm reasonably certain that the "new normal" for the next three to five years will have
most of the characteristics outlined herein.
A new look for Big Pharma.
Major pharmaceutical companies are experiencing the biggest changes. The viability of the 15 largest pharmaceutical companies,
which today account for nearly two-thirds of industry sales and research and development (R&D) expenditures, is being undermined
by patent expirations and the dearth of new drug approvals. They are responding with an array of strategic initiatives, including
refocusing their development pipelines on high-end therapies such as biologics and high-potency oncology drugs, reestablishing
market positions in generics (including biosimilars), targeting emerging markets, and making massive acquisitions such as
the recently announced Pfizer-Wyeth deal and the ongoing Roche-Genentech deal. As their business models transform, so will
their service needs and sourcing strategies.
Emergence of new players.
As the positions of the current Big Pharma companies change, other companies can be expected to play larger roles. Major
Japanese pharmaceutical companies, for example, have become more aggressive in establishing their presence globally; they
are no longer content to outlicense their products for sale in North America and Europe. Many of the generic drug companies
in India are creating programs to develop proprietary products for domestic and global markets, and Chinese pharmaceutical
companies are only a few years behind them. Many of these new players are still vertically integrated and may not be willing
to outsource activities, at least not to the degree of the mature pharmaceutical companies of North America and Europe.
Smaller development pipeline.
CROs and CMOs will have to fight over a smaller market opportunity in the foreseeable future. The early development pipeline
(i.e., preclinical and Phase I) nearly doubled between 1998 and 2008, but the increased number of drug candidates didn't yield
a concomitant jump in new products. Now, major pharmaceutical companies are making radical cuts to their portfolios to improve
R&D efficiency, while equity investors are cutting back support for early-stage companies and candidates. We expect to see
substantially fewer pipeline candidates in the next three to five years, which will have a major impact on CROs and CMOs offering
services such as process development, preclinical testing, and clinical-trial materials manufacturing.
No increase in new product approvals.
CMOs, in particular, must come to grips with the fact that waiting for the number of new product approvals to increase is
like waiting for Godot: it's not coming. The industry should accept that 20 or so approvals annually for new molecular entities
(NMEs) are the norm, and that a return to the high numbers of the 1990s is just not in the cards, at least not on a sustained
basis. Further, industry consolidation means that these few approvals will be concentrated in the hands of fewer pharmaceutical
companies, many of which have captive manufacturing capacity or preferred manufacturing suppliers. That will mean reduced
opportunities for many CMOs.