Avoiding Subprime Contractors and Contracts - Pharmaceutical Technology

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Avoiding Subprime Contractors and Contracts
Could sloppy due diligence practices hurt CMOs and their clients?

Pharmaceutical Technology

Of the three dimensions, the second—validating the client's volume projections—is probably the most daunting and most crucial. When a CMO signs a contract with a client, it is committing a certain amount of its manufacturing capacity to a client's product beginning at a projected date. The business development team is committing to company management and stockholders that, at a certain point in the future, it will be generating a given amount of revenue.

There is a big opportunity cost associated with that commitment: if the client's product is delayed or does not get approved, the CMO is not likely to be able to use the capacity for another product—revenue and profits will be permanently lost.

Realistically, due diligence on a client's volume projections can be very difficult and, if done properly, expensive. It requires knowledge about the product's pharmacology and about sales of products currently in the market for the given indication.

Market sales data from sources such as IMS or Wolters Kluwer can be very expensive, as is scientific and market knowledge about trends in a given therapeutic class. Even with good information, sales projections are a crapshoot: Major pharma companies with plenty of resources and experience cannot necessarily predict clinical and commercial success with great certainty.

The risk to CMOs when projecting client sales volumes was underscored in September when a prominent research institution reported that rates of success for cancer drugs are only 40% of the success rate for all drugs. According to Tufts Center for Study of Drug Development, only 8% of cancer candidates entering clinical development in the mid-1990s won commercial approval in the United States, compared to 20% of candidates overall. This is critical to CMOs because cancer drugs represent a significant share of all drugs in the pipeline, especially injectable drugs.

Despite the challenges validating client projections, it is worth doing because the stakes are high: a commercial manufacturing contract can be worth $10–50 million or more during a five year period.

Yet, CMOs do not seem to be making a big investment in this area: there is a lot of pressure to sign new business, and the current state of the new product pipeline is providing numerous opportunities to close new contracts. Incentives not to do a deal are minimal. CMOs, however, will end up paying the bill for failing to carry out adequate due diligence in 3–5 years when projected sales fail to materialize.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905,


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