Survival of the Fittest Companies - Pharmaceutical Technology

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Survival of the Fittest Companies
The financial crisis could lead to consolidation in the contract services industry.


Pharmaceutical Technology
Volume 33, Issue 1, pp. 90-92

With less money, fewer compounds, and continuing efforts by major pharmaceutical companies to consolidate the vendor base, we expect the number of CROs and CMOs to shrink considerably. Companies that have depended largely on the venture capital-backed companies will have an especially hard time. Their customers seldom have more than one or two candidates in need of services at any one time, so they must continually replace their customers with new ones. However, those candidates won't be there.

The survivors will have a strong track record of servicing companies with multiproduct pipelines that can offer repeat business. They will have profitable operations, strong financial positions, and savvy business development skills. Increasingly, those that serve the largest companies will have a global network of operations to support their clients' global ambitions.

While we don't wish ill on any contract service provider, a shakeout of weaker companies would probably benefit the industry. The CRO–CMO industry has too many participants; lots of new entrants have been attracted in recent years by the growing pipeline and ample funding. In the manufacturing sector, entry has been eased by the willingness of pharmaceutical companies to sell redundant facilities at bargain prices to get assets and employees off of their books. Many of these companies have minimal experience in business development and marketing, no brand equity, and few long-term relationships with better-funded companies. In addition, they are not well-capitalized. We expect a number of them to disappear in the downturn.

Pharmaceutical companies looking for vendors are advised to carry out careful due diligence on the companies with which they seek to work. Financial condition such as profitability, cash position, and debt-service requirements should be a paramount consideration. Clients should insist on full financial disclosure, even from privately-held companies (contractors should demand the same of venture-backed clients). Strategic due diligence will be important to ensure that the parent company or investor group is committed to the business. The CRO–CMO industry will come out of this stronger in the long run, but it will be painful getting there.

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


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