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The big question for pharmaceutical services providers coming into 2006 is: will the good times continue to roll?
2005 was the best year ever for CROs and CMOs. Most publicly owned companies reported double-digit jumps in revenues, and profits grew even faster. For clinical CROs, sales of services for future clinical trials grew nearly twice as fast as revenues, indicating that public CROs should be especially strong performers in the next several years.
Among the nonclinical segments, preclinical toxicology offers the most visibility because the industry is dominated by public companies such as Covance (Princeton, NJ, www.covance.com) and Charles River Laboratories (Wilmington, MA, www.criver.com). These companies require clients to book space as much as six months in advance, and they are rapidly expanding capacity to meet growing demand. The strength in the preclinical and clinical markets should be a good sign for analytical chemistry, formulation, and clinical packaging services providers.
One of the brightest spots in the clinical CRO business has been PPD, Inc. (Wilmington, NC, www.ppdi.com). The company is forecasting 18% revenue growth (to more than $1.1 billion) for 2006, enabling it to join Quintiles (Research Triangle Park, NC, www.quintiles.com) and Covance as CROs with more than $1-billion revenues.
The big jump in revenues is driven by PPD's phenomenal business development performance in 2005. Net bookings of new business (i.e., new contract signings less cancellations) increased nearly 70% in the first three quarters of 2005, and the value of contracts in its backlog has grown 41% to $1.7 billion. Robust growth is expected across all PPD service lines, including Phases I–IV clinical research and bioanalytical and GMP laboratory services. PPD's CEO Fred Eshelman credited the increasing average size and duration of new contract signings, reflecting the growth in large global clinical trials, and efforts by Big Pharma companies to consolidate the number of CROs they work with.
For contract manufacturers, the picture is less certain because few give forward-looking guidance or indications of their order backlog. Both active pharmaceutical ingredient (API) and dose manufacturers have indicated anecdotally that 2005 was a good year for signing new business, especially compared with the early part of the decade. The mood at the CPhI trade show in Madrid was more upbeat than it has been in several years, and exhibitors at the AAPS annual meeting were equally positive. API manufacturers are looking at 2006–07 as the time period when their turnaround would become most evident.
Probably the biggest concern for manufacturers is the slow rate of new product approvals in 2005. Through Nov. 2005, only 14 new molecular entities had been approved, including 13 new drug applications and just 1 biological license application. It's not clear why the rate of new approvals has been so slow, but heightened concerns over drug safety at the US Food and Drug Administration combined with leadership turnover could be slowing new drug approvals.
Despite the overall robust outlook, many uncertainties hang over the services market. These issues could affect how much the pie will grow this year, and even more likely, who will get the biggest slices.
Pharma restructuring. Cost-cutting efforts by major pharmaceutical companies, especially Pfizer (New York, NY, www.pfizer.com) and Merck (Whitehouse Station, NJ, www.merck.com), were big news in 2005, and their impact will really be felt in 2006. Because the two companies account for 30% of industry revenues and spending, these cuts will have a big effect on the market, even as companies such as Novartis (Basel, Switzerland, www.novartis.com), Amgen (Thousand Oaks, CA, www.amgen.com), and Genentech (South San Francisco, CA, www.gene.com) accelerate their R&D spending. Several discovery services companies that relied heavily on Pfizer contracts already have had to face the music (see "Pfizer drops DPI, Tripos").
Sourcing practices. Supplier consolidation is a priority among major pharmaceutical companies. These efforts have benefited major CROs such as PPD, Quintiles, and Covance because of their global capabilities and economies of scale. But, it has been at the expense of small and mid-size companies. We expect more intense competition for the "leftovers"(i.e., the spending by early-stage and mid-size pharmaceutical companies).
Low-cost competition. Indian and Chinese CROs and CMOs are gaining a bigger share of the market, and Western companies are feeling the pressure. Asian competitors have made significant inroads into the medicinal chemistry, process development, and early-stage chemical intermediates markets. Western CMOs are making a belated effort to establish their own operations in Asia. Major pharmaceutical companies and clinical CROs are rapidly moving data management and other clinical trial services into India.
Pipeline bottlenecks. Development candidates are piling up at Phase II, but only a trickle are making it into Phase III. No one is clear about why this is happening. Hypotheses include a shortage of funding for early-stage companies and more candidates being killed over cardiac safety concerns. If the bottleneck is broken, it could be a bonanza for CMOs and large CROs. If candidates continue to die in Phase II, the promise of the early-stage pipeline won't be realized.
Funding for early-stage companies. Although private venture capital funding is available for early-stage companies, the public markets have dried up as new sources of funding. Biopharma companies are more dependent than ever on Big Pharma licensing deals, which is fortunate because Big Pharma is more dependent than ever on licensing deals to bolster anemic pipelines.
Pfizer drops DPI, Tripos
Discovery Partners International (DPI, San Diego, CA, www.discoverypartners.com) and Tripos Inc. (St. Louis, MO, www.tripos.com), providers of discovery-related services, are some of the first CRO casualties of Pfizer's restructuring efforts. Both companies are facing major changing themselves following the decision by Pfizer not to renew four-year-old services agreements. For DPI, the Pfizer relationship generated $92 million in revenues between 2002 and 2005 and accounted for as much as half of its total revenues in recent years. Tripos received $90 million from Pfizer during the life of its agreement.
Pfizer's decision has set off a chain of restructuring activities at DPI. The company said it will close its South San Francisco facility and consolidate operations in San Diego. DPI sold its discovery systems business, and its chairman and CEO Riccardo Pigliucci resigned after what was termed "a mutual difference of opinion" over the company's strategic plans.
Tripos did not announce immediate restructuring moves but said that it was evaluating the resources it would require for its discovery research activities and expected that a "reorganization of Tripos Discovery Research may be necessary."
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.914.1203, fax 703.914.1205, firstname.lastname@example.org, www.pharmsource.com.