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Early Phase revival but over-capacity dictates prices, says analyst

By Dan Stanton , 03-Feb-2014
Last updated on 07-Feb-2014 at 10:13 GMT

Demand for early phase services have increased but the industry is still “far away from the boom times of the early to mid 2000s,” according to an ISI analyst.

Last week Parexel reported strong FY 2013 results, saying recovering demand for early phase clinical services had increase margins. These comments were in keeping with recent reports showing pharma is once again spending money on early phase development following the onset of the recession in 2008 . ISI analyst Ross Muken also believes the recent increase in volume for such services is a promising sign of recovery but the industry is still, however, dependent on a number of challenges

“The key limiting factors to growth are labour shortages, mix shift toward longer studies and an abundance of latent capacity at mid-sized providers,” he said in a note.

“While volume growth began to improve in the August/September timeframe and has stabilized at an elevated level,” he added, “we are far away from the boom times of the early to mid 2000s.”

CRL and Covance

Muken’s analysis comes as shares in Charles River Laboratories (CRL) and Covance have both skyrocketed in the past twelve months (up 36% and 41% respectively), reaching close to their 2008 zeniths.

However, as both firms are set to present their 2013 financial figures in the next week, Muken said: “Margins are likely to remain constrained without a change in the pricing environment and given a need to add headcount to adjust for the improved demand,” and therefore guidance is likely to prove 'conservative' with respect to the Early Phase.

The rise in demand for early phase services has been seen for both Covance and CRL in their last few quarters and, furthermore, has led to some speculation that there is certain recovery for such services coming from the private sector .

Capacity and Price

Before the recession price was not an issue for pharma, according to Muken, and furthermore capacity was running at a maximum. However, today’s market is suffering from over-capacity, with the percentage currently sitting in the 70s.

Though this is an improvement from the 55-60% capacity seen in 2011 – and indeed Muken says the ideal rate is around 85% - it does mean the customer base has become increasingly sensitive to cost.

Nowadays “when CRO tries to raise prices, they end up losing the bid to lower cost alternative,” said Muken, but “when capacity fills up across the board, everyone would have a better ability to raise pricing.”

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