Outsourcing sector robust, for now

By Kirsty Barnes

- Last updated on GMT

Related tags: Private equity, Clinical trial

The pharmaceutical outsourcing industry is experiencing a phase of
robust growth but remains heavily reliant on the continuation of
"dependable" private equity financing.

This was the message from Jim Miller, president of Pharmsource Information Services, who described the state of the outsourcing industry as "the best its ever been and getting better,"​ during a presentation at Interphex 2007, New York. Backing up his claims, Miller pointed to the double-digit growth being generated by the majority of contract research organisations (CROs) and contract manufacturing organisations (CMOs), "even the active pharmaceutical ingredient (API) and intermediate manufacturers who only two years ago were in bad shape." ​ Each of the top ten CROs, for example, reported a strong growth in backlog in the fourth quarter of 2006, compared to the year-ago period in 2005, with the total value topping $8bn (€5.9bn). The willingness of sponsor pharma firms to outsource more, larger, and longer Phase III and IV studies as well as longer contracting times were listed by Miller as contributing factors. In addition, the greening of early-phase pharmaceutical pipelines over the past few years has also driven growth in the outsourcing sector - in December 2002 there were under 600 Phase I and 800 Phase II drug candidates but by the same period three years later these numbers had jumped to 900 and 1050 respectively. According to Miller, who used Lonza as an example, this pipeline growth is represented by both small and large molecule drugs although the latter is the stronger growth area of the two. Stemming from these pipeline surges, demand for clinical and preclinical services is booming and process development, formulation and clinical trial manufacturing offer the greatest benefit for contractors. Miller pointed out, however, that venture capital (VC) to biopharma firms is currently at its highest level ever, with 18 per cent of the total VC floating around having been channelled into biopharma firms over the last few years, and this funding has supported much of the growth in the early phase pipelines, and subsequent demand for contract services. "There is a lot of (VC) money out there being invested, but the robust outsourcing climate could change very quickly if the VC financing dries up,"​ said Miller. "Any downturn would shrink opportunities for CROs and CMOs."​ Factors that could hurt VC include a poor initial public offering (IPO) environment, a trend towards bigger deals, or if "big pharma stops shopping,"​ he said. Meanwhile, pharma services firms are also being buoyed by an influx of private equity investments - Cardinal Health, Althea Technologies, Cambridge Major Laboratories, Patheon and BioReliance have all attracted new financing of this kind since the beginning of the year. Such partnerships offers these firms greater access to capital and freedom from quarterly pressures as well as the ability to build market share, capabilities and scale, and provide opportunities to make acquisitions. They can also provide struggling firms with the financial leeway needed in times of trouble. Finished dosage manufacturer Patheon, as its business has continued to wrestle with profitability, has been recently rescued by private equity from JLL partners, which completed the purchase of $150m of convertible preferred shares this week. John Bell, Patheon's chief financial officer, said the company plans to use the reprieve to "pursue new growth opportunities,"​ although focusing on costs and operations improvements should also be a major focus for the firm, said Miller, who added that he expected "facility closings to be likely." ​ Looking ahead, the trend towards big pharma outsourcing is expected to remain strong, given the buoyant preclinical and clinical sectors and giants such as Merck and Pfizer setting targets to contract out 30-35 per cent of manufacturing, as well as firms leaning towards outsourcing large chunks of their business, such as data management and IT support. However, many companies such as Eli Lilly, Novartis and Amgen are still choosing to hold back on outsourcing and build extra capacity instead and so Miller believes a mixed model of outsourcing and in-house functioning will be most commonplace. Therefore, he urged all players to adopt a strategy to suit them: For the big players he advised, "get bigger";​ the mid-size players, "find a partner";​ and the small players; "find a niche."

Related topics: Preclinical Research, Preclinical

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