Tox demand & capacity use up but pricing unresponsive
The toxicology service sector suffered in the wake of the economic downturn as biotech venture capital shrunk and big pharma prioritised late stage candidates. In recent quarters there have been signs the situation is improving, if only slowly, and this trend appears to be continuing,
“Volumes are improving sequentially, with May being a strong month for many. Utilisation is volatile, but more up than down”, said David Windley, equity analyst at Jefferies & Company.
Capacity use has recovered from lows around 60 per cent to move “solidly into the 70 per cent-range”, said Windley. A private laboratory Windley spoke to claimed capacity use has risen above 80 per cent, prompting the reopening of a small portion of animal rooms it closed during the dip.
Despite improved capacity use pricing is “stubbornly unresponsive”. The expectation is that the upturn in capacity use will lengthen study start wait times, allowing providers to increase pricing. This is yet to materialise but laboratories are seeing fewer severely discounted bids.
Look to biotech, big pharma not increasing
Evidence gathered by Jefferies, admittedly from just one sponsor, suggests big pharma demand for toxicology services will be flat. The large sponsor has no plans to make major changes to its toxicology outsourcing strategy and the size of its early development portfolio is unchanged.
News that Pfizer is to keep a small presence at Sandwich, UK will also restrict the level of big pharma preclinical outsourcing in the short-term, further increasing the importance of biotech clients. Pfizer’s decision “likely reveals a failure to find willing CRO buyers”, said Windley.
Windley based his conclusions on calls and conversations with Charles River Laboratories, several private toxicology service providers, and “a large sponsor”. Covance also expressed positivity about the toxicology market in its last quarterly conference call.