Structural shifts in tox sector to limit growth in ’12 and beyond
After taking the pulse of the preclinical industry at the Society of Toxicology (SOT) annual meeting in San Francisco this week analysts were downbeat about the potential for growth. While demand for clinical services has recovered from its dip, preclinical interest is still weak and is likely to remain so.
“Most agree that the industry is not merely going through a prolonged cyclical slowdown, but has also structurally changed, with less of an emphasis by clients on maximising the number of drug candidates flowing into preclinical testing”, John Kreger, equity analyst at William Blair, wrote.
The impact of a slowdown in candidates entering preclinical is compounded by the delay of chronic toxicology tests until a molecule has reached late phase development. Chronic toxicology tests were a solid revenue driver for preclinical CROs (contract research organisations) pre-recession.
As Outsourcing-Pharma has reported before, delaying these tests until later in development cuts the amount companies invest in many failed compounds. Without this work there is excess capacity, at CROs and sponsors, and this led to pricing pressure that, while softening, is likely to continue.
“Growth will be volume-driven with little contribution from price given that mothballed capacity can be re-opened to absorb multiple years of low growth, pushing any CRO pricing power out several years”, Tim Evans, senior analyst at Wells Fargo, said.
Speaking last month James Foster, CEO of Charles River, said the CRO had enough space for the next three years as it has spare capacity, enough for three big deals, and assets it built but never opened.
There is also the possibility of more closures. Covance warned it will make cuts if 2012 sales are flat and other factors may also drive restructurings. Kreger said the shift to short-term, rapid turnaround work will limit capacity use and change the workflow. In response CROs may close older facilities.
Market share manoeuvrings
Evans expects the overall toxicology market to grow by two per cent in 2012 on higher outsourcing penetration. This matches closely with guidance given by Covance and Charles River, the two public preclinical CROs.
The prediction of similar performance comes after a year of diverging fortunes. Covance and four major private preclinical CROs added up to $80m (€60m) of market share, Evans wrote, with more than half of the gains coming at the expense of Charles River.
After worsening performance since 2008 Charles River sounds more positive about preclinical this year and is predicting a return to growth. “We think Charles River has stopped the bleeding on share losses”, Evans wrote.