Jim Miller

Different arms of the pharmaceutical contract services market have been evolving in very different ways. In the clinical and preclinical research sectors, large CROs have experienced annual growth rates of 15–20% during the past 3 years, more than double the rate of European and North American contract manufacturers. Furthermore, this rapid growth has been accompanied by consolidation of these service sectors, resulting in the 10 largest CROs accounting for approximately 75% of the clinical and preclinical markets.

The large clinical CROs benefited from a number of favourable trends, including growth in the drug development pipeline and efforts by major pharmaceutical companies to reduce the number of vendors they work with. At the same time, however, the big CROs have been making important strategic moves and investments that have enabled them to consolidate their market domination, including investment in electronic data capture and other information technologies, as well as expanding their geographic scope to include the emerging markets in Asia and Latin America.

Major preclinical CROs are consolidating their market positions by building very large research facilities (30000 m² or larger) and entering into long-term contracts with major pharmaceutical companies for use of that space; for example, Eli Lilly and Company (IN, USA) recently outsourced all of its GLP-compliant toxicology testing to Covance (NJ, USA), one of the two largest preclinical CROs. In addition, major CROs are entering into joint ventures to service large pharmaceutical companies' expanding base of R&D operations in China.

CMOs lag behind

CMOs have not enjoyed nearly the success CROs have. The formulation manufacturing and small molecule API segments have experienced overall growth of less than 5%. CMOs have been hurt by a number of factors, including the shrinking number of new product approvals by European regulators and FDA; declining sales for key client products; clients repatriating products to underutilized in-house manufacturing facilities; and overcapacity that has fuelled price competition. The two bright spots in the manufacturing universe have been biomanufacturing (especially mammalian cell culture) and manufacturing of clinical trial supplies.

Immediate prospects for CMOs could change for the better if their clients can get more products approved in the next year or so. However, CMOs may be in trouble in the long term as most of them continue to operate with business models and strategies based on old perceptions that don't reflect the current realities of the pharmaceutical industry. This is particularly true in several key areas.

The author says...

Market growth. Most CMO strategies were established in the early part of this decade when new product approvals were expected to be plentiful, and drug prices and unit volumes were rising. The assumption was that growth would continue, meaning there would always be a need for capacity and that CMOs could expect annual price increases. This led CMOs to invest in substantial capacity expansions and acquisitions of redundant facilities from major pharmaceutical companies. It was also a time when it was assumed that "price doesn't matter" as drug sales were so high and profitable that pharmaceutical companies were more concerned about assuring a dependable supply than they were about cost of goods.

However, the pharmaceutical industry's growth prospects have changed considerably since then. New product approvals have continued a 10-year decline, governments and private insurers have fought back against drug price increases, and safety concerns and utilization guidelines are limiting the growth of blockbuster drugs, especially biologics.

Emerging markets. Five years ago, CMOs geared their strategies to the North American and European markets, where prices were highest and usage was growing the most rapidly. CMOs geared their facility design and quality assurance practices to meet FDA and EMEA standards of compliance.