The contract manufacturing sector lagged behind the rest of the outsourcing industry serving the pharmaceutical sector in 2004, but there are encouraging signs for the future, reports Phil Taylor.
This was the message delivered by Jim Miller, president of outsourcing market research firm PharmSource, in his now-regular annual address at the Interphex exhibition and conference, held last week in New York.
"Overall, 2004 was a pretty good year for contractors," he said, pointing to a 16 per cent growth in preclinical services to just over $1 billion, and an 11 per cent hike for the clinical sector that brough it just shy of the $5bn mark.
However, contract manufacturing of active pharmaceutical ingredients (APIs) slumped 11 per cent to just a little more than $2bn, although the drug development/CMC (chemistry, manufacturing and control) segment - which includes elements such as analytical chemistry and formulation services, managed a 9 per cent rise to around $3.6bn.
"API contractors got pounded - again - in 2004," said Miller, noting that this has been the pattern of the last five years as the segment has struggled with overcapacity - increasingly now in biologics as well as chemical drugs - low-cost competition in both branded and generic APIs from companies in Asia and Eastern Europe, and disappointments in the development of new drug classes such as oligonucleotides and gene therapy.
"Process development and clinical trial material (CTM) companies did better, but a dearth of New Drug Applications over the last five years has meant that commercial-scale manufacturers fared badly," said Miller.
But on a more positive note, he said there are signs that 2005 might signal better times ahead, as the strong gains seen in the clinical and CMC segments suggest that the pharmaceutical industry's problems with R&D productivity may be on the wane.
Late-stage clinical research organisation, such as Quintiles and PPD , are reporting a backlog of orders and waiting times of 3-6 months, compared to the more usual 3-6 weeks, which suggests that late-stage pipelines are not as empty as industry commentators often suggest, said Miller.
However, he added that the other side of this coin is that companies focusing on the manufacture of CTM may experience project delays.
Interestingly, the axiom that a move into biological API production can help offset problems in the chemical API sector seems well and truly refuted. Miller cited Cambrex and Lonza as two companies that had a difficult 2004, hit by major product cancellations that have left them with so far unfilled capacity.
At the same time, product failure such as Biogen IDEC's Tysabri (natalizumab) for multiple sclerosis have left biotech companies with excess manufacturing capacity that they are likely to try to sell on the market.
Miller also said that the preclinical and clinical sectors, while buoyant at present, could face leaner times ahead. The number of Investigational New Drug (IND) applications seeking approval for clinical trials was flat in 2004, while the funding window for small-scale drug discovery and development companies that opened in 2003 now seems to be closing again with companies delaying or cancelling Initial Public Offerings (IPOs).
At the same time, big pharma is ramping up its licensing activities, which can lead to projects going in-house and out of the reach of contractors.
Overall, said Miller, CMOs need to adapt their business strategies to cope with the changing issues facing the pharmaceutical sector, such as longer R&D cycles, an increase in offshoring by the industry and loss of priciing power.
Those CMOs that can do something to cut costs by establishing operations in lower-cost countries, offering more complete service offerings such as downstream fill and finish capabilities and managing the supply chain more effectively - for example by moving beyond item price to consider the overall supply chain cost including shipping, inventory etc - will do better, he said.
Companies in developed markets can compete with those from emerging countries by managing the total cost of the supply chain better, he suggested. Giving an example from another industry, he said that in the IT world outsourcing to India have sometime not paid off because of higher project management costs, higher rework and failure rates and inefficiencies that require more manpower.
"The India and China threat can be faced," said Miller, at least for US CMOs that unlike their European counterparts are aimed more firmly at branded rather than generic API production.
"Project management, rework and product rejection rates can overwhelm labour rate savings,"/I> he said.