Contract Services Growth Strong, but Slowing

AAPS, San Antonio, TX (Oct. 30)-Market growth in the pharmaceutical outsourcing industry is strong, but slowing, according to Jim Miller, president of PharmSource Information Services, Inc. (Springfield, VA, www.pharmsource.com) and publisher of Bio/Pharmaceutical Outsourcing Report. In a presentation entitled, “Surveying the Contract Services Industry: The Outlook for 2007 and Beyond,” delivered Oct. 30 at the Annual Meeting of the American Association of Pharmaceutical Scientists in San Antonio, Texas, Miller suggested that the contract services industry is continuing to grow, but the “rapid growth we saw in 2004­–2005 is starting to slow.”

Growth was slow at the beginning of the decade, accelerated rapidly in 2004–2005, and began to tail off in 2006. “It’s not a bad situation,” stressed Miller. “No one is suggesting that business is going south.” Despite the deceleration, the market climate is still healthy. An indicator of its continued strength, said Miller, is the growth of backlogs (i.e., the value of contracts signed), which “has grown quite nicely” to more than $7 billion in the second quarter of 2006. The growth in backlogs reflects the large amount of consolidation in the contract services industry. “A market-share phenomenon is going on there,” noted Miller. He also explained that contracts for outsourcing services are being signed much sooner in the drug development process. For example, some drug studies may not begin until 2008 though the contracts may have been signed in 2006.

Spending on services

Miller cited the 2006 Pharmaceutical Technology­–PharmSource outsourcing survey as a good indicator of what can be expected in spending for outsourced services next year.

Overall, spending on outsourcing may be less in 2007 than it was in previous years. In the 2005 survey, nearly 20% of respondents said spending on outsourced services would increase at least 20% in 2006. But, only 10% of respondents said in the 2006 survey that spending would grow by that amount in 2007. What the numbers boil down to, said Miller, is “There are still opportunities in the market for contracts, but you may need to work a little harder for them.”

New paradigms

According to data reported by IMS (Fairfield, CT, www.imshealth.com) on the global drug development pipeline, there has been a steady growth of Phase I/II candidates over the past four years. In fact, there has been a 30% growth in Phase II candidates alone. But, Miller said, the Phase I pipeline is starting to flatten, which could reflect a slow down in candidates graduated to later-phase studies or less funding for new candidates. At the same time, industry has seen a small growth in products going to registration because many products are killed before they reach late-stage development.

“It’s interesting what we are seeing in the market now,” said Miller of the challenge to get candidates into late-stage development. “Contractors are starting to respond.” Miller stressed that “proof of concept” (POC) has become a new development paradigm and contractors are closely watching the critical period between when a compound is deemed safe and when companies make decisions about how to proceed with the candidate. New concepts are designed around getting APIs through POC and into Phase II more quickly, such as Patheon’s “Quick to Clinic” program.

Offshore

Most activities in offshore outsourcings are in non-GMP intermediates, clinical research, and discovery chemistry as opposed to GMP manufacturing. Part of the reason, said Miller, is that it is much easier to find subjects for clinical trials in China and India than it is in the United States, for example. And, databasing is much less expensive overseas. Miller speculated that it would be at least 3­–5 years before US-based companies will see competition for GMP custom-manufacturing services overseas. “I think you’ll see more companies jump into the generics market than GMP services,” noted Miller.

Lessons to learn

To deal with the slowing market and the impending threat of competition from overseas contractors, companies should examine unused capacity and customer segmentation. “Capacity can’t be inventory,” Miller said, and recommended that companies push to think about how to sell their excess capacity. And, companies should keep in mind that customers are looking for more than just basic commodities and are willing to pay for it. “When you look at your core strategies, these can be building blocks,” he said.