The New Normal: The Changing Face of Pharma

We are about nine months into the downturn in early drug-development activity and executives at contract services research and manufacturing organizations (CROs and CMOs) are anxiously asking, "When will things get back to normal?"

Jim Miller

More to the point, CRO and CMO executives should be asking themselves, "What will the new normal look like?" It is clear that the biopharmaceutical and pharmaceutical industries are experiencing more than just a cyclical downturn in drug-development activity like the one they endured in the early years of this decade. We are looking at a wholesale restructuring of the industry that will leave the landscape looking very different than it has in recent years. The factors driving that restructuring are well known—patent expirations, few new drug approvals, national efforts to control healthcare spending—and contract services industry executives must prepare themselves for a new set of market dynamics.

While I don't have a crystal ball, I'm reasonably certain that the "new normal" for the next three to five years will have most of the characteristics outlined herein.

A new look for Big Pharma. Major pharmaceutical companies are experiencing the biggest changes. The viability of the 15 largest pharmaceutical companies, which today account for nearly two-thirds of industry sales and research and development (R&D) expenditures, is being undermined by patent expirations and the dearth of new drug approvals. They are responding with an array of strategic initiatives, including refocusing their development pipelines on high-end therapies such as biologics and high-potency oncology drugs, reestablishing market positions in generics (including biosimilars), targeting emerging markets, and making massive acquisitions such as the recently announced Pfizer-Wyeth deal and the ongoing Roche-Genentech deal. As their business models transform, so will their service needs and sourcing strategies.

Emergence of new players. As the positions of the current Big Pharma companies change, other companies can be expected to play larger roles. Major Japanese pharmaceutical companies, for example, have become more aggressive in establishing their presence globally; they are no longer content to outlicense their products for sale in North America and Europe. Many of the generic drug companies in India are creating programs to develop proprietary products for domestic and global markets, and Chinese pharmaceutical companies are only a few years behind them. Many of these new players are still vertically integrated and may not be willing to outsource activities, at least not to the degree of the mature pharmaceutical companies of North America and Europe.

Smaller development pipeline. CROs and CMOs will have to fight over a smaller market opportunity in the foreseeable future. The early development pipeline (i.e., preclinical and Phase I) nearly doubled between 1998 and 2008, but the increased number of drug candidates didn't yield a concomitant jump in new products. Now, major pharmaceutical companies are making radical cuts to their portfolios to improve R&D efficiency, while equity investors are cutting back support for early-stage companies and candidates. We expect to see substantially fewer pipeline candidates in the next three to five years, which will have a major impact on CROs and CMOs offering services such as process development, preclinical testing, and clinical-trial materials manufacturing.

No increase in new product approvals. CMOs, in particular, must come to grips with the fact that waiting for the number of new product approvals to increase is like waiting for Godot: it's not coming. The industry should accept that 20 or so approvals annually for new molecular entities (NMEs) are the norm, and that a return to the high numbers of the 1990s is just not in the cards, at least not on a sustained basis. Further, industry consolidation means that these few approvals will be concentrated in the hands of fewer pharmaceutical companies, many of which have captive manufacturing capacity or preferred manufacturing suppliers. That will mean reduced opportunities for many CMOs.

More drug development in emerging markets. Major and mid-size biopharmaceutical and pharmaceutical companies are moving rapidly to establish R&D operations in emerging markets, especially India and China. This strategy is not chosen because of cost alone, although labor and capital cost differences have certainly been a factor. The move also reflects the large market opportunity presented in those countries as their middle classes and national wealth grow. North American and European CMOs and nonclinical CROs seem to be slow in embracing this reality and are leaving the opportunity open for competitors based in those emerging markets.

Lower drug prices. Healthcare costs are a big issue in every nation, and the political and economic pressure for lower costs will only intensify as expectations rise, populations age, and the recession drags on. Major drug companies are responding to these pressures at both the high end (oncology drugs and biopharmaceuticals) and the low end (generics), but cost reduction will be a constant theme throughout industry. As critical components of the value chain, CROs and CMOs will be forced to work as hard as their clients to identify cost-saving opportunities and to pass those savings on to their clients if they want to keep the business.

More outsourcing. There is no question that outsourcing will be a critical element of every biopharmaceutical and pharmaceutical company's business strategy going forward, and the extent to which companies outsource key activities will only grow. The trend among big companies toward handing off functions previously considered core competencies, including toxicology, clinical data management, and manufacturing, is likely to accelerate in the coming years. As I argued in this column in January, however, the trend is likely to favor CROs and CMOs with the greatest capabilities and financial strength.

These industry changes have been apparent for some time, so I'm hardly going out on a limb here. The key point is to recognize that these changes are vast and they are occurring concurrently and interactively. In addition, the industry these changes are creating will look far different from the one most CROs and CMOs were built to operate in. Executives need to prepare their companies to respond to a different group of players with new needs.

There is one more thing I can safely predict about the "new normal" that is upon us: no matter what shape these changes take over the next few years, we'll need to be thinking about an even newer "new normal" by then.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, info@pharmsource.com, www.pharmsource.com.