Site Lines: Midwest U.S.
Contract Services Providers are finding homes in Indiana and other midwestern states
By David L. Johnson
In the pharmaceutical and biotechnology business, the perceived center of the known universe has always been either the East Coast or the West Coast of the U.S. But the future for both industries may be determined not only by global players beyond U.S. borders, but in some other American states in between.
Photo courtesy of Cook Pharmica
Skyrocketing costs to discover, develop and deliver new drugs are leading to major changes, outsourced infrastructure and new, networked models throughout the pharmaceutical industry. Comparable and constant pressures from venture capital investors to increase productivity, decrease costs and hedge risk along an expanding (and often uncertain) scientific frontier are likewise driving start-up biotech companies to build lean platforms for generating faster proof-of-concept data, rather than lasting models for scalable businesses. In a world of seemingly limitless therapeutic possibilities but increasingly impatient private and public capital markets, the pharma and biotech sectors are converging in their shared needs for doing business in ways that lead to more flexibility, distributed risk, and manageable costs.
The outcome? Increased outsourcing from both pharma and biotech companies to contract service providers (CSPs) for critical discovery and development components such as preclinical analysis and formulation, clinical trial management, central laboratory functions, product development and formulation, and manufacturing. The old paradigm of fully integrated pharmaceutical and mature biotech companies (FIPCO) keeping everything in house and behaving independently is necessarily being supplanted by a newer, fully integrated pharmaceutical network (FIPNET) model. This model encourages partnerships with CSPs, including contract research organizations (CROs), independent drug discovery and development firms, and contract manufacturing organizations (CMOs) as well as smaller, niche service players. It's all in an effort to drive collaboration, share risk and reduce costs along the challenging chain of drug development.
While outsourcing in the pharma and biotech business is not a particularly new trend, the rate of current growth is revolutionary. Industry studies, including a new and extensive review of the Contract Services Provider market by our sister organization BioCrossroadsLINX (Biopharma Discovery and Develop-ment Contract Services, January 2008), all point to a CSP sector expanding at an impressive rate of 14-16% per year, exceeding 20% in certain service segments, and with dramatically increasing service utilization by both pharmaceutical and biotechnology customers.
In Indiana, we have seen evidence of this trend -- and from both the pharmaceutical and biotechnology sides. Like many other states across the U.S., Indiana has focused in recent years on biotechnology discovery and development – in our case, through the privately funded BioCrossroads initiative, building upon a strong base of corporate and university assets in the pharmaceutical, device and diagnostic sectors. As a critical part of this effort, BioCrossroads has worked to raise several venture capital and seed funds, and then set out to find the best technologies for new investment. An early and serendipitous event for us was the decision by Indianapolis, IN-based Eli Lilly and Co. to outsource several service offerings as well as selected clinical and preclinical molecules, no longer viewed as core to Lilly's pipeline, to venture and other private equity investors in the Indiana market. For our locally-based pharmaceutical company, FIPCO was indeed starting to become FIPNET.
Photo courtesy of BioConvergence LLC
The largest of these transactions involved the creation of a new company, CoLucid Pharmaceuticals, for the development of several CNS products, including a novel therapeutic for migraine headaches. CoLucid raised a significant round of initial financing -- $16.5 million -- in January 2006. Immediately, developers, government officials and skilled technicians began asking where to sign up to build, promote or join this exciting new company as "the next Lilly." The answer, of course, was that there would be no building, no laboratories and no staff beyond the four or five executives and project managers required to manage CoLucid's clinical development. For this virtual company, the vast majority of that $16.5 million would go not to construct or even lease offices or open a payroll, but to pay for the expert services of clinical trial organizations and CROs in the U.S. and around the world that could speed CoLucid's first molecule through critical stages of development. And so, for our locally based biotechnology start-up, FIPCO -- the "next Lilly" -- was never the model at all. What began as FIPNET would, indeed, remain FIPNET.
The financial implications of this drive toward a networked industry are substantial. The Pharmaceutical Researchers and Manufacturers of America (PhRMA) estimates that biopharma R&D spending will top $75 billion in 2008, fueled by an increase in scope of research resulting in larger and lengthier studies for a wider range and volume of drugs under development. The shift in spending is also a result of deliberate efforts by both biotech and pharmaceutical companies to implement more specific strategic outsourcing plans to leverage outside expertise and focus internal Resources on core competencies.
Much of that $75 billion could well be spent in the Midwest.
Drug development and contract manufacturing offer a distinctly Midwestern advantage. In fact, according to the U.S. Bureau of Labor Statistics, Indiana and Illinois are two of the top six states for pharmaceutical employment. Dozens of contract service providers and a specialized drug development workforce of 6,000 are already up and operating in Indiana alone. The Midwest has a storied history in manufacturing, though not always a story with a happy ending (consider the automotive industry). Still, when it comes to biopharma, there are strategies across our middle states to keep starting strengths in drug development and manufacturing well within American boundaries.
For example, Ohio's southwest corner is capitalizing on drug manufacturing. Amylin Pharmaceuticals is expanding existing biotech manufacturing facilities in West Chester, OH for increased production of its diabetes biologic Byetta. Similarly, Ricerca, a preclinical CSP near Cleveland, has embarked upon a growth strategy with the goal of doubling revenues, investing in new chemistry and biology facilities and equipment and adding substantial new staff capabilities by 2009.
The Chicago area boasts two major healthcare companies in Abbott and Baxter. Not surprisingly, there are already several CSPs nearby, such as CorDynamics, Midwest BioResearch and Radiant Research, to support the work of these biopharma sponsors.
Several CROs started by ex-Pfizer researchers and executives have cropped up in the Kalamazoo area, including MIR Preclinical Service, Proteos, and Jasper Clinical Research and Development. MPI Research, a 1,500-person CRO, is also located in the region.
In Indiana, building on a pharmaceutical base that includes Lilly, Pfizer, Baxter and Bristol-Myers-Squibb as well as a growing array of emerging biotechnology companies such as Endocyte, CoLucid and ImmuneWorks, there is also a substantial and growing presence of a wide variety of CSPs, ranging in size from as few as three employees to nearly 1,000. As is clear from the detailed presentation of their capabilities on the BioCrossroadsLINX website, these 40+ CSPs form a virtual industry among themselves, covering over 120 of the 128 catalogued discovery-development-manufacturing related services typically required to bring a drug from the laboratory to the marketplace.
Source: BioCrossroadsLINX study: Biophama Discovery and Development Contract Services -- Indiana Market Opportunities and Funding Options
The Indiana example also illustrates the speed of growth taking place in the CSP sector. For example, in early February, Cook Pharmica, a contract biopharmaceutical manufacturer headquartered in Bloomington, IN, announced an $80 million expansion to its two-year-old $70 million core facility to provide new capabilities for formulation, filling and finishing. With this expanded capacity, Cook Pharmica plans to become a centralized source for biopharma development, from cell line development through manufacturing to parenteral finished packaging. In the process, Cook Pharmica will also nearly double its current employee base, with 200 new positions expected by 2010. Clearly, this company is gearing up for a dramatically growing market.
Indianapolis-based AIT Laboratories, a comprehensive laboratory service provider offering pharmaceutical testing and non-GLP services such as pharmacokinetics and pharmacodynamics (PK/PD), has experienced similar growth in both revenues and headcount -- an 80% increase in revenue, and 110 employee addition to payroll in just the past two years.
In the drive to find suitable CSP partners, the Midwestern advantage for biotechs and pharmaceutical companies alike arises from the region's historic, critical mass of skilled scientists, technicians and production personnel, generally drawn from locally based pharmaceutical and diagnostic facilities and laboratories, who are "FDA literate" in discovery and development processes and highly trained in drug development and manufacturing. Feeding into this talent pool are other scientific and technologically-proficient colleagues coming from the region's many leading public and private research institutions.
For example, some of the top chemistry programs in the U.S. are found at the University of Chicago, Indiana University, University of Illinois, Northwestern University, Purdue University, Ohio State University and University of Wisconsin. The 20-plus pharmacy schools in the Midwest -- including the University of Michigan, Butler University, Purdue University and University of Cincinnati -- are not only training our future pharmacists, but also developing the researchers and delivery teams for the life-saving drugs of tomorrow.
The specifics of getting newly formulated samples to clinical trial sites or delivering manufactured drugs to the patient are likewise important. Contact service providers require superior logistics capabilities to meet their mission and maximize revenues. Central locations obviously help, and several Midwestern cities, including Indianapolis, Columbus, Dayton and Louisville, are developing the necessary infrastructure and business focus to emerge as sophisticated logistics partners for the biopharma industry. The Midwest also boasts a low cost of living, a generally friendly regulatory and facility-permitting environment, and a highly competitive cost of doing business when compared with complementary discovery centers on either coast.
In short, the attraction of the Midwest for establishing major, globally linked CSPs is increasing in the current environment, though it is not necessarily new. In fact, some of the very earliest strategic outsourcing for the pharmaceutical industry took place in Indiana-polis, through the establishment of the world's first central laboratory, SciCor, more than 20 years ago. Known today as the Central Laboratory Services division of Covance, Inc., SciCor was founded in 1986 with infrastructure and talent drawn from Eli Lilly and Co., as well as a strategic acquisition and the prospect of early revenues and an innovative contract with Lilly. At the time, SciCor was the only company that could report timely clinical data (within 48 hours) using the same clinical trial methodology. Today, SciCor/Covance sets the industry standard for what has become a 100% outsourced market -- and in the interim, has grown in Indianapolis as a key component of a global company with over 900 local employees.
Of course, the last 20 years have brought other -- and often painful -- economic lessons to the Midwest as well, including massive losses of jobs and the disappearance of entire sectors of activity through increased offshore production and international competition in skilled manufacturing industries such as automobiles and steel. While the pressures driving the transformation of FIPCO to FIPNET are complex, and range well beyond pure considerations of production costs, it is also true that the opportunities in biopharma development and manufacturing will be increasingly global. The scramble for the rising tide of CSP business will be intensely competitive.
Still, at least for the moment, the contract service sector is one of U.S. and European dominance. Of the estimated 1,100 CSPs worldwide, approximately 900 are based in North America and Europe. While the numbers of sophisticated CSPs are increasing in Asia, particularly China and India, several factors make offshoring of services and product development arguably less of an immediate competitive threat in the biopharma services sector than in other areas of traditional manufacturing and production.
First, the challenges of offshoring are substantial when it comes to intellectual property protection, overcoming language barriers, ensuring clinical study quality and integrity, and prevailing over perceived problems of delay around multiple layers of foreign regulatory approvals. Additionally, as offshoring escalates for technology-intensive industries, the "labor arbitrage" between the costs for skilled employees in U.S. vs. global (often Asian) markets will inevitably begin to close.
Further, and particularly for the many early-stage biotechnology companies with a limited number of products under development, no international workforce, and scant administrative and management resources in their "virtual" business structure, offshoring may be less attractive -- and less feasible -- than U.S.-based CSP alternatives offering the benefits of far easier access and clearly enforceable intellectual property protection.
Finally, some service segments, such as clinical trials, already present clear and attractive offshoring alternatives for the entire biopharma industry. But other components are far "stickier" to the U.S. geography -- such as preclinical services or clinical sample biomanufacturing that rely upon advanced facilities and equipment and a small number of highly trained scientists to drive value -- and often make more sense to keep closer to home.
Ultimately, considerations of quality, proximity and the absence of logistical and cultural barriers should allow reliable and high-skilled U.S.-based CSPs to continue to enjoy a significant share of a growing market. This should be true, even as that market inevitably becomes more global and more competitive.
And within the regions of the U.S., the Midwest should fare particularly well in the competition to "make discovery" into marketable products through a growing network of sophisticated service providers. The region has a tradition of therapeutic innovation, skilled processing and manufacture and, simply, hard work. The public and the corporate sectors in many Midwestern states increasingly see biotechnology and life sciences as the "new industries" to replace a fading manufacturing base, and are bringing substantial resources to the pursuit of opportunity.
And the biotechnology and pharmaceutical sectors, undergoing massive transformations of their own, are definitely looking for new partners. There is no reason at all that many of those new partnerships can't be forged a bit farther from the great oceans -- and a lot closer to the Great Plains of the United States.