Steve Snyder10.11.11
Because the nature of my work requires me to visit a number of preclinical CROs during the course of the year, I am often asked for my opinion regarding a variety of topics relating to the preclinical CRO industry. It is important to emphasize that my answers are based on “snapshot” observations from my travels, which may or may not be indicative of industry trends. Even if my opinions are accurate as I write this article, keep in mind that industry dynamics may change by the time you read it. As always, it would be foolish to use any information shared herein to guide investment decisions, and sponsors need to remember that it is always their responsibility to their due diligence when selecting a preclinical CRO. I think that about covers the disclaimers, so here are some of the Frequently Asked Questions.
Is Customer Demand for Preclinical Services Improving?
As I write this, I just had a flashback to my days when I worked in Corporate America. I remembered that one of my Human Resource colleagues told me that they always started an answer to any question with, “It depends . . .” Well, when addressing the topic of customer demand for preclinical outsourcing in 2011, “It depends . . .” is probably an appropriate initial response. Some preclinical CROs report that they have been busy throughout 2011 while others have reported that customer demand is practically unchanged since 2010, which was the second year of the industry-wide slowdown in preclinical outsourcing. Other CROs have reported slow and steady improvement in customer demand throughout the year. Some reported scheduling a higher number of short-term studies while others saw more studies of a longer duration scheduled as the year progressed. Some smaller CROs experienced higher capacity utilization in 2011 but that simply may be because it is easier to fill a smaller facility. While several facility closures during the past two years have diminished the overall CRO industry capacity, there is still open capacity in the North American market. At some preclinical CROs, sponsors are waiting longer to start studies, but it is still nowhere near the six-month waiting periods that were seen in 2007. In summary, some CROs seem to be experiencing better business in 2011 than others but any improvement in customer demand is a positive sign for the industry.
Will Customer Demand for Preclinical Services Grow or Has It Hit a Plateau?
I am a big believer that we will see the demand for preclinical outsourcing grow in the coming years. Because the preclinical CRO industry has matured during the past 10 years, sponsor companies have a reliable alternative to conducting this work in their own facilities. A preclinical research operation consists of an expensive infrastructure that draws critical dollars away from a company’s R&D budget. Despite what some may believe, preclinical CRO operations are often more efficient than the comparable operations in a pharmaceutical company. Because a preclinical CRO staff conducts numerous studies, the level of technical competence is often greater in these organizations. As the economics of drug development and the ongoing patent expiration of blockbuster drugs continue to weigh on pharma and biopharma companies, I would not be surprised to see more internal preclinical operations downsized or eliminated in favor of increased outsourcing. The long-held belief that no one can do research better than a pharma company’s own staff will continue to crumble under persistent economic pressures and as a new generation moves into leadership positions.
What is the Outlook for Preclinical CROs In Emerging Markets?
Prior to the recent two-year slowdown in demand for preclinical outsourcing, the outlook for preclinical CROs in emerging markets was quite bright. In 2007 and 2008, sponsors began looking to the CROs in Asia in particular as a lower cost alternative to North American CROs. Not having to wait six months to start a study was appealing as well. In 2008, additional capacity went into production in North American CROs just as customer demand began to wane. Open capacity in North America and more competitive pricing presented a new challenge for CROs in emerging markets. Why outsource work thousands of miles away when the economics, study start times and technical experience were competitive in North America? The future remains bright for CROs in emerging markets. As customer demand grows, North American CRO capacity will fill and CROs in emerging markets will again present an alternative that may be considered.
What are Your Concerns about Preclinical Outsourcing Going Forward?
I mentioned earlier that in the past 10 years, we have seen preclinical CROs grow and mature. While there was significant growth in available facility space across the industry, the real success was in the growth of reliable capabilities. Pharma companies recognized this, which is why outsourcing demand grew over this time. Herein is my concern: the times are a-changin’. It took a lot of time for the industry to gain the trust of the pharmaceutical industry as CRO capabilities were methodically developed. I fear that we are now in a period where everything is moving faster and that expectations, especially from the investment community, are greater. My concerns are not just limited to the CRO industry. Consider the following:
Lack of experience: The drug development industry is experiencing a transition from highly experienced scientists to less experienced scientists, due to retirements and layoffs. We are now seeing scientists in sponsor companies and in CROs who have never conducted toxicology studies before. Of course, less experienced scientists need to start their careers somewhere, but I fear that the pressures to develop drugs faster and maximize revenues has adversely impacted the effectiveness of critical mentoring programs in these companies. There are many fine programs that offer education in toxicology, but beyond the books, it is a discipline that needs to be experienced, and that requires time.
Expedited technical training: Similar to the scientific mentoring mentioned above, technical training has changed in recent years. In CROs, there is now a rush to move technicians into a production (read: revenue-generating) mode as quickly as possible. This is the same industry that gained the trust of the pharmaceutical industry a decade ago by marketing its elaborate training programs. Today, newer technicians are still trained but there is a difference between completing a training program and being “trained.”
Layoffs: Maintaining the optimal workforce for customer demand is a good business practice. In the past several years, we have seen the employee layoffs used in the pharma, biopharma and CRO industries as a tool to manage resources. The challenge in a preclinical research operation is that a trained workforce can’t be significantly curtailed and then restored like flipping a light switch. People have become more mobile and those who have endured layoffs will move to where they can find work. Should a company decide to add staff following a period of layoffs, it may be more challenging to find experienced workers, even in these tough economic times. Even then, these new workers now experience the changes in mentoring and training that were described above. One of the biggest concerns following a layoff is the net loss of organizational expertise. Accordingly, it is worth considering that the next time the CRO industry encounters slow customer demand, perhaps it would be better to direct excess staff toward improving the operations instead of showing them the door.
Management changes: In the financial world, it is said that investors should take note when a successful mutual fund manager departs, as it could lead to a decline in that fund’s performance. I believe that the effectiveness of sponsor and CRO preclinical research operations are particularly sensitive to management changes. Because many large pharma companies experience periodic organizational changes, that could explain why their internal operations may be less efficient than preclinical operations in the CRO industry. Management changes can impact morale, operational effectiveness, and/or operational quality, especially if the new management team lacks the operational experience of its predecessors. Management changes in CROs can also be stressful for those sponsors that have developed long-standing, trusting relationships with their outsourcing partners. In fairness, organizational changes can and will occur in any organization. In some cases, a new management team may improve employee morale, operational effectiveness, and/or operational quality. The bottom line is that management changes should not be taken lightly. Sponsors need to be alert for potential operational issues and CRO executives should periodically assess the effectiveness of organizational changes.
Quality: Because of the operational changes in the drug development industry that were described above, I believe we will see a decline in operational quality across the industry. I think the new quality standard for the industry will be what was regarded as substandard when compared to the expectations that existed 10 years ago. Reduced mentoring, expedited training, loss of organizational expertise due to layoffs, and operational management changes can — and likely will — lead to an erosion of operational quality. The quality standard that the CRO industry was built on to gain the trust and business from the pharmaceutical industry will be compromised in the pursuit of revenue growth. The change is already happening. Managers may explain away quality concerns (e.g., “these things will happen”) rather than demonstrating leadership and holding the operation to a higher standard. Newer managers may not realize that mentoring, elaborate training, and building organizational expertise were key elements in the commitment to quality that helped gain the trust of the pharma industry many years ago. Sponsors need to look for those CROs that still champion the endless pursuit of quality. In successful preclinical operations, the commitment to quality is proclaimed at the highest levels of management and is thus embraced by the remainder of the organization. In today’s economy, it is extremely difficult to maintain a commitment to quality. If the findings from some recent FDA inspections are indicative of the erosion of quality standards across the industry, I fear a catastrophic quality failure could occur in the coming years.
CROs in emerging markets: Preclinical CROs in emerging markets are vying for business for their newly developed capabilities. The words, “newly developed,” represent the risk. As I wrote earlier, experience cannot simply be taught. Furthermore, it is unclear if the management teams and staff in these organizations have embraced the commitment to regulatory and operational quality similar to what was seen in the North American preclinical CRO market years ago. Anecdotal accounts from some of these CROs suggest that this is a significant work in progress. Because everything in emerging market CROs is so new, sponsors truly need to assess if these operations are equivalent to more established preclinical CROs in the west.
We have explored the current market trends and the future outlook for the preclinical CRO industry. In my opinion, the future prospects for the industry are very positive, as economic pressures will drive more pharma and biopharma companies to outsource their research. As the burden for maintaining the preclinical research infrastructure shifts from the pharma industry to the CRO industry, CROs will continue to encounter their own economic challenges. Those CROs that manage these challenges without compromising the quality standards on which their businesses were built are those that are best positioned for long-term success. At least, that’s one observer’s opinion.
Steve Snyder is a consultant with more than 25 years of experience in preclinical toxicology as an outsourcing customer and provider. He can be contacted at info@outsource-support.com.
Is Customer Demand for Preclinical Services Improving?
As I write this, I just had a flashback to my days when I worked in Corporate America. I remembered that one of my Human Resource colleagues told me that they always started an answer to any question with, “It depends . . .” Well, when addressing the topic of customer demand for preclinical outsourcing in 2011, “It depends . . .” is probably an appropriate initial response. Some preclinical CROs report that they have been busy throughout 2011 while others have reported that customer demand is practically unchanged since 2010, which was the second year of the industry-wide slowdown in preclinical outsourcing. Other CROs have reported slow and steady improvement in customer demand throughout the year. Some reported scheduling a higher number of short-term studies while others saw more studies of a longer duration scheduled as the year progressed. Some smaller CROs experienced higher capacity utilization in 2011 but that simply may be because it is easier to fill a smaller facility. While several facility closures during the past two years have diminished the overall CRO industry capacity, there is still open capacity in the North American market. At some preclinical CROs, sponsors are waiting longer to start studies, but it is still nowhere near the six-month waiting periods that were seen in 2007. In summary, some CROs seem to be experiencing better business in 2011 than others but any improvement in customer demand is a positive sign for the industry.
Will Customer Demand for Preclinical Services Grow or Has It Hit a Plateau?
I am a big believer that we will see the demand for preclinical outsourcing grow in the coming years. Because the preclinical CRO industry has matured during the past 10 years, sponsor companies have a reliable alternative to conducting this work in their own facilities. A preclinical research operation consists of an expensive infrastructure that draws critical dollars away from a company’s R&D budget. Despite what some may believe, preclinical CRO operations are often more efficient than the comparable operations in a pharmaceutical company. Because a preclinical CRO staff conducts numerous studies, the level of technical competence is often greater in these organizations. As the economics of drug development and the ongoing patent expiration of blockbuster drugs continue to weigh on pharma and biopharma companies, I would not be surprised to see more internal preclinical operations downsized or eliminated in favor of increased outsourcing. The long-held belief that no one can do research better than a pharma company’s own staff will continue to crumble under persistent economic pressures and as a new generation moves into leadership positions.
What is the Outlook for Preclinical CROs In Emerging Markets?
Prior to the recent two-year slowdown in demand for preclinical outsourcing, the outlook for preclinical CROs in emerging markets was quite bright. In 2007 and 2008, sponsors began looking to the CROs in Asia in particular as a lower cost alternative to North American CROs. Not having to wait six months to start a study was appealing as well. In 2008, additional capacity went into production in North American CROs just as customer demand began to wane. Open capacity in North America and more competitive pricing presented a new challenge for CROs in emerging markets. Why outsource work thousands of miles away when the economics, study start times and technical experience were competitive in North America? The future remains bright for CROs in emerging markets. As customer demand grows, North American CRO capacity will fill and CROs in emerging markets will again present an alternative that may be considered.
What are Your Concerns about Preclinical Outsourcing Going Forward?
I mentioned earlier that in the past 10 years, we have seen preclinical CROs grow and mature. While there was significant growth in available facility space across the industry, the real success was in the growth of reliable capabilities. Pharma companies recognized this, which is why outsourcing demand grew over this time. Herein is my concern: the times are a-changin’. It took a lot of time for the industry to gain the trust of the pharmaceutical industry as CRO capabilities were methodically developed. I fear that we are now in a period where everything is moving faster and that expectations, especially from the investment community, are greater. My concerns are not just limited to the CRO industry. Consider the following:
Lack of experience: The drug development industry is experiencing a transition from highly experienced scientists to less experienced scientists, due to retirements and layoffs. We are now seeing scientists in sponsor companies and in CROs who have never conducted toxicology studies before. Of course, less experienced scientists need to start their careers somewhere, but I fear that the pressures to develop drugs faster and maximize revenues has adversely impacted the effectiveness of critical mentoring programs in these companies. There are many fine programs that offer education in toxicology, but beyond the books, it is a discipline that needs to be experienced, and that requires time.
Expedited technical training: Similar to the scientific mentoring mentioned above, technical training has changed in recent years. In CROs, there is now a rush to move technicians into a production (read: revenue-generating) mode as quickly as possible. This is the same industry that gained the trust of the pharmaceutical industry a decade ago by marketing its elaborate training programs. Today, newer technicians are still trained but there is a difference between completing a training program and being “trained.”
Layoffs: Maintaining the optimal workforce for customer demand is a good business practice. In the past several years, we have seen the employee layoffs used in the pharma, biopharma and CRO industries as a tool to manage resources. The challenge in a preclinical research operation is that a trained workforce can’t be significantly curtailed and then restored like flipping a light switch. People have become more mobile and those who have endured layoffs will move to where they can find work. Should a company decide to add staff following a period of layoffs, it may be more challenging to find experienced workers, even in these tough economic times. Even then, these new workers now experience the changes in mentoring and training that were described above. One of the biggest concerns following a layoff is the net loss of organizational expertise. Accordingly, it is worth considering that the next time the CRO industry encounters slow customer demand, perhaps it would be better to direct excess staff toward improving the operations instead of showing them the door.
Management changes: In the financial world, it is said that investors should take note when a successful mutual fund manager departs, as it could lead to a decline in that fund’s performance. I believe that the effectiveness of sponsor and CRO preclinical research operations are particularly sensitive to management changes. Because many large pharma companies experience periodic organizational changes, that could explain why their internal operations may be less efficient than preclinical operations in the CRO industry. Management changes can impact morale, operational effectiveness, and/or operational quality, especially if the new management team lacks the operational experience of its predecessors. Management changes in CROs can also be stressful for those sponsors that have developed long-standing, trusting relationships with their outsourcing partners. In fairness, organizational changes can and will occur in any organization. In some cases, a new management team may improve employee morale, operational effectiveness, and/or operational quality. The bottom line is that management changes should not be taken lightly. Sponsors need to be alert for potential operational issues and CRO executives should periodically assess the effectiveness of organizational changes.
Quality: Because of the operational changes in the drug development industry that were described above, I believe we will see a decline in operational quality across the industry. I think the new quality standard for the industry will be what was regarded as substandard when compared to the expectations that existed 10 years ago. Reduced mentoring, expedited training, loss of organizational expertise due to layoffs, and operational management changes can — and likely will — lead to an erosion of operational quality. The quality standard that the CRO industry was built on to gain the trust and business from the pharmaceutical industry will be compromised in the pursuit of revenue growth. The change is already happening. Managers may explain away quality concerns (e.g., “these things will happen”) rather than demonstrating leadership and holding the operation to a higher standard. Newer managers may not realize that mentoring, elaborate training, and building organizational expertise were key elements in the commitment to quality that helped gain the trust of the pharma industry many years ago. Sponsors need to look for those CROs that still champion the endless pursuit of quality. In successful preclinical operations, the commitment to quality is proclaimed at the highest levels of management and is thus embraced by the remainder of the organization. In today’s economy, it is extremely difficult to maintain a commitment to quality. If the findings from some recent FDA inspections are indicative of the erosion of quality standards across the industry, I fear a catastrophic quality failure could occur in the coming years.
CROs in emerging markets: Preclinical CROs in emerging markets are vying for business for their newly developed capabilities. The words, “newly developed,” represent the risk. As I wrote earlier, experience cannot simply be taught. Furthermore, it is unclear if the management teams and staff in these organizations have embraced the commitment to regulatory and operational quality similar to what was seen in the North American preclinical CRO market years ago. Anecdotal accounts from some of these CROs suggest that this is a significant work in progress. Because everything in emerging market CROs is so new, sponsors truly need to assess if these operations are equivalent to more established preclinical CROs in the west.
We have explored the current market trends and the future outlook for the preclinical CRO industry. In my opinion, the future prospects for the industry are very positive, as economic pressures will drive more pharma and biopharma companies to outsource their research. As the burden for maintaining the preclinical research infrastructure shifts from the pharma industry to the CRO industry, CROs will continue to encounter their own economic challenges. Those CROs that manage these challenges without compromising the quality standards on which their businesses were built are those that are best positioned for long-term success. At least, that’s one observer’s opinion.
Steve Snyder is a consultant with more than 25 years of experience in preclinical toxicology as an outsourcing customer and provider. He can be contacted at info@outsource-support.com.