The Society of Toxicology (SOT) will hold its 51st annual meeting from March 11-15 in San Francisco. As mentioned on the organization’s website, www.toxicology.org, this is the largest toxicology meeting, attracting scientists representing industry, government, and academia from countries around the world. The annual meeting covers a broad range of themes from drug research to environmental toxicology to regulatory trends and much more. This venue also attracts a significant number of exhibitors that provide products and services for the toxicology community. You can find a listing of the SOT exhibitors in this print edition of Contract Pharma. Among the exhibitors that will be participating at the SOT meeting will be representatives of the preclinical CRO industry. If we are to believe anecdotal observations from industry veterans, after several years of slow and inconsistent spending by sponsors, there are positive signs of an improving business environment for the preclinical CRO industry in 2012.
Unfortunately for preclinical CROs, there is no good predictor or data measurement that determines when the volume of outsourcing is increasing or decreasing. CRO management teams rely on talking to decision makers in the pharma and biopharma industry to get an indication of outsourcing spending for the coming year. Even then, the sponsor’s guidance is always subject to change based on the financial health of their company. The lack of solid information to predict business volume has made it challenging for CROs to manage their own Resources . In 2011, we commonly heard that preclinical CROs were “cautiously optimistic” that the volume of preclinical outsourcing was increasing. The hope of the industry is that, after years where pharma and biopharma companies diverted research dollars to clinical trials and marketing, these companies were sooner or later going to have to return their attention to their preclinical pipelines to ensure that potential new drugs will be available to support future revenue growth. We may now be seeing some possible leading indicators to support this thinking. Consider the following:
Study duration: At the beginning of 2011, many CROs reported an increase in sponsor demand for shorter term, non-GLP studies. If you accept the premise that sponsors will increase preclinical spending, this observation could be regarded as an early positive indicator. Sponsors need to do the shorter-term studies to gather early data and set doses for longer-term studies. What we now know in 2012 is that many preclinical CROs have seen a gradual shift in outsourced work to longer term, GLP studies. Even those CROs that may not have fully experienced this shift are now reporting that they are receiving sponsor guidance that longer term studies are being planned for outsourcing. Longer term studies occupy facility capacity for a longer period of time and provide CRO management teams with somewhat more predictability to help manage CRO resources.
Specialty studies: Specialty toxicology studies — e.g., inhalation, continuous intravenous infusion, developmental and reproductive toxicology [DART] — are among the more expensive studies in preclinical drug development. To conduct these studies, CROs need specialized equipment and a research staff with unique scientific and technical training. Sponsors who seek to curb outsourcing costs may delay the initiation of these studies until it is absolutely necessary to avoid the associated high costs. These studies are also among the first to be canceled by a sponsor when mid-year budget reviews result in trimming R&D expenses. In early 2011, many CROs reported sponsor interest in conducting shorter term studies but it seemed there was little demand for specialty toxicology studies. By the end of 2011 and now in 2012, several CROs have seen an uptick in the demand for specialty tox studies. This increased demand either suggests a relaxing of sponsors’ outsourcing spending restrictions and/or that some sponsor’s could no longer afford to delay these critical studies without slowing down their project timelines. Regardless of the reason, increased demands for specialty toxicology work can only be good news for preclinical CROs. Like the trend toward longer-term studies, commitments to CROs to conduct specialty studies only helps CRO management teams in managing their internal resources.
Organizational stability: As mentioned above, in the absence of reliable data to predict trends in customer demand, many CRO management teams were forced into definitive actions to manage internal resources. For an industry that experienced its fair share of layoffs, organizational changes, and other cost-cutting measures over the past few years, it seems like several months have passed since we have heard about any new significant initiatives. As the global economy continues to recover, companies will continue to watch their spending, but this seeming pause in CRO headcount reductions could be another positive indicator of an improving trend in customer demand. In fact, some CROs have been hiring to fill key positions. It also seems that as we head move through 2012 that some investors may have figured out that public rants can only harm a CRO’s business by creating uncertainty among potential customers. We can only hope that is the case. When compared to the beginning of 2011, investors have largely stayed out of the spotlight as we head into 2012.
Emerging markets: Conventional thinking would suggest that preclinical CROs in emerging markets would not benefit until capacity in North America fills up and prices rise. As we head into 2012, there is still ample open capacity in North America and several CROs have indicated that they do encounter resistance from the client community when they try to increase prices. Why place studies in India or China when there is open capacity in North America? This is just a guess but we have to remember that the motivation to place work in emerging markets is to lock in lower prices and to possibly gain favorable consideration from regulatory authorities for conducting research in a market that has been targeted for future drug sales. Anecdotal reports suggest that large pharma companies are actively exploring preclinical research opportunities in these markets. Unlike their CRO counterparts, pharma management teams can (generally) project how much preclinical work will need to be conducted in the coming years. Even with open capacity in North America, their initiatives to leverage preclinical CROs in emerging markets could be an indicator of a long-term increase in outsourced research activities.
There are other areas that may indicate an improvement in business for the preclinical CRO industry, but these factors are less predictive and more confirmatory in nature. While the aforementioned leading indicators may help CROs anticipate customer demand, the following indicators may be more useful to the sponsor community in optimizing their outsourcing activities.
Capacity: For the past several years, we have discussed how there is significant open capacity in North America. What has been the dread of the CRO industry has been the benefit of the sponsor community. Sponsors no longer had to wait to start studies and costs were reasonable. If we are to believe that outsourcing customer demand is improving, then capacity will begin to fill and last-minute decision-making by sponsors may become a thing of the past. In addition to an improving spending environment, don’t forget that the CRO industry took capacity offline by closing or mothballing facilities. Several pharma companies have also closed or downsized internal preclinical operations. To the sponsor community, my belief is that we may already be seeing indications that the residual capacity in the U.S. is beginning to fill. If we are seeing a transition to longer-term studies, those rooms will be occupied in a facility longer. Clients who indicated that they could start a study at a CRO with minimal notice at the beginning of 2011 reported that this extreme flexibility had disappeared by the middle of 2011.
During the last portion of 2011, several CROs reported that they had developed a queue of studies to be conducted that hadn’t existed just six months earlier. When I first started writing this column years ago, sponsor preparedness — or lack thereof — prior to the start of a study was a significant issue for CROs. My concern now is that sponsors may have gotten used to starting studies at CROs that were hungry for business and willing to endure sponsor delays. I believe we are on the verge of seeing longer waiting periods to start studies. Even if a shorter wait time is available, sponsors will need to be prepared to seize that opportunity (i.e. have their test article ready and available) or they will find themselves waiting for the next available start time from the rear of the queue. While capacity may fill at some CROs faster than others, sponsors need to remember that an improving business environment may limit their access to capacity at their preferred CRO. Again, being prepared and having a thoughtful outsourcing plan will help avoid unnecessary delays.
Cost: Prior to the global recession, customer demand for preclinical outsourcing was so great that it seemed like CROs could charge any price for a study. We now know that the prolonged economic downturn resulted in a significant decline in study costs. Price wars were common when customer demand first declined, as CROs struggled to attract business. There were anecdotal reports at that time that North American study costs competed favorably with those in emerging markets. We now know that pricing seems to have stabilized although it mostly remains below pre-recession levels. CROs report that the client community is still price sensitive and they risk losing business if when they try to increase their profit margins. Sponsors need to pay attention; if open capacity in any market does decline, you can bet that an increase in pricing won’t be far behind. Sponsors with limited outsourcing budgets may want to start seeking bids for their studies now rather than later, because prices will increase eventually.
CRO resources: Beyond facility space, preclinical CROs need access to a readily available supply of study animals and sufficient number of trained research staff to conduct studies. Animal availability was a significant issue in the CRO industry 10 years ago, which occasionally resulted in significant delays to starting studies. Many CROs responded to this issue by either maintaining a readily available supply of animals and/or by contracting with vendors. These initiatives preceded the capacity expansion projects at many CROs. Today, while much of the attention has focused on the open availability of CRO facility space, sponsors need to make sure that CROs still have animals readily available for their studies.
Sponsors also need to remember that as customer demand improves, some CROs may have more facility space than staff available to conduct studies, due to previous cost-saving initiatives. This may or may not be the case but it is important for sponsors to be aware of this, particularly if they prefer to work with specific scientists at CROs.
In 2012, there are positive signs that we are finally seeing an improvement in customer demand for outsourcing work to preclinical CROs. Beyond their specific study needs, sponsors should pay attention to the business environment in the preclinical outsourcing area to optimize their outsourcing activities and avoid unseen delays in project timelines. Additionally, sponsors that are able to share accurate information about outsourcing spending trends will only help preclinical CROs better position themselves to effectively handle future workload demands. To that point, because the Society of Toxicology meeting attracts scientists and industry experts from around the world, its additional value is that it provides a critical networking opportunity for sponsors and preclinical CRO providers.
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 email@example.com.