CRO Industry Update

Opportunities in uncertain times

By Kristin Brooks

The Pharmaceutical industry is undergoing significant change, from drug development philosophy and tightening of regulations, to restructuring, consolidation and mergers and acquisitions — all in the midst of an economic downturn. These changes impact CROs, the services they provide, from where, and for whom. The drop in R&D spending during the last few quarters has taken its toll on preclinical CROs, which are experiencing heavy discounting, delays, and cancellations. These changes may however present some opportunities for CROs. Although R&D spend has been down, many in the industry feel outsourcing will inevitably rise. Despite the financial crunch and a drop in early-stage research, a new report conducted by Business Insights states that the global CRO market is expected to grow 14% per year during the next three years, making contract research a $35 billion industry by 2013.

Photo courtesy of PPDInc.

CROs continued their Asia-Pac expansion efforts in 2008, which may prove beneficial for pharma and biotech companies seeking value for their R&D dollars in this current economy, and they continued to add bioanalytical services to their central labs. Also, several grand scale strategic CRO/sponsor partnerships materialized this past year, signifying increased appeal for sponsors looking to take advantage of the benefits gained though outsourcing. Additionally, we’ve seen big pharma’s biopharma buy-ins take place during the last few years and now mega-mergers dominate the charts as revenue streams and R&D pipelines dry up. The impact these mergers have on CROs remains to be seen, however some industry experts contend that they will inevitably lead to an overall increase in outsourcing.

Another area that may prove valuable to CROs, once regulations emerge in the U.S., is the potential for biosimilars to provide a significant new source of revenue. CROs already have the tools for bioequivalence studies. If R&D history repeats itself, some of these industry changes may present significant opportunities for CROs.

Recent Performance

Outsourcing to CROs may not decline, but it’s certainly not immune to pharma R&D cycles and strapped financial markets. Restructuring and cost containment strategies have dealt a blow to pharma R&D resources, which has hit the preclinical arena hard, as evidenced by the last few quarters. Overall, top CROs fared well in 2008, however we began to see early development revenues for some companies slip in 4Q08, a trend that continued into 1Q09.

Early development revenues for Covance grew 3% in 4Q08 (compared to a 13% uptick the previous year) and were down 5% in 1Q09. Late-stage revenues, which also includes central lab services, were up 11% in the fourth quarter, and up 18% in 1Q09. According to a company statement, Covance expects overall revenue growth to slow from approximately 15% to the 5-10% range during 2009, adding that approximately half of this slowdown is due to foreign exchange fluctuations.

At PPD, Inc. discovery sciences segment revenue was down 20% in 4Q08 and down 64% in 1Q09. Development segment revenue was up 1% in 4Q08 and down 7% in 1Q09. Additionally, Charles River Laboratories’ preclinical services revenue was down 8% in 4Q08 and down 17% in 1Q09, due to slower market demand.

William Sharbaugh, chief operating officer, PPD, Inc., commented, “Many large pharma companies are focusing on their late-stage assets as they face patent expiration cliffs combined with turbulent economic conditions. These assets have a higher probability of technical and regulatory success and can be commercialized more quickly. I believe this trend favors CROs with late-stage expertise.”

Dealing with Downturn

The preclinical arena is experiencing a significant downturn as the economic crunch has thwarted the efforts of early research projects for many companies, particularly smaller biotechs and startups. Discounting, delays, cancellations, cost containment have replaced recent expansion efforts to keep up with the now diminished demand.

Tom Oakley, president of Bridge Laboratories, commented, “I’ve been in the business for 13 years and this is the third down cycle I’ve seen. However, the difference with this down cycle is that it happened a heck of a lot faster. We went from a place where the big guys in the industry were scheduling out six months and everybody’s capacity was filling up, filled up, or beginning to fill up, at all levels of the industry, to a place where virtually everyone has excess capacity or the space of about two months.” He added that companies dependent upon small pharma or biotechs were probably disproportionately affected by the funding crisis. These companies quickly moved their focus from preclinical pipeline development to molecules that were closest to the cash. “These guys are sacrificing tomorrow at the altar of today because of the need to get compounds partnered, to get deals in place, and to get financing. Generally speaking, you don’t get financing on preclinical molecules, you get financing on clinical molecules.”

Preclinical CROs are dealing with the downturn through market competitiveness, cost containment, as well as looking to other service areas help offset losses. Clinical CROs, on the other hand, have their late-stage revenues to compensate for early development losses. “There is less work out there and everyone is working harder to get it. We are seeing significant pressure on pricing,” said Mr. Oakley. “Although 2009 is going to be a tough year for the preclinical business, the demographics of the market have not changed. The argument for outsourcing preclinical research is still valid and will continue to grow. As pharmaceutical companies get pressure to decrease the cost of drug development, outsourcing will continue to be a likely option. Within the next six to 12 months, we expect the market to turn around and the demand to return as the financial system stabilizes and pharmaceutical companies work through their acquisitions.”

Chris Perkin, corporate senior vice president of Charles River Laboratories (CRL), said, “We continually examine our portfolio. We have 8,500 employees, 60 facilities, in 15 countries with research models moving into preclinical, and we’re seeing that portfolio having to be adapted. We talk with sponsors and make sure that our services match their needs.” In addition to the acquisitions of NewLab Bioquality, a German-based CRO providing early and late-stage drug development services, CRL has acquired Molecular Imaging Research, Inc. (MIR) of Ann Arbor, MI. MIR provides discovery services supported by in vivo imaging capabilities to pharma and biotech clients and specializes in oncology discovery research, an area CRL is seeing increased demand for. “We continue to look at opportunities to add to our portfolio with acquisitions and strategic alliances, but everything’s changing at the moment,” said Mr. Perkin.

CRO Asia Pacific Expansion Efforts, New Service Offerings Quintiles Opens Phase I facility in India. Acquires Targeted Molecular Diagnostics of Westmont, IL, with pathology and biomarker analysis capabilities. Partners with Medca Japan to provide central lab services. Expands and consolidates Global Central Labs and Clinical Development Services units in Beijing Covance Increases biotechnology service capacity in Europe, receives cGMP manufacturing license Forms joint venture with WuXi PharmaTech to provide preclinical services in China Upgrades pharmacology research unit in Evansville, IN. PPD Opens Office in Tokyo, Japan. PPD purchases Merck’s vaccine testing lab; Expands central lab service relationship. Expands Global Central Lab services into Singapore. Expands Global Central Lab services into China. Charles River Laboratories Opens Shanghai Facility. Acquires NewLab BioQuality AG, a Germany-based provider of safety and quality control services to biopharmaceutical clients. PAREXEL Expands early phase drug development capabilities to provide biopharma companies with dedicated support for proof of concept studies. Expands clinical pharmacology capabilities in the Central Nervous System (CNS) therapeutic area. Completes expansion of three Clinical Pharmacology Research Units in Baltimore, MD in the U.S.; London, UK; and Berlin, Germany. Expands minority interest ownership in the clinical pharmacology business of Synchron Research in Ahmedabad, India. ICON Acquires Prevalere Life Sciences Inc., a provider of bioanalytical and immunoassay lab services, operating a 49,000 square foot facility in Whitesboro, NY. Opens full service Central Laboratory in India. Acquires Healthcare Discoveries Inc., which operates an clinical pharmacology unit in San Antonio, TX. MDS Pharma Services Moves Singapore Global Central Lab to a new, larger facility. Establishes an office in Tokyo, Japan. Kendle: Expands Asia/Pacific operations with opening of additional office in India. Expands global clinical pharmacology capabilities with the acquisition of DecisionLine Clinical Research. Pharmanet Development Group Enhances immunochemistry capabilities. Eurofins Medinet: Establishes new, dedicated Central Lab in Shanghai, China. SGS Life Science Services Offers bioanalytical services moving products through the entire preclinical through Phase IV pipeline.

The drop in R&D spending has slowed from double-digits to a single-digit pace. “While R&D spending is falling,” said David Spaight, president of MDS Pharma Services, “outsourcing spending is on the rise, as sponsors seek to make the most of scarce dollars by improving efficiency through strategic use of outsourcing. Dedicated capacity arrangements are becoming more common, as for example, biopharmaceutical companies determine that it’s not cost-effective to maintain their own toxicology facility.”

Mr. Perkin of CRL added, “A lot of what preclinical CROs do, and this may even apply to clinical CROs, is not core to large pharma companies. So, I think we’ll see an increased amount of outsourcing, which will compensate for the lower level of drugs being outsourced, and that the two things will work together. Our belief is that it’s quite encouraging and provides the opportunity to broaden partnerships with clients. In the last six months, we’ve had more in-depth discussions with our client base about outsourcing and different outsourcing models and structures, many of them very innovative.”

Several of the companies that work in the preclinical arena indicated that inquiries and booking levels are beginning to stabilize, but many expect the soft market for preclinical services to continue, at least until the second half of this year.

Growing Services & Partnerships

As a result of failed R&D efforts in small molecules, pharmaceutical companies are rapidly transitioning their portfolios to large molecules. With the increased focus on biologics, along with the increasing number of biologics in the pipeline, and as new therapies and technologies evolve, sponsors require more specialized research services. Following suit, the CRO industry has been expanding bioanlytical services. Biopharmaceutical products, such as recombinant human proteins, often trigger immune reactions that affect toxicology and other clinical applications. CROs have sprung into action to address increasing demand for bioanalytical services such as immunology and toxicology, as well as pharmacology.

According to CRL’s Mr. Perkin, “There is no doubt that immunology has remained ‘immune’ to the downturn. We’re hearing from big pharma that 80% of their portfolios will be monoclonals within five years. That puts a big responsibility on CROs because studies for large molecules are much more interactive, require a lot more evaluation, and are a great deal more cutting edge.” He added that CROs have traditionally never been at the leading edge of research.

CROs must have the latest technologies in order to operate in this market. “I’ve heard it said that immunology is the new spectrometry. Mass spectrometry, 15-20 years ago, was cutting edge and only the large CROs could afford it. At the time, it was very expensive and difficult to do, and it was not automated. You need good chemists and good maintenance, that’s really the new immunology and there are a lot of companies working on automating it,” Mr. Perkin commented.

The trend for pharma to outsource analytical testing has spurred partnerships and portfolio expansion projects among CROs. Mr. Sharbaugh at PPD said, “We have seen very strong growth across our lab business. We have recently undertaken three strategic expansion projects. First, we are building a cGMP analytical testing lab in Athlone, Ireland, investing as much as $18 million and creating approximately 250 jobs. Second, we are building a central lab in Singapore in response to growing client demand in Southeast Asia. Third, we acquired Merck’s vaccine testing facility to focus on assay development and immunogenicity testing services for vaccines and biologics.”

Carl Martin, Ph.D., vice president of Biotechnology Services at Covance, added, “We have made significant infrastructure investments and enhancements to help our customers get their products to market sooner. Our biotechnology expansion in Europe has doubled service capacity, adding 8,000 sq.-ft. to our biotechnology services facility.The expanded facility includes a state-of-the-art biosafety facility access corridor, upgraded infrastructure, class 10,000 labs and equipment for biopotency, molecular biology and protein chemistry services. The additional capacity and scientific expertise will help us reduce lead times and provide faster project reports with the highest data quality.”

This past January, PPD purchased Merck’s 130,000-sq.-ft. vaccine testing lab and related equipment in Wayne, PA and hired the 80 Merck employees who operate the facility. As part of the partnership between the two companies, PPD will provide assay development and immunogenicity testing services to support Merck’s vaccine portfolio for five years. The two companies also expanded their existing central lab service relationship, under which PPD will provide central lab and sample storage services to Merck for its clinical development activities for five years.

“Our vaccine and biologics lab allows us to bring on first-in-class vaccine and bioassay development, services and competencies we didn’t previously have. We now have biological testing services in the areas of infectious diseases, oncology, vaccine, CNS vaccines and immunization. Through our strategic collaboration with Merck, we have expanded beyond genetic testing of biologics. PPD plans to invest in our newly acquired lab by developing new technologies and assays to expand our immunochemistry and oncology vaccine testing services as well as biologics lab services for other biopharma clients,” remarked Mr. Sharbaugh.

In a similar arrangement, Covance signed an agreement with Lilly in October 2008 to help transform Lilly’s R&D model. Covance acquired Lilly’s 450-acre early drug development campus in Greenfield, IN for $50 million and offered employment to approximately 260 Lilly employees. Covance will provide Lilly with a broad-range of drug development services during the next 10 years for a contract value of $1.6 billion. As part of the arrangement, Lilly will transfer responsibility to Covance for its non-GLP toxicology, in vivo pharmacology, quality control lab, and imaging services. In addition, the contract includes a committed level of clinical pharmacology, central lab, GLP toxicology studies, and clinical Phase II-IV services.

“Our 2008 partnership with Lilly is an example of the partnerships that are emerging, and will continue to emerge. In the next 5-10 years, we expect the CRO market to increase to more than $30 billion, with more than 50% of business coming from strategic outsourcing partnerships, including asset transfer and program management,” according to a Covance statement.

The Greenfield, IN facility serves as a Center of Excellence and provides drug discovery and lead optimization programs in multiple therapeutic areas. The three new services offerings resulting from the facility include in vivo pharmacology, molecular, and anatomical imaging.

Asia Pacific Expansion Efforts

Although growth has slowed, the Asia Pacific region remains one of the highest growth regions and therefore remains a high priority for global pharma companies. “This means the market access driver of trial placement is becoming even stronger for Asia—combined with the already strong cost efficiency and patient recruitment drivers. Based on all of these factors, the rapid growth in clinical trial growth in Asia is sure to continue,” said Dr. Ross Horsburgh, vice president of global clinical development, Asia/Pacific, Kendle. Competition in the Asia Pacific region is picking up among both CROs and sponsors. CROs have and continue to make significant investments in the region.

Demand for services in the region has been flat in some areas while increasing in others. Mr. Oakley of Bridge Labs said, “U.S. interest in China has increased as a cost effective option for quality research. In fact, most of the interest from the U.S. prior to this time has been from small-to-mid-sized pharma and biotech companies. These companies are getting squeezed out in our current economy, making a China solution even more compelling. Additionally, we are now seeing inquiries about our China capabilities from larger pharma companies that are primarily interested in taking advantage of the cost differential between U.S. and China research.” He added that there is also a significant increase in the interest in Asian-based companies working toward global filing.

Dr. Horsburgh at Kendle remarked, “Despite the global recession, the demand for services continues to increase in Asia Pacific. In fact, the recession may actually help drive increased focus to the region. For biopharmaceutical customers trying to stretch their development budgets, the cost effectiveness and recruitment efficiencies now look even more compelling. India is an especially hot market for CRO development right now, with particular demand for biometrics, and drug safety work.”

Industry successes and a more mature CRO industry in the Asia Pacific region are building confidence among small and mid-size biopharma companies, according to Dr. Horsburgh, which is helping to remove reservations about including the region in global development plans for companies of all sizes. With access to patients with disease patterns similar to the rest of the world, and access to half of the world’s population, along with improved regulatory timelines, growth in the Asia Pacific region is not likely to decline any time soon. Dr. Horsburgh added, “It may surprise many to learn how much global oncology work has shifted to Asia Pacific. This is especially true for NSCLC (non small cell lung cancer). A significant proportion of patients for recently approved targeted therapies came from Asia.”

CRL’s Mr. Perkin commented, “There are a lot ofsmall biopharma companies using the Asia Pacific region as a platform for research, whether it’s in China, Singapore, or Korea. We’re seeing interest from small and mid-size biopharma for services in the region and a lot more of those smaller companies have shown an interest in our new facility in Shanghai. They’re requesting more data. I think it’s too early to say whether that’s a change in uptake but we’d like to think so, it’s certainly a change in interest level.” CRL’s new facility is intended to help multinationals as well as local biopharma organizations with drug development programs.

The Big Get Bigger

Mega-mergers, driven by the need to streamline drug development, maximize efficiencies and foster innovation in anticipation of looming generic competition for blockbuster drugs will drive closer integration and strategic relationships with CROs, according to Mr. Spaight of MDS. “We expect to see increased emphasis on Phase IIa proof-of-concept studies to help clients make earlier go/no-go decisions. This in turn will require earlier coordination and collaboration with CROs to develop the assays and biomarkers needed to demonstrate proof-of-concept,” he remarked.

Douglas Peddicord, Ph.D., executive director of the Association of Clinical Research Organizations (ACRO), had this to say about mega-mergers: “We think partnerships is the key word. One likely outcome for these mergers is that big pharma companies will focus on drug discovery on the front end and marketing on the back end. That leaves a big opportunity for CROs to partner with Pharma on the research piece.”

“The short end is that it could be huge for CROs,” commented Mr. Perkin of CRL. “I don’t think the Pfizer/Wyeth, Merck/Schering-Plough will have as big an impact as some because all of those companies are not traditionally large outsourcers. There aren’t many companies left now with significant internal capacity. I think this is all part of a reevaluation, looking to lower staff operating costs while accommodating changing research pipeline demands. I think in the longer term, mega-mergers are going to result in increased outsourcing, but like anything that involves big pharma, there is usually a hiatus between making the decision to change and the results of that change. We’re also seeing the results of that and that’s why the economic downturn is hitting CROs. Everyone is waiting for sponsors to get their new models on the way.”

Josef von Rickenbach, chairman and chief executive officer, PAREXEL International, added, “Industry research has shown that typically, following mergers and acquisitions, outsourcing increases because the acquiring company, with a reconstituted product pipeline, seeks to achieve greater efficiencies, improved productivity, and lowered costs that can be provided through outsourced partners. Additionally, with an increased focus in the industry on evolving strategic relationships among service providers and sponsors, we expect that new operating models and emergence of partnering best practices will create new expectations of CROs, which will bring even more innovation to study design and execution.”

Biosimilar Prospects

Biosimilars, an official term used by the European medical authorities, and what’s referred to as follow-on protein products (FOPPs) in the U.S., are terms used to describe non-innovator versions of original biopharmaceutical products, following patent expiry. So far, 10 biosimilars have been approved in Europe, and on March 17, 2009, the Pathway for Biosimilars Act was introduced in the U.S. House of Representatives, with legislation anticipated within the next few years.

Many biopharmaceuticals are antibody-based compounds, which often elicit a response from the immune system. Tests for biosimilars would need to determine objective quantification of immune cells and assessment of immune function to ensure patient safety. Rigorous testing and reproduction efforts would be needed to ensure bioequivalence. And who is better equipped than CROs to provide this testing?

Marie Rock, Ph.D., vice president of Midwest BioResearch’s Protein Bioanalysis group, stated, “The methods used for determining circulating blood levels of biologics are much more complex than small molecule drugs. Demonstrating bioequivalence requires a greater level of analytical finesse, which is where CROs can be very helpful to the client. The methods used for bioequivalence studies have to be extremely precise and rugged. CROs have a broad scope of experience in different analytical platforms, very fine equipment, and highly skilled analysts to conduct the sample analysis. Therefore there is an opportunity for an increase in services provided and a need for that service by potential clients.”

Once the FDA provides guidance and research requirements have been established, biosimilars will be an important source of revenues for a great many companies. Dr. Peddicord of ACRO said, “Whatever the outcome, we are confident that sponsors developing these products will look to the expertise of CROs for whatever testing or trials might be required. In a similar way, we see the move toward comparative effectiveness research to be a good potential business opportunity for CROs and we are working to ensure the emphasis stays on clinical effectiveness and not simply cost effectiveness.”

PPD’s Mr. Sharbaugh commented, “Biosimilars present a significant opportunity for CROs because regulators will require some form of comparative clinical trials and bioanalytical testing. Within the next two or three years, biologics are expected to account for more than 50% of newly approved medicines. It is likely that the U.S. will approve guidance and regulations within the next year that could pave the way for biosimilars. Once there is a clear regulatory pathway for biosimilars in the U.S., we can expect to see global market expansion, and CROs will have a role to play in this area.”

Some determining factors for big pharma entering the biosimilar market, according to Mr. Spaight at MDS, will have to do with the period of exclusivity established, for example whether it’s five to seven years or 12 years. Another determining factor for some companies will be whether late-stage clinical trials will be required. This could be daunting for smaller companies lacking the capacity to support large, global, multi-site trials. To address these potential opportunities, MDS has established a Biopharmaceutical Development Consulting Group to provide scientific and regulatory guidance to clients developing biologics, including biosimilars.

“Although CROs have forecast more conservative growth expectations for 2009, it’s only a matter of time until biotech funding and overall R&D spending picks up. Innovation is vital for successful drug development. Companies both large and small must fund their pipelines to create, sustain, and grow revenue. Outsourcing will remain a key solution to efficient drug development,” said Mr. Sharbaugh at PPD.

R&D tie-ups and drug development cycle fluctuations inevitably plague the industry from time to time. It seems however, that they are not likely to adversely impact CROs in the long run. Despite ups and down in the industry, CROs have and continue to seek opportunities, grow services and build relationships. These circumstances provide an opportunity to better position themselves in the changing market. It has always been a about strategic balance for CROs.

Kristin Brooks is associate editor at Contract Pharma.