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Written by Nigel Walker

Managing Director, That's Nice

Nice Insight Outsourcing Trends in 2016

Moving into 2016, the outlook for outsourcing is brighter than ever as pharmaceutical and biotechnology companies continue to rely more heavily on external service providers for research, development and manufacturing services. According to a new 2016 Nice Insight CRO and CDMO Outsourcing survey of 1,173 industry representatives from pharma and biotech companies, spending for outsourced services takes a big leap compared to previous years.

The three major trends characterizing the state of industry outsourcing this year are:

  • Continued growth in contract service provider consolidation.
  • Escalating spending by pharmaceutical and biotech companies for outsourcing services.
  • A growing preference by big pharma, big biotech and others for preferred provider and strategic partner relationships.

Outsourcing Escalates

The surveys reveals that more than three quarters (77%) of pharma/ biotech industry companies currently outsource services or operations to contract development and manufacturing organizations (CDMOs), contract manufacturing organizations (CMOs), and contract research organizations (CROs), with 30% of those companies outsourcing to CDMOs and/or CMOs. Only 23% do not currently outsource these services but are in the process of evaluating CDMOs and CMOs within the next 24 months.1

More than half of big pharma and emerging pharma companies currently outsource to both CDMOs/CMOs and CROs. Small pharma and biotech companies are the ones most likely to need outsourcing services within the next 24 months (37%). Most companies (69%) that currently outsource services to CDMOs or CMOs indicated that the number of these contractors they work with is likely to increase in the next three years, and for only 1%, the number is likely to decrease.

Consolidation Mania: The End of the Line?

Consolidation among industry outsourcing organizations, paralleling the merger and acquisition trend among pharmaceutical and biotechnology companies, has been a major trend in recent years as service providers strive to fortify their capabilities to meet increasing competition and challenges. They are also repositioning their business profiles through divestitures of specific product lines or business units.

In the last few years, Patheon acquired DSM’s pharmaceutical products business, Gallus Biopharmaceuticals, and Agere Pharmaceuticals; Catalent purchased Pharmapak Technologies, Redwood Bioscience and Micron Technologies; Cambridge Major Laboratories merged with AAIPharma; and Piramal Enterprises acquired Coldstream Laboratories. It will be interesting to see whether these consolidated companies are able to fully integrate their services and improve their performance.

Interestingly, in the drug product contract services industry, only 32 of the industry’s providers account for 67% of industry revenues.2 Interviews with senior executives of large biotech and pharma companies indicate that most plan to continue their strategy of investing in acquisitions, mergers, and consolidation, and many intend to divest assets this year. The strong wave of consolidations has been driven by the desire for contract services companies to offer integrated, end-to-end solutions, or to enter new market segments.

However, according to industry thought leader Jim Miller, the consolidation process and pace have recently slowed because there is a dearth of remaining acquisition targets. He says that most of the current deals are smaller transactions where the buyer fills technology gaps rather than gains broad capabilities or expands its geographic footprint.3

To compete favorably in this fiercely competitive marketplace, contract services must be able to provide real value, continually anticipate the changing needs of their customers, and adjust their offerings accordingly. CDMOs with expertise in pre-formulation and formulation development, and the ability to provide clinical trial supplies and achieve seamless scale-up and transfer for commercial manufacturing have an advantage. Industry companies will also seek service providers with specialized capabilities, such as innovative dosage form technologies, advanced technical capabilities and automation, and the ability to produce potent compounds and controlled substances.

Increased Outsourcing Spending

According to the Nice Insight surveys on 2016 outsourcing trends, this year saw another big jump in expenditure for contract research, development and manufacturing organizations, maintaining the continuously escalating outsourcing spend over the past five years. The majority (43%) of companies spent $51 million to $100 million USD on outsourcing and another 28% spent more than $100 million. Compared to the previous year, the 2015 Nice Insight survey found that the vast majority (62%) of CMOs spent $10M to $50M per year on outsourcing and only 23% spent more than $50M. Three quarters of the 2016 survey respondents said this expenditure is likely to increase in the next five years.

What’s driving the increased use of contract services? Part of the reason pharma and biopharma companies of all sizes are increasingly relying on outsourcing providers is to help deal with cost pressures and speed time to market in a highly competitive marketplace. Another significant reason is access to needed scientific and technical expertise that is lacking in-house. In particular, advanced expertise is needed for the growing trend of complex specialized drugs and immunotherapies for smaller populations, as well as for rare diseases, all of which require extremely high costs.

Other key drivers are the reduced need for capital investment, the increasing potency of many new candidates, access to stateof-the-art production capabilities, cost cutting, and the need for specialized services.

Meeting Medical Need with Technology

The changing product pipeline is another important factor accounting for the industry’s growth, with the rising importance of generics, biologics and biosimilars. Biopharmaceutical companies are spending more on outsourcing for their growing pipeline of biologics for the treatment of diseases such as diabetes, cancer and genetic diseases. In response, CMOs are trying new technologies, such as advanced expressions systems, improved bioprocessing systems, and single-use technologies to lower costs and meet demand more effi ciently. And they are doing so at a greater rate than biotherapeutic developers, who are slower to switch from their current systems.

Contract service providers continue to build their capabilities throughout drug development and manufacturing to adapt to these changing industry demands. They are updating their practices with innovations such as more sophisticated manufacturing processes that work faster, technology advances such as continuous manufacturing, and concepts such as risk-based monitoring and quality by design.

References

  1. 2016 Nice Insight Contract Research - Preclinical and Clinical Survey (CRO Outsourcing survey) and Nice Insight 2016 Contract Development & Manufacturing Survey (CDMO Outsourcing survey), January 2016.
  2. Dose CMOs by the Numbers: Composition, Size, Market Share, Profi tability and Outlook. PharmSource. August 2015.
  3. Miller J. CMO Consolidation Pace May Slow Down. Pharmaceutical Technology. Jan. 6, 2016. Accessed at: http://www.pharmtech.com/cmo-consolidation-pace-may-slow-down

To learn more about Nice Insight contact Nigel at nigel@thatsnice.com or visit www.niceinsight.com and the annual study websites: clinical services at www.niceinsightcro.com, contract development and manufacturing atwww.niceinsightcdmo.com, pharmaceutical excipients suppliers at www. niceinsightexcipients.com and pharmaceutical equipment (products, systems and services) at www.niceinsightpharmaequipment.com

 

Survey Methodology

The Nice Insight Contract Development & Manufacturing Survey is deployed to outsourcing-facing pharmaceutical and biotechnology executives on an annual basis. The 2015-2016 report includes responses from 587 participants. The survey is comprised of 225+ questions and randomly presents ~50 questions to each respondent in order to collect baseline information with respect to customer awareness and customer perceptions of the top 123 CDMOs servicing the drug development cycle. Four levels of awareness, from “I’ve never heard of them” to “I’ve know them very well” factor into the overall customer awareness score. The customer perception score is based on six drivers in outsourcing: Quality, Innovation, Regulatory Track Record, Aff ordability, Productivity, and Reliability. In addition to measuring customer awareness and perception information on specifi c companies, the survey collects data on general outsourcing practices and preferences as well as barriers to strategic partnerships among buyers of outsourced services.

The Nice Insight Contract Research - Preclinical and Clinical Survey is deployed to outsourcing-facing pharmaceutical and biotechnology executives on an annual basis. The 2015-2016 report includes responses from 586 participants. The survey is comprised of 200+ questions and randomly presents ~50 questions to each respondent in order to collect baseline information with respect to customer awareness and customer perceptions of the top 74 CROs servicing the drug development cycle. Four levels of awareness, from “I’ve never heard of them” to “I’ve know them very well” factor into the overall customer awareness score. The customer perception score is based on six drivers in outsourcing: Quality, Innovation, Regulatory Track Record, Aff ordability, Productivity, and Reliability. In addition to measuring customer awareness and perception information on specifi c companies, the survey collects data on general outsourcing practices and preferences as well as barriers to strategic partnerships among buyers of outsourced services.