Contract Services Make a Comeback Jim Miller - - PowerPoint PPT Presentation

Contract Services Make a Comeback

Jim Miller

PharmSource-Pharmaceutical Technology Breakfast November 15, 2010

Contract Services Make a Comeback?

Jim Miller

PharmSource-Pharmaceutical Technology Breakfast November 15, 2010

Overview

Agenda

 Industry performance  Performance drivers  Industry consolidation  Final thoughts

Key points

 Gradual but choppy

improvement in business

 Supply base

consolidation under way

 Industry becoming more

intensely competitive

3

4

• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25% 30%

CMC API CLIN EARLY

Year-Over-Year Revenue Change

Contractor Performance

07 H1 07H2 08 H1 08 H2 09 H1 09 H2 10 H1

Industry performance

Some recovery, but early development lags

Industry performance

Early development – Early Warning?

 Too much capacity

– Pharma in-house & CRO – Pharma keeps work in

 Prices down < 30%  Clients delaying high

value studies

 20% fewer compounds

entering development

 “Pig in the python”

– Fewer preclinical compounds means less CTM and approvals

 Facility closings and

layoffs presage similar CMC challenges

5

Performance drivers

R&D spending is flat

20 40 60 80 100 120

06 Q1 06 Q2 06 Q3 06 Q4 07 Q1 07 Q2 07 Q3 07 Q4 08 Q1 08 Q2 08 Q3 08 Q4 09 Q1 09 Q2 09 Q3 09 Q4 10 Q1 10 Q2

Index

R&D Spend Index

07 Q1 = 100

Global Self-Sustaining Breakout Early 

External finance-dependent companies not recovering

– Breakout – Early



Global pharma better

– Suspect less goes to products vs. partners – More outsourced



Note: Q4 spend bumps due to stock option/bonus expense

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Performance drivers

New funding directed toward late stage

$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 $5.0 09 Q109 Q209 Q309 Q410 Q110 Q2 Public-Early Public-B/O VC 20 40 60 80 100 120

Cash Position Index

Q1 2007 = 100 Breakout Early Stage 7 Source: PharmSource Lead Sheet, public filings

Performance drivers

Poor returns threaten VC availability

$0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 Funds Raised - $ billions

VC Fundraising

Quarterly

• 10%
• 5%

0% 5% 10% 15% 20% 25% 30% 35%

00 01 02 03 04 05 06 07 08

Returns on VC Investment

Pharma Biotech All VC 8 Source: National Venture Capital Association, Cambridge Associates

Performance drivers

Low NME approvals hurt CMO industry

42 34 27 36 28 63 41 49 45 57

20 40 60 80 100 120

2006 2007 2008 2009 2010

Number of Approvals

NDA Approvals by FDA

Outsourced In-house Unknown

 High % of older APIs

among 2010 approvals

– Generics companies manufacture in-house

 High safety and efficacy

barriers for NME approvals

9 40% 43% 33% 32% 40%

• % above bar is % of approvals outsourced.
• Source: FDA data, PharmSource analysis

$0.0 $5.0 $10.0 $15.0 $20.0

Capital Expenditures

$0.0 $0.5 $1.0 $1.5 10

Global Self-Sustaining

Performance drivers

Global pharma capex declining

 Global pharma capex

decline suggests more

• utsourcing in future

– PharmSource analysis indicates more

• utsourcing of small

molecules

 Mid-size companies

more willing to invest

Performance drivers

Factors affecting future outlook

Positive factors

 General economic recovery  Positive industry growth  Exchange rates  Global pharma investments

in early stage companies

 Global pharma commitment

to outsourcing

Negative factors

 Restructuring of pharma

pipelines

 Difficult approval

environment

 Government spend cutbacks

in EU and US

 Reduced availability of VC

finance

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Supply base consolidation is major trend

“We want to work with a smaller number of suppliers”

Richard Spoor, SVP Global Procurement, Merck & Co.,

DCAT Sourcing Summit, November 3, 2010

Perceived benefits of reduced supply base

 Improved pricing  Better governance  Tighter integration  Continuous improvement

and innovation

 Reduced sourcing and

• versight OH expense

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Industry consolidation

Clinical research initial focus of consolidation

Pharma CRO Service

sanofi Covance P1-P4, lab, preclin Lilly Covance P1-P4, lab, preclin Lilly Quintiles Site mgmt-Americas Lilly Icon Site mgmt - Europe Lilly Icon Data mgmt – Europe Lilly i3 Data mgmt - US Lilly Parexel Site mgmt - Asia GSK Parexel Multiple CR services GSK PPD Multiple CR services BMS Icon Multiple CR services BMS Parexel Multiple CR services Eisai PPD Multiple CR services Otsuka Covance Multiple CR services

 Why focus on clinical?

– Few hard assets; mostly staff – Fluctuations in resource demand – In-house inefficiency/ poor operating skills – Globalization of trials – Need for IT skills – Longer history of

• utsourcing and CRO

relationships

13 Source: public reports

Industry consolidation

CRO industry is consolidating

Q 15% CVD 10% PPD 9% PRXL 7% Icon 6% KNDL 3%

INC 2% RPS 1%

Others 47%

CRO Market Share

$14 B Market

 Top 6 companies

account for 50% of industry revenues

 Largest CROs gaining

momentum at expense

• f mid-size companies

 A sign of industry

maturity

14 Source: public financial reports, PharmSource estimates

Industry consolidation

Backlog growth reflects consolidating share

$0 $2 $4 $6 $8 $10 $12 $14 $16 $18

CRO Backlog

CVD PPD PRXL ICON KNDL 6 Other

 Largest CROs enjoy

greatest backlog growth

– Multi-year strategic deals – Preferred providers – Larger studies

 Smaller CROs treading

water

– Some leaving altogether, e.g. MDS

15 Source: public financial reports

Industry consolidation

Top 5 CROs gaining market share vs. next 5 CROs

Icon (5) PRXL (3) CVD (2) PPD (1) KNDL (7)

MDS (4)

Omni (8)

PharmaNet (6)

$- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 05 06 07 08 09 Revenues - $ million

Revenue Performance of Top 8 Public CROs Since 2005

16 Note: Quintiles (# 1 overall) and PRA (#7 overall) went private 2006-7 Source: public financial reports

Industry consolidation

Covance: the power of scope and scale

sanofi-aventis

 Acquired 2 sites for $25 million  Received take-or-pay contracts

worth $1.2 billion

 Named sole source for central

labs – worth $1 billion

17

Lilly

 Acquired1 site for $50 million  Received take-or-pay contracts

worth $1.6 billion

Why Covance?

 Scope of services – Preclinical – Clinical – CMC  Scale of operations – Largest player in preclinical & central labs – Global site network  Performance record in

existing relationships

 Financial strength

Industry consolidation

Contract manufacturing faces big hurdles

Demand side impediments

 Supply chain risk fears  Large fixed asset base  High cost of closing facilities  Emerging markets expect

local presence

 Technologies viewed as

strategic

Supply side impediments

 CMO capabilities limited

relative to needs

– Technologies – Logistics & IT  CMO financial stability and

strategic commitment

 Networks not sufficiently

global

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Lab and clinical supply services face fewer impediments

Final thoughts

 Don’t expect big pipeline-driven improvements

– Funding, portfolio restructuring will limit pipeline growth

 More outsourcing by global pharma will drive industry

• pportunity

– But will favor larger CRO/CMOs with broader capabilities

 Gradual but steady shift toward emerging markets

– Following the revenue growth

 No longer a “nice little business”

– Entering an aggressively competitive phase

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PharmSource Market Intelligence Services

 PharmSource Lead Sheet  PharmSource ADVANTAGE  PharmSource PRISM  Custom consulting services

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