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 Key points  Industry performance  Gradual but choppy improvement in  Performance drivers business  Industry consolidation  Supply base consolidation under way  Final thoughts  Industry becoming more intensely competitive 3

Industry performance Some recovery, but early development lags Contractor Performance 30% 25% Year-Over-Year Revenue Change 20% 07 H1 15% 07H2 10% 08 H1 5% 08 H2 09 H1 0% 09 H2 -5% CMC API CLIN EARLY 10 H1 -10% -15% -20% 4

Industry performance Early development – Early Warning?  Too much capacity  “Pig in the python” – Pharma in-house & CRO – Fewer preclinical compounds means less – Pharma keeps work in CTM and approvals  Prices down < 30%  Facility closings and  Clients delaying high layoffs presage similar value studies CMC challenges  20% fewer compounds entering development 5

Performance drivers R&D spending is flat External finance-dependent  R&D Spend Index companies not recovering 07 Q1 = 100 – Breakout 120 – Early 100 80 Global pharma better  Index 60 – Suspect less goes to products vs. partners 40 – More outsourced 20 0 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 Note: Q4 spend bumps due to  stock option/bonus expense Global Self-Sustaining Breakout Early 6

Performance drivers New funding directed toward late stage $5.0 Cash Position Index $4.5 Q1 2007 = 100 $4.0 120 $3.5 100 $3.0 80 $2.5 60 $2.0 40 $1.5 $1.0 20 $0.5 0 $0.0 09 Q109 Q209 Q309 Q410 Q110 Q2 Public-Early Public-B/O VC Breakout Early Stage Source: PharmSource Lead Sheet, public filings 7

Performance drivers Poor returns threaten VC availability Returns on VC Investment VC Fundraising 35% Quarterly $9.0 30% Funds Raised - $ billions $8.0 25% $7.0 20% $6.0 $5.0 15% $4.0 10% $3.0 5% $2.0 0% $1.0 00 01 02 03 04 05 06 07 08 $0.0 -5% -10% Pharma Biotech All VC Source: National Venture Capital Association, Cambridge Associates 8

Performance drivers Low NME approvals hurt CMO industry  High % of older APIs NDA Approvals by FDA among 2010 approvals 120 40% – Generics companies 100 Number of Approvals 40% 32% 33% manufacture in-house 43% 80 63 60 45 57 41  High safety and efficacy 49 40 barriers for NME 42 approvals 20 36 34 28 27 0 2006 2007 2008 2009 2010 Outsourced In-house Unknown •% above bar is % of approvals outsourced. •Source: FDA data, PharmSource analysis 9

Performance drivers Global pharma capex declining  Global pharma capex Capital Expenditures decline suggests more $20.0 outsourcing in future $15.0 $10.0 – PharmSource analysis Global $5.0 indicates more outsourcing of small $0.0 molecules $1.5 Self-Sustaining $1.0  Mid-size companies $0.5 more willing to invest $0.0 10

Performance drivers Factors affecting future outlook Positive factors Negative factors  General economic recovery  Restructuring of pharma pipelines  Positive industry growth  Difficult approval  Exchange rates environment  Global pharma investments  Government spend cutbacks in early stage companies in EU and US  Global pharma commitment  Reduced availability of VC to outsourcing finance 11

Supply base consolidation is major trend Perceived benefits of “ We want to work with reduced supply base a smaller number of  Improved pricing suppliers”  Better governance  Tighter integration Richard Spoor, SVP Global  Continuous improvement Procurement, Merck & Co., and innovation DCAT Sourcing Summit, November 3, 2010  Reduced sourcing and oversight OH expense 12

Industry consolidation Clinical research initial focus of consolidation Pharma CRO Service  Why focus on clinical? sanofi Covance P1-P4, lab, preclin – Few hard assets; mostly Lilly Covance P1-P4, lab, preclin staff Lilly Quintiles Site mgmt-Americas – Fluctuations in resource Lilly Icon Site mgmt - Europe demand Lilly Icon Data mgmt – Europe – In-house inefficiency/ Lilly i3 Data mgmt - US poor operating skills Lilly Parexel Site mgmt - Asia – Globalization of trials GSK Parexel Multiple CR services GSK PPD Multiple CR services – Need for IT skills BMS Icon Multiple CR services – Longer history of BMS Parexel Multiple CR services outsourcing and CRO Eisai PPD Multiple CR services relationships Otsuka Covance Multiple CR services 13 Source: public reports

Industry consolidation CRO industry is consolidating  Top 6 companies CRO Market Share $14 B Market account for 50% of industry revenues Q 15%  Largest CROs gaining CVD 10% momentum at expense Others 47% of mid-size companies PPD 9% PRXL 7% Icon  A sign of industry 6% maturity KNDL RPS INC 3% 1% 2% Source: public financial reports, PharmSource estimates 14

Industry consolidation Backlog growth reflects consolidating share  Largest CROs enjoy CRO Backlog greatest backlog growth $18 $16 – Multi-year strategic deals $14 – Preferred providers $12 CVD – Larger studies $10 PPD $8 PRXL $6 ICON  Smaller CROs treading KNDL $4 water 6 Other $2 – Some leaving altogether, $0 e.g. MDS Source: public financial reports 15

Industry consolidation Top 5 CROs gaining market share vs. next 5 CROs Revenue Performance of Top 8 Public CROs Since 2005 $1,600 PPD (1) $1,400 Revenues - $ million $1,200 PRXL (3) $1,000 CVD (2) $800 Icon (5) $600 MDS (4) KNDL (7) $400 PharmaNet (6) $200 Omni (8) $- 05 06 07 08 09 Note: Quintiles (# 1 overall) and PRA (#7 overall) went private 2006-7 Source: public financial reports 16

Industry consolidation Covance: the power of scope and scale sanofi-aventis Why Covance?  Acquired 2 sites for $25 million  Scope of services – Preclinical  Received take-or-pay contracts – Clinical worth $1.2 billion – CMC  Named sole source for central  Scale of operations labs – worth $1 billion – Largest player in preclinical & central labs Lilly – Global site network  Acquired1 site for $50 million  Performance record in existing relationships  Received take-or-pay contracts worth $1.6 billion  Financial strength 17

Industry consolidation Contract manufacturing faces big hurdles Demand side Supply side impediments impediments  Supply chain risk fears  CMO capabilities limited relative to needs  Large fixed asset base – Technologies  High cost of closing facilities – Logistics & IT  Emerging markets expect  CMO financial stability and local presence strategic commitment  Technologies viewed as  Networks not sufficiently strategic global Lab and clinical supply services face fewer impediments 18

Final thoughts  Don’t expect big pipeline-driven improvements – Funding, portfolio restructuring will limit pipeline growth  More outsourcing by global pharma will drive industry opportunity – 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 19

PharmSource Market Intelligence Services  PharmSource Lead Sheet  PharmSource A DVANTAGE  PharmSource P RISM  Custom consulting services 20