The need for better drugs at better costs and timelines has become the need of the hour globally. With changing worldwide demographics and the challenges it has put on healthcare budgets, there has been a thrust on curbing healthcare costs and therefore drug expenditures by the governing bodies. This has compelled the traditional pharmaceutical industry participants to look at their value chain and strategies that can optimize their efficiencies effectively for current and future operations.
A combination of powerful forces has triggered a cascade of challenges for the pharmaceutical industry exerting pressure to identify methods to grow their product pipelines in order to reach revenue demands and accelerate drug development at optimal cost structures.
Overview
The outsourcing services market, pegged at US $33bn and growing at 10% has exhibited a consistent double-digit growth for the past five years. Outsourcing services have achieved penetration across the entire industry value chain and now comprises of seven segments.
The evolution and establishment of outsourcing as a routine practice by the pharmaceutical industry in select major segments has also contributed towards developing a second degree of segmentation into smaller specialized niches that are being targeted by activity specialists to provide a higher degree of super- specialization. The limited overlap across value chain components also substantiates the transformation of this domain from being a market for vertically integrated generalists to fragmented specialists that focus on niche areas even within each market segment.
Clinical Research with a 29% share of the market is the single largest segment contributing to more than one-fourth of the revenues in this industry followed closely by dosage form manufacture and API manufacture at 26% and 24%, respectively.
The market however has a long way to go when it comes to deeper penetration and acceptance into each value chain component. The more established segments like API manufacture and clinical research have acquired more than 30% share of their potential, which also reflects in their contribution to the total outsourcing revenue. However, emerging segments like basic research and developmental activities for drug substance and dosage form are yet to cross the 20% threshold of their total potential.
Consequently, the outsourcing industry still averages at about 24% of the estimated total potential for outsourcing - an indicator of the magnitude of opportunity in this area that remains untapped.
Experts are confident that this long journey towards optimal outsourcing across the value chain segments is getting the right boost and acceleration through the realization that companies are increasingly assessed by the way they create values and not by what they own. A focus on core competencies and accessing external expertise for this value creation is fast becoming an attractive value proposition.
Market Segments Basic Research Services
The world market for basic research services is US $3.96bn growing at 22.7% year on year. This includes expertise and capabilities offered for the discovery of revolutionary new leads and their development in new drug candidates.
Therapy area assumes a vertical segmentation of the drug discovery process allowing an integration of skills and technologies needed across the process points for a particular disease in drug discovery. The technology platforms however, span the therapy areas allowing a horizontal segmentation using process points that can be utilized across the various therapy areas. Current market dynamics suggest that disease focus is the major contributor. Quite rightly so - over the past five years, therapeutic area-based services have managed to acquire an edge in the revenue contribution. With the advent of revolutions in genomics, proteomics and other technologies the scales are most like to tip in favor of technology platforms in the coming years, as the race to have platforms that can be customized for research programmes across various disease areas heats up.
Logical extensions to the new focus of drug discovery can also be derived from the way the revenues are grouped by disease areas - Oncology / Hematology and Autoimmune and Inflammation are the centre point of most of the research programmes amongst pharmaceutical majors. These areas bring in nearly 65% of the revenues into the basic research services segment.
Similarly, from traditional requirements in screening tools and compound libraries in outsourcing, genomics and genomic supplies currently account for nearly half the revenues brought in by technology platform-based outsourcing - quite in line with the current rush to acquire the deluge of genomic targets being spewed out by the genomics project. It is anticipated however that while genomics is providing the numbers in terms of novel targets to be researched, the bottleneck has not been removed but is merely moving towards lead screening and lead optimization, which could very well re-emerge, as the potential opportunity area in the near future.
Focus areas
Outsourcing within these broader areas is balanced with regards to the bigger players in the pharmaceutical industry. However, the more recent outsourcing objectives are predictably in technology platforms with the advent of high throughput screening, genomics, proteomics, and the establishment of the more mature platforms like delivery technologies that are fast becoming tools for ever greening of patents, differentiation and extension of product monopolies for research based pharmaceutical players given the increasing pressure tactics being used by generic players to challenge the patents. The second tier companies are taking on where the biggies have left off - focused on therapy area-based outsourcing with oncology being the unchallenged area. The interest areas for biotechnology players in contrast is on technology platforms especially chemistry and chemistry based technologies - a realization of supporting their ambitious biotech dreams with the more achievable small molecule drug discovery programmes.
Trends
Pharmaceutical majors dominate all verticals and have the highest contribution to revenue generation in the cardiovascular segment.
oAverage payouts made across the industry are the highest for outsourcing in the following areas:
u Broad based screening technologies and tools,
u Oncology and
u Genomic targets
Second tier players focus on segments such as Autoimmune and Inflammation, Central Nervous System which account for 60% of the total outsourcing budget of the mid-sized players' universe
Analysis of the cumulative revenue generated by this segment reveals 64% of the value was generated in the last five years. The share ranges from 35% - 40% for the established big companies in the pharmaceutical industry and moves up to nearly 100% for the mid-sized or niche players in the industry that have started utilizing the outsourcing advantage only recently and have much smaller outsourcing budgets than the bigger players to grow on.
Clinical Research Services
The US $9.57bn world market for contract clinical research services growing at 13.4% includes pre-clinical and phase I, II, and III clinical services provided by contract research organizations (CROs) to pharmaceutical and biotechnology drug developers. Pre-clinical studies include toxicology and other safety studies, conducted both in vitro and in animal models. Phase I studies evaluate drug safety, determine safe dosage ranges, and identify side effects in small human groups of 20 to 80 volunteers. Phase II tests measure effectiveness and further evaluate safety in large groups of 100 to 300 patients. Phase III trials confirm effectiveness, monitor side effects, and compare the drug to other commonly used treatments in large patient groups of 1000 to 4000 or more individuals.
The Clinical research segment currently comprises more than 1,000 companies, of which two thirds are based in the U.S. The segment derives most of its revenues from U.S. based projects. Europe and Asia are also important areas for CRO activity and the trends that affect industry players tend to operate on a global rather than regional basis.
This is due primarily to the status of U.S. as the world's largest drug market and the favorable conditions it offers for contract research. The other regions see a slight decline or status quo in their market shares. Although Asia will benefit from increases in clinical research activity, particularly in China and India, these revenues will remain relatively low in comparison to overall CRO sales because of the extremely low currency valuations in these regions. South America and Africa are beginning to account for a small fraction of contract research fees. Like Eastern Europe and parts of Asia, these regions offer the ability to conduct clinical trials at a fraction of U.S. and Western European costs, while providing high quality patient populations that lead to high quality data. Many of the leading CROs including Quintiles, Covance, Omnicare, and Parexel are active in these regions and often acquire local firms.
Competition remains high with more than 1,000 companies offering various services. These range from small firms with revenues under $1 million to large, publicly traded.