Covance CEO Joe Herring is outspoken on the problems in drug development. And this was never more evident than on last week’s Q4 results call. Asked what Big Pharma is up to in drug discovery, Herring laid it out bluntly:
“The clients are in complete disarray.”
He moderated his tone within seconds, clarifying that “disarray” was too strong a word. “Their model is evolving,” was the more banal phrase on which he quickly settled. But it’s clear Herring, like many others, still sees fundamental failings in the drug development process.
“It’s hard to find a business process that’s more bloated, broken than drug development. The single biggest issue is that people continually don’t have facts and data for decision-making,” he said later in the call.
Covance, of course, thinks it has the tools to fix the bloated, broken world of drug development. It’s biggest clients are already benefiting from these tools - which mine data to guide trial site selection and other choices - but they’re too manually intensive to scale. This is where IT investments come into play.
“On the back of these investments, we will be able to do that with the push of a button. It will allow us to provide the data, analysis and consulting for a broader range of clients. And maybe even sell that as a package product in some way, whether they use Covance or not,” Herring said.
The problems continue to mount up for pharma and CROs in India. And vendors are still feeling the knock on effects. Waters, which along with Sigma-Aldrich reported weakness in India early in fiscal 2012, ended the year with the former growth driver continuing to under perform.
“Sales in India were lighter than we had hoped as local currency weakness, recent drug manufacturing and CRO issues, combined with government inertia, have contributed to slower business momentum,” Douglas Berthiaume, CEO of Waters, said.
Waters is predicting the market will improve in 2013. But it isn’t the first time its CEO has said better days are coming, a fact he acknowledged to investors. “I know this is getting to be a little bit of a broken record; we’re pretty confident that it’s going to change,” Berthiaume said.
The Indian government slipped this document out in the run up to Christmas. It’s a list of all biopharma sponsors and CROs involved with clinical trials in which patients died from 2009 to 2011. All deaths - not just those linked to drug-related adverse events - are included. The second part of the document covers which companies have paid compensation, and how much they’ve had to cough up. We now know that total deaths in clinical trials were down again in 2012, but drug-related adverse event deaths were up from 16 to 20. When the Indian parliament resumes, politicians are likely to push for more information on the 2012 figures, particularly given the outspoken statements by the Indian Supreme Court.
When India said it would increase pharma exports to $25bn by 2014 it looked a big ask. It still does, but accelerating growth last year offers encouragement. In 2011 Indian exports of drugs and fine chemicals grew 30%, pushing the total well past the $10bn barrier.
There is still a long way to the $25bn goal though. Exports must more than double over three years. If the 30% growth rate is maintained - and exchange rates remain similar - India will hit its target. But - as an Indian minister said - China, Brazil and other emerging economies provide stiff competition.
Increasing client concentration now stands alongside death and taxes as an inevitability for the big CROs. Each quarter brings a bigger number. And everyone expects the rise to continue.
Everyone knows why too. It’s the strategic deals, stupid. More-and-more work is being funneled into the hands of fewer-and-fewer CROs. With each multi-year deal the proportion of business coming from top five clients edges a little higher, from one-quarter, past one-third, and so on.
Is that the only story though?
It wasn’t always this way. Throughout most of the 2000s CROs became less-and-less reliant on their top five accounts. In 2002 Icon derived a whopping 60% of its sales from just five clients. By 2009 the figure had dropped to 27%. Parexel and Kendle saw similar precipitous falls.
Why? Biotech funding is one possible answer. When Icon was relying on five clients for 60% of its sales back in 2002 the venture capital community pumped $3.3bn into biotech companies. By the time Icon halved its reliance on its big clients in 2007 VCs were investing $5.6bn in biotech.
Of course, 2007 was the high watermark. Since then biotech VC funding has faltered, dipping back below $4bn in 2009. And as VC funding has fallen, client concentration has risen. Strategic deals have pulled concentration up, but the dilutive effect of biotech business has lessened too.
Unconvinced? Check out the graph.
The red line shows the rise and fall of biotech VC funding. The blue line shows the fall and rise of CRO client concentration*. Okay, it’s far from a perfect inverse correlation - there are too many complicating factors for that - but the year after VC funds peaked, client concentration troughed.
As it takes time for biotechs to spend cash it seems likely the bulk of funds invested during the peak year of 2007 were spent in 2008. Buoyed by biotech business, client concentration levels at CROs hit historic lows. Since then though it’s been up, up, up for client concentration levels.
But, if biotech was to boom once again, could it check the rise? Maybe slightly, but the upward pressures are probably too big. When a company adds $2.2bn to your backlog it doesn’t matter how vibrant the biotech scene is, client concentration is going to rise.
And the upward pressures are poised to get bigger. As Covance CEO Joe Herring said recently the Lilly deal is worth a minimum of $160m a year. R&D spend at Lilly is upwards of $5bn a year.
Digging a little deeper into that $5bn would more than offset even a strong biotech VC recovery.
*Data for the blue line was gathered from SEC filings from Parexel, Covance, Icon, PharmaNet, Kendle, Quintiles and PPD. It’s an incomplete and imperfect record but gives an indication of how client concentration has ebbed and flowed over the past 15 years.
I’ve spent most of August back in the UK, the longest I’ve spent in the country since leaving for France in 2008. And it’s been great. England on a sunny day - yes, they do happen - is wonderful place. Work continues apace though. Here’s a selection of articles from the past month: