
A leaner, but more focused Cambrex (East Rutherford, NJ) following its $460-million sale of its biopharmaceutical and bioproducts business to Lonza (Basel, Switzerland) in 2007, is banking on growth in contract manufacturing of small-molecule active pharmaceutical ingredients (APIs) but with a decidedly valued-added offering. Although contract manufacturing of APIs and intermediates has long been a mainstay of the company, Cambrex is emphasizing value-added services such as drug-delivery technologies and a focus on contract manufacturing of specialized APIs such as high-potency compounds and controlled substances as part of its growth strategy.




Cambrex is led by Steven Klosk, who became CEO and president of Cambrex in May 2008. Klosk held various senior-level positions with Cambrex beginning in 1992 and was most recently executive vice-president and chief operating officer of Cambrex before assuming the top post last year. He replaced James A. Mack, president and CEO since 1995, who retired in 2008.

Cambrex’s exclusive focus on small molecules follows two important recent decisions: the decision to exit the biologics market and divest its bio business to Lonza in 2007 and a decision not to pursue becoming a specialty pharmaceutical company, something it considered in 2006. That left the company with certain core businesses, its generic API business and custom API manufacturing business, which included capabilities in two niche, but higher valued segments: high-potency APIs and controlled substances.




In seeking to grow those businesses, Klosk had to devise a strategy to overcome certain market weaknesses, namely industry-wide overcapacity for large-scale manufacturing and increased competition, particularly in generic APIs, from suppliers in India and China.

“To stay competitive, Cambrex must differentiate its offering to provide value to customers while avoiding direct competition with low-cost international API suppliers,” says Klosk. A case in point is the market for controlled substances. “The market is less competitive because of the high level of regulation from such agencies as the US Drug Enforcement Agency and the US Food and Drug Administration and is not subject to Asian competition.” Cambrex’s controlled-substances business has approximately 10 products, and had revenues of roughly $15 million for 2007.

In its generic API business, Klosk also emphasizes the company’s selection of products. “Our focus is typically not on blockbuster APIs, but on niche products where the competition is reduced.”

Cambrex is also offering valued-added services in drug delivery to differentiate its position in the generic API market, and taking its generic API business beyond its exclusive focus on API manufacturing. “We see terrific growth potential in such areas as enhanced forms of generic APIs with improved delivery characteristics,” says Klosk. Cambrex has a technology position in several areas, including transdermal, thin-film, transmucosal, polymeric drug delivery, and taste-masking.

In 2007, the company had roughly $15+ million in revenues from its drug-delivery business through five over-the-counter products, a good start from a business that that was just formed three to four years ago. To support the business, Cambrex added new formulation-development laboratories at its facility in Charles City, Iowa, in 2008. It is currently working on 12+ APIs in its formulation facilities.

Cambrex is also seeking to differentiate itself by investing in high-potency API manufacturing. Klosk says the company has had capabilities in manufacturing high-potency APIs since 1999 and can manufacture product from laboratory to commercial scale. In 2008,Cambrex added a new 11,500-ft

 facility with five process development/kilo laboratory production suites for high-potency APIs as well as enhanced facilities for analytical development and quality-control activities. It also expanded its high-potency micronization facility in Charles City. It now offers small-scale to commercial-scale micronization for high-potency APIs.




Cambrex made other investments in its small-molecule API business in 2008. It invested roughly €20 million ($26 million) to increase the capacity of its API finishing facility in Milan by 20–30%. The expansion was completed in 2008 and is now operational. The company also invested $20 million for setting up a mid-scale API facility in Karlskoga, Sweden. The facility is scheduled to become operational in the first quarter of 2009.

Cambrex also added to its small-scale development capabilities through the acquisition of Prosyntest (Tallinn, Estonia), now called Cambrex Tallinn. ProSyntest was formed in 1990 as a spin-off from the Tallinn University of Technology. “This acquisition provides additional manpower to work on proprietary products and early-stage development molecules, including route selection and chemical process-development capabilities,” explains Klosk. With the acquisition, Cambrex gained laboratories and a pilot-plant facility. Cambrex had worked with the Estonian facility for roughly 15 years and was familiar with the company’s capabilities, says Klosk. The facility is located near Cambrex’s Karlskoga’s facility.

Cambrex’s selection of a contract manufacturer in Eastern Europe fits into the company’s plans and also represented a decision, for now, not to seek acquisitions in Asia. “At this time, we have no plans to build facilities in those markets, but we are always alert to market trends in both of these areas and have made numerous exploratory trips to scout opportunities.”

On an industry basis, Klosk remains bullish on the market for custom manufacturing of APIs. “In terms of the short-term and long-term outlook for custom manufacturing, we see the market growing at 5-7% per year with the primary reasons for growth being the continued consolidation of Big Pharma facilities and their continued reliance on the outsourcing of manufacturing and the growth of small pharma and biotech companies that must outsource their new compounds.”

Articles

Pharma Partner Focus

Cambrex CEO Steve Klosk looks to higher valued-added segments such as high-potency actives, controlled substances, and drug-delivery technologies to drive growth.

Cambrex Keeps Focus on Small Molecules


 Several contract manufacturers announced capacity and service expansions at this year's InformEX. 

 

 (Craigavon, Northern Ireland) has expanded its GMP (good manufacturing practices) and non-GMP radiolabeling services with plans to double its capacity over the next several months, according to a company press release. The company also launched its solid-state chemistry capabilities for the North American market. Almac Sciences is the contract manufacturing arm of the Almac Group. The company is investing $100 million in new North American headquarters, which are scheduled to be completed by 2010. 



 (Detroit), a contract manufacturer, added parallel synthesis and calorimetry instrumentation at its Riverview, Michigan, active pharmaceutical ingredient (API) development and manufacturing site. The new equipment gives the company the ability to assess heats of reaction for the safe scale-up of processes. The news system allows up to four experiments to be conducted simultaneously using a broad range of reaction conditions. The new safety enhancements also include a thermal screening unit to evaluate the onset of thermal decomposition of reaction components. 

 Ash Stevens will also bring on line a new three-reactor processing suite designed for hydrogenation and additional manufacturing capacity. It is scheduled to come on line in the third quarter of 2009. The new suite will house a 50-gallon glass-lined steel hydrogenation reaction vessel and a pair of 100-gallon vessels. 

 The company also reports that it has completed the program requirements for and is now certified as compliant with the Synthetic Organic Chemical Manufacturers Association’s “ChemStewards” program.  The program incorporates and evaluates continuous performance improvement in environmental, health, safety, and security measures. 



 (Carey, NC) expanded its research and development laboratory in Carey, North Carolina with the launch of CiVentiAnalytical, an analytical laboratory operating under good laboratory practices and current good manufacturing practices. In addition to the analytical laboratory, the company is adding a new active pharmaceutical ingredient and intermediates pilot plant in Hyderabad, India, to manufacture large-volume products.



 (Parsippany, NJ) joined the Green Chemistry Institute Pharmaceutical Roundtable of the American Chemical Society (ACS) as an associate member. The Pharmaceutical Roundtable is a partnership between the ACS Green Chemistry Institute and pharmaceutical companies. It was formed in 2005 to promote sustainable manufacturing of active pharmaceutical ingredients. 

 

 (Ahmedabad, India), a contract manufacturer, announced capital investments of more than $33 million: $20 million in the current financial year and $13 million planned for fiscal year 2009, which begins in April. Investments include the addition of a high-potency facility near Dishman’s headquarters in the district of Ahmedabad in India and a new plant in Shanghai. 

The 4300-m

 facility in India caters to cytotoxic and non-cytotoxic highly active substances. The plant in Bavla, India,  will be managed and operated by the Dishman subsidiary, Switzerland-based Carbogen Amcis, and is scheduled to be operational in mid-2009. 

 The facility in Shanghai will include a production plant, a warehouse, dedicated on-site utilities, and administrative/quality control offices. Construction of the facility is underway and is expected to be fully staffed and operational by the second quarter of 2009. 



 (Holywell, Wales), a contract manufacturer of active pharmaceutical ingredients (APIs) and intermediates, has completed the initial phase of a three-year expansion and upgrade program at its Holywell, Wales, facilities. The full investment program includes a new API finishing suite, reactor train alignment, and increased product isolation capacity. The company also appointed Peter Chinigo, formerly with DSM’s emerging pharma division, to lead business development in the United States, and the consultant Jim Bruno as an US agent. 



 (Mumbai), the contract development and manufacturing division of Piramal Healthcare, India’s fourth largest pharmaceutical company,  is on schedule to commission a formulation-development and clinical trial materials (CTM) supply center in Ahmedabad, India. The center will have GMP (good manufacturing practices) supply capabilities beginning in March 2009. The center has a total footprint of 50,000-ft 

, of which only half will be built on in Phase I of the project. The center will initially be staffed with 34 formulators and 48 analytical chemists with plans to increase this staffing to a total of 180 over two phases. 



 (Manchester, England), a pharmaceutical catalyst technology provider, recently received a third round of financing from international investors to enable more focus on bulk-scale operations. The company’s bulk “QuadraPure” and “QuadraSil” scavengers are available in hundreds of kilograms, and production of metric ton lots are scheduled to be on line later this year. These products are used for metal extraction and purification technology for pharmaceutical manufacturing. Reaxa is also planning to establish low-cost production of its leading products with partners in India, according to a company press release. 



 (St. Louis, MO), a business segment of SAFC, which is part of Sigma-Aldrich (St. Louis), started operations at its 7000-ft 

 laboratory complex in Carlsbad, California, adjacent to the company’s existing viral-substance production facility. The new complex includes a dedicated polymerase-chain-reaction (PCR) facility and a tissue-culture laboratory and stability suite supported by microbiology and regular testing laboratories. The new PCR facility consists of separate suites with uni-directional personnel flow for sample processing, reaction assembly, and PCR amplification. In addition to PCR assays, the unit is capable of performing cell-based, molecular, and immunological assays as well as analytical assays using high-performance liquid chromatography. 

The commissioning of the new laboratories follows SAFC’s 2008 announcement of a $12-million expansion at the site to construct two fully segregated manufacturing suites, which are scheduled to be operational by the end of 2009. These suites will add 8000-ft

 of manufacturing space to enable 100-L batch production in stirred tank bioreactors and 500–1000-L batch manufacturing in disposable reactors. The expansion adds commercial manufacturing capacity within the current 44,000-ft

 site and is planned to be Biosafety Level 2 compliant, which allows for manipulation of human pathogens. 



 (Shanghai), a contract research and manufacturing organization, began validation at its new 350,000-ft

 commercial manufacturing plant, located at the company’s research and commercial manufacturing site in the Jinshan area of Shanghai. The addition of the new plant quadruples the manufacturing capacity at the Jinshan site, which also includes a 220,000-ft 

 CGMP (current good manufacturing practices) process-development and manufacturing plant. The plant features 18 reactors with capacities ranging from 8000 to 20,000 L. It also has cryogenic capability as low as 78 degrees Celsius with 10,000-L scale. Annual capacity of the plant is projected at 50 to 100 metric tons. Other plant features include two isolated API finishing areas, each classified at 100,000; high-temperature capability; GMP kilo laboratories (classified at 100,000 for handling production of active pharmaceutical ingredients), and high-pressure reaction capability.

Wuxi AppTech introduced a new global procurement services (GPS), which will assist customers in navigating the challenges of purchasing low-cost commercial reagents from qualified vendors in China. The GPS services also include quality control testing, certificates of analysis, repacking, relabeling, and export services. 

 The company also launched rapid microbial testing services through use of the “BacT/Alert” 3-D microbial detection system.  The system detects microbial growth based on the production of carbon dioxide by microorganisms rather than visual turbidity as in conventional methods, so there is no need for extended incubation to measure sample matrix interference.

Contract Manufacturing

Several contract manufacturers announced capacity and service expansions at InformEx, the exhibition of custom and batch manufacturers, held in San Francisco, last week.

Informex Report: Contract Manufacturers Expand


The proposed $68-billion merger of Pfizer (New York) and Wyeth (Madison, NJ) would create a pharmaceutical giant with estimated annual sales of $70 billion, adding to Pfizer’s already leading position as the top global pharmaceutical company. Analysts, however, point out that the deal may fall short of the mark for mitigating one of Pfizer’s pressing revenue needs: the anticipated loss of revenue relating to the pending expiry of the US patent for “Lipitor” (atorvastatin), Pfizer’s top-selling drug. The deal, however, provides Pfizer with much needed diversification, particularly in biologics, in a current product portfolio and pipeline that is dominated by small molecules.




In announcing the merger last week, Jeffrey B. Kindler, chairman and chief executive officer of Pfizer, pointed to the opportunity the deal presents in creating a powerhouse in large and small molecules. “The combination of Pfizer and Wyeth provides a powerful opportunity to transform our industry,” he said in a company press release. “It will produce the world’s premier biopharmaceutical company whose distinct blend of diversification, flexibility, and scale positions it for success in a dynamic global health care environment. The new company will be an industry leader in human, animal, and consumer health. With our combined biopharmaceuticals business, it will lead in primary and specialty care as well as in small and large molecules. Its geographic presence in most of the world’s developed and developing countries will be unrivaled.”

Pfizer also sees the merger as an opportunity to address the anticipated revenue fall when its and the industry’s top-selling drug Lipitor faces US patent expiry in 2011. With global revenues of $12.7 billion in 2007 and $12.4 billion in 2008, Lipitor accounted for more than 28% of Pfizer’s total prescription pharmaceutical sales in 2007 and 2008, according to the research and consulting firm Datamonitor.

“Pfizer [is] one of the pharmaceutical  companies expected to be hardest hit by the impending ‘patent cliff’ of patent expiries between 2008 and 2012 and thus subject to generic incursion, [so] shoring up its mature product portfolio is [a] priority,” said Datamonitor pharmaceutical senior analyst Simon King in a Datamonitor press release.“Most significant for Pfizer is obviously the loss of patent protection for Lipitor, which comes off patent in the US in 2011.”

As Datamonitor points out, however, the proposed Pfizer–Wyeth merger would only slightly lessen the blow of generic incursion over the near term for Pfizer. Based on current Datamonitor forecasts, 38.5% of Pfizer’s 2007 prescription pharmaceutical sales will be exposed to expiry threat during the period 2007–2013 prior to the Wyeth acquisition. Post acquisition, it is forecast that 34.7% of Pfizer–Wyeth’s combined 2007 prescription pharmaceutical sales will be exposed to expiry threat during the period 2007–2013. “Clearly, while the acquisition will dilute Pfizer’s expiry threat slightly, it will not solve the primary underlying commercial challenge faced by Pfizer over the period 2007–2013,” said Datamonitor in its press release analyzing the merger. “This deal gives Pfizer scale but will not resolve the company’s negative pharmaceutical sales outlook,” said King.

Already facing competition in the market from other generic statins, sales of Lipitor fell both in the fourth quarter of 2008 and the full year 2008. Global sales of Lipitor decreased 8% in the fourth quarter of 2008 from $3.4 billion in the fourth quarter of 2007 to $3.1 billion in the fourth quarter of 2008. US sales declined 13% to $1.6 billion, down from $1.9 billion in the fourth quarter of 2007. Full-year global sales of Lipitor declined 2% in 2008 from nearly $12.7 billion in 2007 to $12.4 billion in 2008. In the US, full-year sales in 2008 declined 12% from $7.2 billion in 2007 to $6.3 billion in 2008.

For the full-year 2008, Pfizer reported total revenues of $48.3 billion, essentially flat compared with 2007 full-year revenues of $48.4 billion, despite the loss of exclusivity of “Norvasc” (amlodipine), “Zyrtec” (cetirizine), and “Camptosar” (irinotecan), which collectively decreased revenues by $2.6 billion. Full-year revenues were favorably affected by foreign exchange of approximately $1.6 billion, or 3%, and by the solid performance of many key products. Global pharmaceutical sales fell 1% in 2008 to nearly $44.2 billion from $44.4 billion in 2007.

For the full-year 2008, Pfizer posted reported net income of $8.1 billion, essentially no gain compared with the prior year, and reported diluted earnings per share (EPS) of $1.20, an increase of 3% compared with $1.17 in the year-ago period. This change was primarily attributable to the following: savings associated with  cost-reduction initiatives;  the 2007 after-tax charges of $1.8 billion related to the decision to exit “Exubera” (inhaled insulin); and the favorable impact of foreign exchange. These measures were offset by charges related to “Bextra”(valdecoxib) and other open investigations in the fourth quarter of 2008, an after-tax charge of $640 million resulting from the agreements in principle to resolve certain litigation involving the company’s nonsteroidal anti-inflammatory) pain medicines in the third-quarter 2008, and an increased effective tax rate.

Premerger, Pfizer faced sales contraction at a compound annual average growth rate (CAGR) of –3.5% through 2013 because of key patent expiries, including for Lipitor. Although the merger with Wyeth will mitigate a sales decline, the combined company will still face a decline in sales. Pfizer–Wyeth is forecast to have combined prescription pharmaceutical revenues of approximately $55 billion in 2013 compared with sales of approximately $61 billion in 2008, which is equivalent to a CAGR of –2.3% for 2008–2013, according to Datamonitor. This decline is also due to Wyeth’s exposure to generic-drug competition. Wyeth’s “Effexor ” (venlafaxine) and “Protonix” (pantoprazole) are due to lose patent protection in 2010 and “Tazocin” (piperacillin) lost patent protection in 2007.



Great diversification, particularly in biologics


Pfizer hopes, however, that a combined Pfizer–Wyeth will provide a more diversified portfolio. Under a combined Pfizer–Wyeth, no drug will account for more than 10% of the combined company’s revenue in 2012, according to Pfizer in its company press release. The combined company would have 17 products with annual revenues of more than $1 billion, according to Pfizer. According to Pfizer, the deal would also make the combined company the second largest specialty care provider, with products such as the anti-arthritis drug “Enbrel” (etanercept), the vaccine  Prevnar, the anticancer therapy “Sutent” (sunitinib), the antipsychotic “Geodon” (ziprasidone), and “Zyvox” (linezolid).

Analysts also point to the value of the deal in broadening Pfizer’s drug portfolio, both in terms of drug technology and in areas of therapeutic focus. “Pfizer’s traditional focus has been on small molecules and the cardiovascular market,” says King. “This acquisition allows it to greatly improve its presence in the immunology and inflammation and infectious diseases sectors, and also to integrate Wyeth’s expertise in the biologic and vaccines markets.”

Prior to the acquisition of Wyeth, Pfizer generated over 98% of total prescription pharmaceutical sales from small-molecule pharmaceutical products, based on forecast 2008 sales, according to Datamonitor. A combined Pfizer–Wyeth entity will generate roughly 88% of total prescription pharmaceutical sales from small molecules, illustrating the immediate impact of Wyeth on Pfizer’s biologics and vaccines exposure. Wyeth generated approximately 18% of its 2008 prescription pharmaceutical revenues from therapeutic proteins and 16% from vaccines, according to Datamonitor.

Based on IMS data released by Pfizer, the combined company will be number one in terms of biopharmaceutical revenues in the United States with an approximately 12% market share; in Europe with an approximately 10% share; in Asia (excluding Japan) with an approximately 7% share; in Japan with a 6% share; and in Latin America with a 6% share. 
 
 


Although the merger may have minimal immediate impact on the sales side, “there is a clear opportunity for cost savings through the elimination of duplicative activities in both companies,” said the Datamonitor release. Pfizer expects to create savings of $4 billion by 2012 or the third year after closing. “Likely cost-cutting initiatives within a combined Pfizer–Wyeth entity will continue a policy of cost containment that is already underway at Pfizer,” said Datamonitor. Pfizer says it expects to realize further savings in selling, informational and administrative functions, research and development, and manufacturing.

In announcing its earnings results last week, Pfizer says it will implement a new cost-reduction initiative, which is expected to achieve incremental cost savings of approximately $3 billion, at 2008 average foreign exchange rates, compared with 2008 adjusted total costs of $28.6 billion. The program is expected to be substantially complete by the end of 2010, with the full savings to be realized by the end of 2011. Approximately $1 billion of these savings will be reinvested in the business, resulting in an expected $2 billion net decrease in costs. With this initiative and a recently completed initiative, Pfizer expects to reduce adjusted total costs by about $4.8 billion while absorbing inflation and compensation increases.

As part of this cost-reduction initiative, Pfizer intends to reduce its workforce by approximately 10%. Reductions will span sales, manufacturing, research and development, and administrative organizations. The company also intends to reduce the number of manufacturing sites to 41 from 46 today, as well as reduce its facilities square footage by approximately 15%. In conjunction with this program, Pfizer expects to incur costs of approximately $6 billion on a pretax basis, of which $1.5 billion has been incurred.

In 2009, Pfizer expects to generate revenues of $44.0 billion to $46.0 billion, and adjusted diluted EPS of $1.85 to $1.95, which includes most of the anticipated $1 billion investment intended to create new sources of revenue. This also assumes a reduction in revenues of approximately $3.0 billion compared with 2008 directly related to the strengthening of the US dollar, said the company in the release.



 
Pfizer and Wyeth expect the transaction to close at the end of the third quarter or during the fourth quarter 2009. The proposed transaction is subject to customary closing conditions, including approval by the stockholders of Wyeth and notification and clearance under certain antitrust statutes. In addition, the proposed transaction is subject to Pfizer’s financing sources not declining to provide the financing due to a material adverse change with respect to Pfizer or Pfizer failing to maintain credit ratings of A2/A long-term stable/stable and A1/P1 short term affirmed. There are no other financing conditions to closing in the merger agreement. Pfizer says the transaction will be financed through a combination of cash, debt, and stock. A consortium of banks has provided commitments for a total of $22.5 billion in debt.

Global Feature

The pending merger of Pfizer and Wyeth provides Pfizer with greater strategic diversification, particularly in biologics, but only minimally addresses its generics exposure in the near term.

Implications of the Pending Pfizer-Wyeth Mega Merger

The pharmaceutical industry—and by extension the pharmaceutical services business—was once thought to be immune from general economic cycles, but that's not the case this time. The current global economic crisis, set off by the unwillingness or inability of financial institutions to make funding available to companies, has cut deeply into the prospects for contract research and manufacturing organizations (CROs and CMOs) for 2009 and probably beyond. 

The industry outlook has changed from rosy to glum in a remarkably short period of time. Less than six months ago, we reported that the respondents to the 2008 PharmSource–

 Outsourcing Survey were optimistic about their 2009 prospects. Nearly 70% of participants from contract services companies expected 2009 to be better than 2008, and a similar share of biopharmaceutical and pharmaceutical company respondents expected their outsourced expenditures to grow in 2009. 

The financial crisis is putting an end to those expectations. Service providers that offer early research and development services, including discovery, preclinical toxicology, process development, and clinical-supplies manufacture, are reporting steep downturns in business activity, and a sharp increase in project cancellations and delays. 

The primary culprit behind this gloomy picture is the uncertainty of funding for early-stage companies. Traditional funding sources such as initial public offerings (IPOs), follow-on stock offerings, and debt have nearly dried up. Venture capital flows have held steady at about $1 billion per quarter, but investors are funneling money to companies in which they already have investments rather than spreading it around. That's because they want to ensure that the most promising candidates in their portfolio companies continue to progress, and because new investors would insist on terms that would greatly dilute the equity positions of the early investors.  

To conserve funds, early-stage companies with multiple product candidates are being forced to shelve less developed candidates. They are focusing instead on candidates with the nearest and best prospects for commercial approval or out-licensing. Start-up projects are having a difficult time finding any funding. 

The demand downturn has been compounded by major pharmaceutical companies' efforts to reduce costs even as they increase outsourcing. Big Pharma is exiting entire therapeutic areas and halting early-stage projects in those areas. For continuing programs, they are aggressively looking for ways to cut development expenditures before  demonstrating proof of concept. 

Further, most major pharmaceutical companies have established global sourcing units that are pursuing strategies to reduce outsourcing costs by standardizing processes and reducing the number of vendors that must be qualified, audited, and managed. These programs started five years ago in the clinical CRO realm and resulted in companies reducing the number of CROs they work with by as much as 80%. We expect to see a similar pattern for outsourced formulation and manufacturing services. This changing environment is hitting especially hard those CROs and CMOs that focus on early development because there are fewer candidates and less money to spend. Late-stage development has not been affected as much and contract backlogs at clinical CROs continue to rise. 

It's hard to say how long this environment may last. No one knows how the financial and economic crisis will evolve and when the funding situation for early pharma will improve. The impact on the product pipeline is likely to be longterm, however. When the financial markets were flush with cash, many companies and projects received funding that would not have if proper due diligence had been carried out. They got the green light because venture capital investors had to put their large pools of money to work. Now, products and companies with marginal chances of success (and many that may be promising, as well) are not being funded. Thus, the decline in early-stage compounds could be sustained for several years. 

Moreover, a higher percentage of remaining development candidates will be placed in the hands of major biopharmaceutical and pharmaceutical companies. Most of the largest companies have substantial caches of cash (Pfizer alone has more than $26 billion in the bank). These companies have been eager buyers of promising early-stage companies and licensees of promising products and technologies. They  have bid up valuations to historic levels. Now, with early-stage companies desperate for funding and their valuations collapsing, the cash-rich major pharmaceutical companies are widely expected to step up their acquisitions. 

With less money, fewer compounds, and continuing efforts by major pharmaceutical companies to consolidate the vendor base, we expect the number of CROs and CMOs to shrink considerably. Companies that have depended largely on the venture capital-backed companies will have an especially hard time. Their customers seldom have more than one or two candidates in need of services at any one time, so they must continually replace their customers with new ones. However, those candidates won't be there. 

The survivors will have a strong track record of servicing companies with multiproduct pipelines that can offer repeat business. They will have profitable operations, strong financial positions, and savvy business development skills. Increasingly, those that serve the largest companies will have a global network of operations to support their clients' global ambitions. 

While we don't wish ill on any contract service provider, a shakeout of weaker companies would probably benefit the industry. The CRO–CMO industry has too many participants; lots of new entrants have been attracted in recent years by the growing pipeline and ample funding. In the manufacturing sector, entry has been eased by the willingness of pharmaceutical companies to sell redundant facilities at bargain prices to get assets and employees off of their books. Many of these companies have minimal experience in business development and marketing, no brand equity, and few long-term relationships with better-funded companies. In addition, they are not well-capitalized. We expect a number of them to disappear in the downturn.  

Pharmaceutical companies looking for vendors are advised to carry out careful due diligence on the companies with which they seek to work. Financial condition such as profitability, cash position, and debt-service requirements should be a paramount consideration. Clients should insist on full financial disclosure, even from privately-held companies (contractors should demand the same of venture-backed clients). Strategic due diligence will be important to ensure that the parent company or investor group is committed to the business. The CRO–CMO industry will come out of this stronger in the long run, but it will be painful getting there. 

 is president of PharmSource Information Services, Inc., and publisher of 

Outsourcing Outlook

The financial crisis could lead to consolidation in the contract services industry.

PTSM: Pharmaceutical Technology Sourcing and Management-02-04-2009

Cambrex Keeps Focus on Small Molecules

Informex Report: Contract Manufacturers Expand

Implications of the Pending Pfizer-Wyeth Mega Merger

Survival of the Fittest Companies