By Kate Hammeke, research manager, Nice Insight
The past decade has been a challenge for custom synthesis providers, no doubt influenced by the drug boom predicted in the 1990s when pharmaceutical companies anticipated 60+ new products per year and forecasted a 15% CAGR. At the time, the expectation was that an increase in the number of new molecules within pharmaceutical pipelines would generate a significant rise in outsourced clinical projects. This belief drove the majority of custom synthesis providers to proactively increase their capacity to cover early-stage product development. Examples of this type of expansion included DSM’s acquisition of Catlytica in August 2000 and Degussa’s (now Evonik Degussa) purchase of Laporte in December 2000. The reality was that predicted growth didn’t materialize, which resulted in reactionary and enforced consolidation. As of July 2011, capacity across the early stages of development still exceeds demand, making further consolidation highly likely.
The reality is that there has been a steep drop in the annual number of new molecular entity (NME) applications since the midnineties. In fact, 2010 saw one of the lowest annual frequencies of NME applications filed (n=23) in the past fifteen years. In addition, the recent spotlight on regulatory compliance and good manufacturing practices (cGMP) — based on quality control issues amongst some major chemical synthesis players — has further dulled pharmaceutical companies’ willingness to outsource products and intermediates beyond the established shortlist of tried and tested vendors. As a result, the pipeline for chemical synthesis projects continues to decline.
Shrinking demand for this service has left many small-scale facilities vulnerable to acquisition by large corporations, thus removing an element of competition from the chemical synthesis service market. For sponsors in need of chemical synthesis providers, the shining light within the sector has been the emergence of low-cost Asian manufacturers. These businesses have taken advantage of lessons that were hard-learned in established markets by joining the contract research and manufacturing industry later. As such, Asian emerging market manufacturers have focused on technology from the outset. Standardized regulatory practices coupled with increasing technical capabilities means these emerging businesses are likely to increase their overall share within the custom synthesis market through their ability to handle more advanced intermediates and APIs rather than just building blocks and early-stage intermediates.
Will Innovation Lead To Partnerships?
Ultimately, the survival of custom synthesis providers depends on the fortunes of their customers — and those customers are looking for ways to improve operating efficiency, which leads to the question: Should custom synthesis providers embrace innovation as a primary strategy for enabling long-term partnerships with sponsors?
Of the 265 CMOs covered in the Nice Insight Brand Index, approximately 127 (48%) offer chemical synthesis as part of their service offering. We averaged the customer perception scores of these businesses to establish benchmarks for outsourcing drivers among chemical synthesis providers. Then, we looked specifically at businesses whose productivity and quality ratings improved across the first three quarters of 2011. We selected these outsourcing drivers because productivity and quality link closely to innovation as a long-term growth strategy, especially considering that these measures allow a sponsor organization to focus on its core competencies while trusting its project is receiving the attention to detail it deserves. Twenty-one of the 127 chemical synthesis CMOs illustrated this trend, and one-third of this subset showed increased projected market share for chemical synthesis from quarter to quarter. Five companies worth considering for chemical synthesis projects, based on their customer perception scores in productivity and quality improving over the last three business quarters, are Astatech, Dishman Pharmaceuticals, Ferro Pfanstiehl, Northern Lipids, and Paragon Bioservices.
Currently, few organizations believe that innovations in technology will strengthen their ability to stay competitive. Rather, the majority are focusing on capacity and cost-cutting to capture market share instead of improving wasteful product development processes. When selecting a new outsourcing partner for chemical synthesis projects, it’s worthwhile focusing the search on businesses pioneering improvement strategies — be it improved drug design, smaller chemical libraries with more predictive capability, or creating cross-functional groups delivering interdisciplinary expertise to the synthesis process. While it may be too soon to tell if innovation, as it relates to improvements in productivity and quality, will help struggling chemical synthesis providers stay afloat, efforts to boost these customer perception drivers correlated to modest increases in market share.