Back in the early 1990s, the arrival of high throughput synthesis and screening raised several questions in drug development organisations. How big will the increasing demand be? And how variable would it be? The answer to managing these uncertainties was to create a flexible, external supply chain. At around the same time, a sector of small biotech companies began to emerge, which began to supply drug candidates to fill big pharma pipelines. While it’s interesting to think about what came first, it’s now evolved into a mutually dependant ecosystem. But how robust is this ecosystem?
Today, partly due to the growth of contract research organisations (CROs), a significant proportion of big pharma pipelines derive from small biotech companies – an estimated two-thirds of all new drugs produced in 2022, according to a report by the CRO IQVIA Most of these charge for their drug discovery work using full time equivalent (FTE) rates – the charge for one person working 100% on a project for a year, pro-rated for the actual time used. This type of costing model means that the CRO will get paid irrespective of whether it ultimately succeeds.
And yet full-time equivalent (FTE) rates in many CROs today are similar to those of the early 1990s. This represents a decline of over 60% in real terms. Some FTE rates were as high as $300,000 (£235,000) in 1990, which would be equivalent to over $800,000 today. The actual highest charge I’ve heard of is around $350,000 per FTE.
Therefore, over time, much of the western chemistry manufacturing and controls CRO sector has moved from a high-risk, high reward enterprise to a high-risk, low reward one. Asian competition has played a major role in this reduction, but even some Asian CROs are beginning to feel the pinch. One can see the tell-tale signs of this margin reduction. Occupancy figures (the proportion of a CRO’s staff working on an active project), already high, will have to increase, higher capital expenditure will be more difficult. The recent high level of inflation has been difficult to absorb, especially the increases to energy costs. The net result will be a loss of overall CRO capability.