While the approach of large pharmaceutical companies toward outsourced activities is evolving toward more robust and structured partnerships, a widespread feeling of caution is shifting their focus from suppliers engaged in early stages to those active in more advanced stages of development or on established drugs, perceived as less risky than emerging therapies.
This phenomenon is accompanied by the growingreluctance of investors to fund the early stages of research and development of gene and cell therapies both in terms of venture capital and IPOs. Also likely to suffer are the Cdmo and Cro engaged in the early stages of development, whose reach is gradually shrinking.
Preclinical M&A declining
Drawing this scenario is the CphI annual report 2024, published in conjunction with the international pharmaceutical industry event of the same name held in Milan in early October. According to the report, large pharmaceutical companies have significantly reduced outsourcing of research and development (R&D) activities in the early stages in recent years, favoring the acquisition of companies with development pipelines already in the clinical stages. Iqvia has calculated that Preclinical M&A activities by 2023 represent less than 5 percent of the total.
Big pharma may also be pursuing a fundamental pivot away from outsourcing discovery and early R&D.
CphI annual report 2024
A critical economic framework
Charles River Labs (CRL), a leading provider of early-stage drug development outsourcing services, announced in August 2024 that it had significantly cut its forecast due to a substantial and permanent decline in the research and development services required by big pharma.
According to the report, this trend is heavily influenced by the phase of rationalization and de-risking undertaken by big pharma after the Covid19 pandemic. Indeed, in the past year, the race to cost reduction has continued, also due to the pressure of the many critical economic and financial issues, such as the loss of exclusivity on many products (analysts calculate that big pharma will lose rights for $180 billion until 2033), high US interest rates, and persistent inflationary pressure.
The biotech indicator
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One indicator for determining the health of the CRO/ CDMO sector, the Cphi report goes on to explain, is funding to biotechnology(nearly two-thirds of all drugs submitted for FDA approval come from these companies), which has come to a significant halt in the past two years (see chart).
Although in the first half of 2024, overall funding shows signs of recovery, private venture investments in biotechpreclinical stage were about 28% of the total through mid-2024 (~$3.5 billion), declining from previous years.
IPO also seems an increasingly less viable option: the percentage of IPOs (initial public offerings) in preclinical companies is about half of what it was in the previous four years.
The impact on Cdmo and Cro
The scarcity of funding for early-stage biotechs has accentuated the slowdown that began in 2023 and is set to continue until at least 2025.
According to analysts, this shift of interest toward companies in more advanced R&D stages could have profound repercussions: although clinical stage services are improving, early-stage companies continue to suffer from a severe funding gap. This could slow down innovation in CGTs, such that recovery in this sector is not expected until 2025.
Good news
Cost cutting in pharmaceutical companies could also be a positive factor, however. According to the Fierce Biotech Layoff Tracker, there was a 57 percent increase in the number of layoffs in 2023 compared to the previous year, and it is estimated that through mid-2024, approximately 25,000 employees have been laid off in the pharmaceutical sector.
This phenomenon could benefit CROs/CDMOs generating increased demand for outsourced services, as pharmaceutical companies will have to increasingly outsource their activities, including R&D and manufacturing.
Also for clinical development
In contrast, the situation for CROs and CDMOs focused on clinical development programs is expected to be rosier, with demand for services expected to grow in the coming year. Clinical stage biotechs and large pharmaceutical companies continue to invest in clinical asset development, which are considered safer investments than early stage.
This trend is expected to provide some stability, offering growth opportunities for companies in this area.
Demand for ADCs, small molecules and biologics holds up
Established therapeutic modalities such as monoclonal antibodies (mAbs), small molecules, and ADCs (antibody drug conjugates) are among the fastest-growing areas, due to the fact that they are perceived as less risky than emerging therapies: Cro/Cdmo focusing on these products will seestable, if notincreasing, demand through 2025.
The Impact of the Biosecure Act
The Biosecure Act being passed in the United States could cause a radical shift in the global supply chain, accelerating the shift of manufacturing out of China. The Biosecure Act aims to protect U.S. national security by restricting business interactions and contracts with companies from countries considered adversaries.
Predictably, Chinese companies, particularly in the biotechnology sector, are among the main targets of this law. Among the companies that could be affected are names such as WuXi AppTec, WuXi Biologics, and BGI Group, which provide crucial services such as Cro/Cdmo deemed too risky for U.S. security. Thisscenario is expected to favor suppliers in non-China regions, such as North America, Europe, and India.
Although the new version of the law provides a buffer phase, with a five-year period to dissolve existing contracts (seven for some specific companies), agreements entered into after the law takes effect will have to follow the new provisions.
