I was happy to participate in the premier issue of Contract Pharma by writing a column assessing the growth prospects for the pharmaceutical outsourcing industry. Following a robust period of expansion, 1999 had been “punctuated by numerous pricks in the sacred balloon of growth.”

Over the years, I’ve written columns trumpeting the gains made by outsourcing, cautioning observers that “trees do not grow to the sky,” describing the nature and extent of consolidation in the industry, commenting on financial topics, speculating on the impact of political events, et al. It’s hard, but I’ll resist the temptation to review my columns and point out instances of particularly prescient analysis. Instead, I’ll use the beginning of Contract Pharma‘s 11th year of publication to offer my views of what has changed and what has not changed during the first 10 years of its life.

Drug development firms have a long tradition of using the specialized capabilities of outsiders to conduct various types of preclinical research. During the past 10 years, the large companies seem to have realized that they no longer need to maintain in-house expertise in running vivariums or developing new animal models. They also appear more confident in the abilities of specialized firms to conduct ADME studies as well as routine chemistry, pharmacology and toxicology analysis. And of course, emerging biopharmaceutical companies long ago concluded that they did not need to build their own preclinical development infrastructure. The current business environment serves as a reminder that the demand for these services still ebbs and flows, but it’s fair to say that the outsourcing industry has increased and enhanced its participation in this broad category of research.

In the broad sector of clinical research services, I doubt that anyone regards outsourcing as a temporary phenomenon, meant only as a tool to help the drug development industry cope with short-term staffing issues. Most biopharmaceutical firms have been educated to appreciate the tangible benefits of using outside agents to help conduct clinical research. The fact that most CROs employ teams of experienced personnel has helped convince some recalcitrant sponsors of the value of their services. However, it does not seem that sponsors have moved beyond using CROs as arms and legs to accomplish certain tasks. Many are still reluctant to use the brain power, institutional knowledge, or therapeutic category expertise that many CROs offer. I will be extremely curious to see how that reluctance changes as more sponsors engage in more strategic partnerships with selected CROs.

Firms providing contract manufacturing services have clearly benefitted from the growing realization on the part of their customers that a drug development organization does not have to devote its scarce financial resources to manufacturing simple chemicals or complex biologicals. Indeed, during the past decade, the sale of many drug companies’ production facilities to various contract manufacturers has been one of the most tangible signs of this shift towards outsourcing. It’s easy to predict a continuation of this trend; it’s also easy to suggest that emerging biopharmaceutical firms will continue to rely almost exclusively on contract manufacturers for their production needs.

Of course, the devil is always in the details. Outsourcing firms build laboratory and manufacturing capacity in large increments; demand does not always follow the curve that allows them to optimize the profitability of that capacity as quickly or smoothly as might be desired. Clinically-oriented CROs need to maintain their complement of trained personnel even while prospects delay commitments to authorize new work and clients delay the start of already-established projects. Sponsor organizations are almost always involved in discussions with potential partners (involving joint ventures or acquisitions). Outsourcing providers rarely if ever control their own flow of revenue. And every participant in drug development is acutely aware of the changing requirements and procedures promulgated by the FDA.

All things considered, the past decade has been a fruitful one for the outsourcing industry and for most participants, large and small. I suspect the coming decade will be more challenging for all, but highly rewarding for those firms whose managements are up to the task.

Michael A. Martorelli is a Director at the investment banking firm Fairmount Partners. For additional commentary on the topics covered in this column, please contact him at Tel: (610) 260-6232; Fax (610) 260-6285.