Bioanalytical market, bioanalysis, pharmaceutical development, contract services

1. PARIOFORMA
Summary Report – October 2003
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2. PARIOFORMA
PHARMACEUTICAL R&D EXPENDITURE IN EUROPE AND USA
35000
30000
Millions Euros
25000
20000 US
15000 EU
10000
5000
0
1990 2000 2001 2002e
FIGURE
 The European pharmaceutical industry invested 18.9 billion Euros in R&D in 2001, and was
projected to spend 19.8 billion Euros in 2002.
 This sum covers all R&D spending within EFPIA countries by national and foreign companies.
 However, despite increasing R&D spending in Europe it should be noted that Europe is
gradually losing ground to the US as a locus of innovation. Between 1990 and 2002, R&D
investment in United States rose more than fivefold, while in Europe it only grew 2.5 times.
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3. PARIOFORMA
Amount spent in each country by national and foreign companies
6000
1999 2000 2001
5000
Euros Millions
4000
3000
2000
1000
0
UK
Finland
Italy
Spain
France
Norway
Belgium
Germany
Ireland
Denmark
Netherlands
Sweden
Switzerland
FIGURE 2
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4. PARIOFORMA
By location of mother company
120
100 97
Number of chemical entities
90
80 77
66 68 Europe
63 61
United States
60 52 Japan
Others
40
29
20
5 6 4
FIGURE 3
0
1988-1992 1993-1997 1998-2002
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5. PARIOFORMA
 A major driving force behind the growth of the European Biotech industry was the flow of money
into dedicated mutual funds in the latter part of the 1990’s up until 2000.
 In addition, countries such as The Netherlands and Germany were at the forefront of integrating
state and private capital to support the life sciences industry – this had the effecting of initiating
many new Biotech start-ups, notably in Germany who still lead Europe in terms of the number of
companies – see figure 4.
 However, the impressive stock performances witnessed by European companies over this period
was not sustainable. After a decade of 30-40% year on year growth in revenues, the European
biotech sector stalled in 2002.
 The UK remains the dominant player with 43% of total market capitalization (€9.4 billion) and
37% (€2.9 billion) of revenues.
 The current hostile financing environment is forcing companies to radically rethink their
strategies, and further fall-out in the sector can be expected over the coming twelve months.
However this is a cycle that has been experienced several times already in the US and will result
in a stronger and more robust industry in Europe.
 However, it should be noted that the number of profitable biotech companies is increasing and
the average loss per public company has halved over the past 4 years to €7 million.
 Europe's public biotech companies now have 53 products in phase III clinical trials. Hence
despite the harsh environment companies are continuing to develop innovative products and a
potential tidal wave of product successes is building up, which could transform the industry.
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6. PARIOFORMA
400
13 Private Public
350 46
300
Number of Companies
250 6
200
9
347
2
150 285 5
233
100 3
170 1 5 1
147
124 1
50 82 2
75 70 68 3
50
33 18
0
Israel
Belgium
Italy
France
Germany
Denmark
Ireland
Netherlands
Finland
UK
Norway
Sweden
Switzerland
FIGURE 4
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7. PARIOFORMA
10
9
8
7
Billions Euros
6
5
4
3
2
1
0
Industry market capitalisation
UK
Switzerland
Netherlands
Revenues
Ireland
France
Germany
FIGURE 5
Source: Ernst & Young
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8. PARIOFORMA
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9. PARIOFORMA
FIGURE 7
500
450
400
350
Millions Euros
300
US
250
EU
200
150
100
50
0
2000 2001 2002e 2003e 2004e 2005e
Source: RM Consulting, published data PhRMA, E & Y, Scrip, Pharmaceutical Compendium: CMR International
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10. PARIOFORMA
 Figure 7 depicts the market forecasts for the North American and European bioanalytical
market – development and discovery support.
 It shows modest, but sustained growth over the next few years; however, calculations
assumed a constant US vs. EU split of R&D expenditure over this period1. Given the current
trend towards the US as a locus of innovation; figures might be biased slightly more in favour
of the US over time.
 Market analysis revealed that the key drivers for market value are:
◦ the volume of new business arising, due to new candidates entering development – there are an average
3,405 drugs2 in active trials worldwide with an estimated 1,362 candidates in trials 3 in Europe;
◦ increased outsourced volumes from medium sized Pharma and Biotechs – these companies are traditional
outsourcers;
◦ higher sample prices for increased complexity of biomolecule assays;
◦ increased range of possible assays at premium prices – biomarkers, metabolite profiling, etc.
 The underlying market growth rate is positive - bioanalysis remains an attractive business.
1 The R&D split for the year 2001 (EFPIA, PhRMA- Pharmaceutical R&D Expenditure in Europe and the USA): Europe: 41%; USA : 59%.
2 Average number of Adis R&D Insight; IMS R&D Focus; Pharmaprojects.
3 RM estimate based on the ratio of new entities by geographical region.
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11. PARIOFORMA
 Bioanalytical buying behaviour can be viewed as a factor of company size, company “attitude”
and the stage of development.
 “Attitude,” or the propensity to outsource, is both a function of company size and company
culture. Geographical location impacts on a company’s social, cultural and economic heritages.
 Analysis of the European bioanalytical market highlighted some geographical trends:
◦ Particularly in continental Europe there can be very significant “social” costs that a company must pay for
each employee; it is also a highly regulated employment market – this combined with low cost labor
market gives rise to the tendency for more to be done in-house in parts of continental Europe than in the
US;
◦ There is a trend to use European phase I units (notably in the UK) to avoid regulatory IND submissions –
however, phase II often returns to the US in preparation for FDA registration;
◦ Within Europe, the issue of language barriers can add further complexity, people preferring to deal with a
service supplier in their mother-tongue. There is also the concept of keeping work within national
boundaries – e.g. French companies prefer to deal with French vendors;
◦ Additionally, the buying process tends to be more formalized for US based companies who have well
developed procurement procedures – such processes tend to be more embryonic for European based
pharmacos.
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12. PARIOFORMA
 Market research indicates that the European bioanalytical business lags behind the US by as
much as two years in terms of market development.
 The European business is also far more fragmented than in North America and is characterized
by:
◦ several new entrants in last 2 years – e.g. York Bioanalysis, Xendo Labs;
◦ a great many small labs with 3 – 6 LC/MS machines;
◦ “stand-alone” labs, as opposed to full service CROs, offering a suite of bioanalytical services including LC-
MS/MS and immunoassays;
◦ no dominant player – MDS, unlike in the US, is not a strong player.
 The competitive situation in Europe is not as intense as in the US, and most labs are predicting
growth in middle and upper teens.
 This is because they are not yet under the same degree of price pressure as in the US; in part
because their prices are already much lower1, but also because “mid-sized” European Pharma
companies have continued to maintain or grow their outsourcing in contrast to US “Big Pharma”.
 European Pharma companies also feel that they are getting “good value” from the contract labs
and are less concerned about price than their US counterparts.
1 See Appendix
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13. PARIOFORMA
 The bioanalytical lab market currently shows no signs of concentrating, with no “lab-lab”
mergers. Instead the trend has been to acquire or merge with complementary organisations
e.g. PPDI + MRLI, Inveresk + ClinTrials, Icon + Medeval, AAI + MTRA; Cephac + ITEC
Pharmacology; or for new entrants to buy their way in e.g. Parexel + CEMAF.
 These “complimentary” mergers link the bioanalytical services of one company to the clinical
services of another with the aim of improving business lead generation and more importantly
the continuity of business from one phase to another.
 Europe has also been the focus for expansion for many US labs – the UK in particular, for
example:
◦ ABC Laboratories – N. Ireland (now acquired by CSS Analytical);
◦ Advion Biosciences – Norwich, England;
◦ BAS – Congleton, England;
◦ BioReliance – Scotland;
◦ CentaLabs – Cambs; England.
 Other well-known bioanalytical names in Europe include:
◦ Covance – Harrogate, England;
◦ AAI – Neu-Ulm, Germany;
◦ MDS – Zurich, Switzerland;
◦ Quintiles – Scotland, Sweden;
◦ Inveresk – Scotland;
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 Despite the trend towards the US as a locus of innovation, Europe still exhibits healthy growth
in terms of R&D spending – see figure 1.
 In the past 5 years, Europe in particular has experienced vigorous M&A activity in the
pharmaceutical industry. A consequence of this has been much pipeline pruning with delays,
postponements and even cancellations in clinical programs. The effects of this are still being
felt - see figure 3.
 However, worldwide drug pipelines are healthy with an estimated 1,362 candidates in active
clinical trials in Europe, including 53 products in phase III originating from Europe's public
biotech companies.
 Europe can be divided into bioanalytical “hotspots” according to R&D spending – see figure 2:
1. UK;
Decreasing 2. Germany;
attractiveness
on the basis of 3. France;
R&D spending 4. Switzerland;
5. Scandinavia – Norway, Finland, Sweden, Denmark;
6. Benelux – The Netherlands, Belgium;
7. Italy;
8. Spain.
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 Germany still leads in Europe in terms of the number of Biotech companies – see figure 4.
However, there is a widening divide in terms of revenues and market capitalisation – see figure
5.
 The UK remains the dominant Biotech player and therefore, provides the most attractive
opportunity from a bioanalytical perspective. Not only are there a large number of Biotech
companies themselves, but revenues are stronger – these companies are more likely to be able
to afford and maintain clinical programs.
 This report would not be complete without mentioning the fact that Europe has a very mature
generics industry that is facing a period of unprecedented growth - $82 billion worth of global
blockbusters are set to face US patent expiry by 2007.
 Rising competition from Indian and Eastern European low cost generic providers will augment
the pressure on margins, forcing Western players to add value through specialty generics and
super generics.
 For some labs the generic market is an attractive business; but unlike the “research business”
this area is highly price sensitive - prospective customers “shop around” for the cheapest
option. It is particularly suitable for high volume players who can easily amortise the cost of
assay development.
 Entering this market can require considerable investment. Proprietary assays are usually owned
by the original customer, consequently a lab has to re-develop and validate an assay before it
can claim ownership and sell on to a generics customer.
 The economics of the business suggest that it takes 2 – 3 customers to break into profit per
assay developed.
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16. PARIOFORMA
Summary of Opportunities
All three countries present an attractive opportunity for a bioanalytical business.
The United Kingdom because it remains the main focus of R&D spending in Europe and
continues to outpace the rest of Europe in this respect. It has the highest number of R&D
bases and the most profitable Biotech industry in Europe. Employment laws are more
favourable in the UK than in continental Europe; however, sales of a UK-based facility could
be vulnerable to exchange rate fluctuations.
United Kingdom Germany is also attractive from an R&D point of view. AAI is the dominant player and there
are a number of local players – Germany has not been the focus of expansion for US-based
Germany labs as has the UK. Germany also leads Europe in the size and maturity of its generics
Switzerland industry.
For its size, Switzerland has a high density of R&D based companies and a high level of
R&D spending. MDS is present but not dominant, and there are a number of well-
established local players.
A lab situated in either Germany or Switzerland is also well placed from a geographical point
of view to serve customers in other parts of continental Europe.
Attractive from an R&D spending point of view; but this market is heavily dominated by Aster
Cephac and Parexel. Aside from these large players there are only a handful of smaller local
France players.
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17. PARIOFORMA
Summary of Opportunities
Sweden and Denmark dominate in terms of R&D spending.
The region supports a large number of Biotech companies, led by Sweden, but Biotech
Scandinavia – revenues are very low in comparison to other countries in Europe.
Norway, Sweden, In terms of suppliers, Quintiles has a small facility attached to a Phase I unit in Sweden – but
Finland and this is not well advertised. There are a few local suppliers, again mainly in Sweden, and
many sponsor companies traditionally outsource to other regions of Europe.
Denmark
Sales from a lab in this region would also be vulnerable to fluctuations in exchange rates. It
is probably not an area that would attract bioanalytical business from other parts of Europe.
Already many low cost labs present notably in The Netherlands where government
Benelux – The investment helped initiate start ups in the life science sector.
Netherlands and Many technical graduates at low cost and a highly regulated employment market – hence
many R&D based companies find it more cost effective to conduct work in-house rather than
Belgium to outsource.
Sponsor firms either conduct in-house bioanalysis or outsource to Northern European
Southern Europe – companies. Some very small local labs only.
Italy & Spain
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18. PARIOFORMA
Summary of Opportunities
The Czech and Slovak Republics, the Baltics, Poland, Hungary, and Slovenia will all be part
of Europe as of May 2004.
The domestic pharmaceutical industry in this region is dominated by the cheap local
production of generic drugs. R&D bases of Western firms tend to conduct work in-house due
to the low cost of skilled labor as well as outsourcing to Western European companies.
The CEE is now fast becoming the preferred location for many clinical trials due to the
CEE relatively lower costs per patient (in comparison to Western Europe) as well as the need to
access treatment naive patients.
A lab in this region [e.g. Czech Republic] could leverage the cheap skills base and the ease
of communication with the rest of Europe. There are at present, no well known bioanalytical
names in this region.
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19. PARIOFORMA
GEOGRAPHY Mid 1990s (US $) 2002 (US$) 2004/2005 US$
USA} Average for Standard Assay $130 $70 $40
USA } Range for Standard Assay $100 - 150 $60 - 80 $30 - 40
Europe} Average for Standard
$90 $63 $50
Assay
Europe} Range for Standard
$84 - $98 $50 - 90 -
Assay
Source: RM estimates and analysis
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