Biotech and pipeline refills add to preclinical turnaround, say analysts

27-Mar-2014 - Last updated on 28-Mar-2014 at 08:27 GMT

Preclinical industry growing again, say analysts at this year's SOT meeting

Demand from biotech firms and Big Pharma’s need to refill its pipeline is driving the preclinical services industry, say analysts at this year’s Society of Toxicology (SOT) meeting.

A number of industry analysts returned from the annual conference in Phoenix, Arizona, having their expectations of an upturn in preclinical demand reaffirmed following an economic downturn that has seen sponsors shelving early R&D plans to the detriment of preclinical CROs.

“Overwhelmingly, the commentary we heard suggested recent positive momentum noted over the past few quarters continues,” said William Blair analyst John Kreger. Both Covance and Charles River Laboratories - the two largest providers of toxicology services - recently reported strong preclinical growth.

Kreger suggested such improvement was down to “the feeling that pharmaceutical companies, who have focused energy on late-stage development for the past several years, are beginning to refocus on early development to backfill their pipelines.”

He added the second major driver was “the very strong funding environment for biotech companies,” a sentiment echoed by Jeffries’ analyst David Windley.

Though not the exclusive driver of continuing growth, Windley noted, “preclinical CROs are seeing the most rapid growth in non-human primate (NHP) studies, which are strongly correlated with large molecule development and further indication of the push from biotech clients.”

Capacity Filling Up

“Two of our company guests highlighted certain areas of their businesses operating at full capacity,” added Windley, “a status that was only a wish over the last five years.”

Citi Research Garen Sarafian added capability utilisation across the industry is now estimated to be around 70-75%, a clear improvement from 65-70% last year, and reflected the tone which is “clearly more upbeat than twelve months ago.”

With increased demand, existing capacity should fill up relatively quickly, added Kreger, “given the high fixed cost nature of the toxicology business combined with the reduction in capacity seen worldwide by both pharmaceutical companies and CROs,” resulting in a very high incremental margin rate (50%-70% EBIT margin).

Long-term trend?

Whilst the analyst coverage was mostly positive compared to the last few years, there was less assurance from the show as to whether the upturn in the industry would continue in the longer-term.

“The cautious enthusiasm seems consistent with what we believe is largely built into current market expectations,” said Sarafian. “While we’re encouraged by the tone of the conference, we see more value in more clinically focused CROs as Buy rated Quintiles and Parexel.”

Furthermore, Kreger was “not yet ready to declare a definitive turn has occurred,” citing several instances since 2008 where expected turns in demand did not materialise. However, he remained hopeful adding “the likelihood of a sustained improvement in demand in 2014 is higher than it has been in the past five years.”