Is Clinical Research Recession Proof?

Since this past summer, the most common questions that I receive during my conference and meeting presentations revolve around the current recession and its impact on clinical research.

Kenneth A. Getz

Though reluctant to openly admit it, inquisitors are responding to growing concerns about announced layoffs, tight financial markets that once fed smaller company R&D spending, and project postponements and cancellations.

The questions are not easily answered. Historically, I explain, clinical research has weathered recessionary periods extremely well, leading analysts and insiders to conclude that biopharmaceutical R&D is somewhat immune to economic cycles.

A Tufts CSDD analysis of the past five recessions since 1973 shows that R&D spending continues to grow, though at a more modest rate compared with healthy economic periods. Active Phase I–III project volume continued to rise steadily during the past five recessions. And, according to PhRMA, clinical research personnel growth has typically been flat or has slightly increased during recessionary periods.

I add, however, that the current economic crisis appears to be an anomaly.

Unusual volatility

The impact of this global recession has hit clinical research squarely and broadly, although a few select sponsors and CROs have emerged unscathed and eager to pursue market opportunities.

Pharmaceutical and large biotechnology companies have announced that they will be terminating—or leaving unfilled—more than 50,000 positions, of which about 10% will come from R&D. Additionally, a number of major drug development sponsors have announced plans to focus research priorities.

In the past few months alone, for example, GlaxoSmithKline has announced its plans to eliminate hundreds of research positions as part of an operations overhaul. AstraZeneca and Merck also announced plans to cut thousands of positions worldwide—including those within R&D—during the next several years. Pfizer, which recently acquired Wyeth, reports that it plans to eliminate 19,500 jobs—or 15% of its combined workforce.

In addition, Pfizer indicated that cardiovascular disease, long a major focus of its innovation, is not a core R&D area of interest at this time.

After cutting 1200 jobs a year ago, Abbott Labs announced that it will be eliminating another 1000 jobs. Belgium's UCB Pharma reported that it would cut 2000 jobs, or 17% of its workforce. And Procter & Gamble is now apparently looking to pull out of the drugmaking business altogether.

Good and bad

Amidst downsizings and consolidation, there is a smattering of positive news.

Sponsors with very strong pipelines have reported solid sales and profit growth during the current recession. As such, rumors are circulating that some of these top-performing companies are attractive takeover candidates.

Bristol-Myers Squibb, for example, posted very strong revenue and earnings growth in 2008. Schering-Plough and Novartis also posted very strong financial performance in 2008. Novo Nordisk reported a 138% increase in net income for fourth quarter 2008.

For small pharmaceutical and biotechnology companies, the current operating environment is particularly volatile. Many of these companies face the bleak prospect of scarce funding from capital markets and major biopharmaceutical companies.

There are numerous cases, at this time, of financially distressed small biopharmaceutical companies roiled by the current operating climate.

To name a few: Myocor Inc., which had a promising atrial defibrillation device, folded this past October. Orchestra Therapeutics, while developing a treatment for multiple sclerosis, filed for Chapter 7 bankruptcy the same month. Titan, a small biopharmaceutical company focused primarily on CNS disorders, significantly downsized this past December. Altus Pharmaceuticals announced it is cutting 75% of its workforce—or 107 jobs—and will reduce its research focus to a single program.

A holding pattern

Economic uncertainty is driving much higher levels of cautious program management among private sector clinical research sponsors.

Based on anecdotal reports, sponsors are taking a far more conservative approach to new study starts. They are suspending and terminating large numbers of programs. And they're placing more emphasis on early and substantial justification to continue funding development programs.

Service providers (e.g., CROs, investigative sites, and patient recruitment companies) note that industry sponsors have been eliminating programs and focusing on priority projects with tight performance timelines and costs.

Sponsors are also becoming more selective about what, as well as to whom, they outsource to better capitalize on in-house competencies.

A number of CROs reported very strong 2008 performance due to rising sponsor reliance on outsourcing to handle capacity needs. Recently, PharmaNet stated that a high number of postponed and canceled contracts have forced it to adjust its financial forecasts for 2009.

In its December 31, 2008, financial statement, Parexel noted that a small biopharmaceutical company client was filing for bankruptcy protection and would no longer fund its late-stage clinical research program.

An independent institutional review board (IRB) recently told me that on a single day in early February it had four major studies terminated or reduced in size for reasons unrelated to the product's safety profile.

Investigative sites are reporting widespread postponements and cancellations of planned work. In response, sites have been aggressively pursuing whatever clinical trial opportunities they can find with sponsors and CROs to replace lost study volume.

Sites overall report that they're in good shape if they are able to execute work already on their books, but the pipeline seems uncommonly light for the second and third quarters of 2009.

Many clinical trials postponed in the fourth quarter of 2008 have yet to be initiated. Investigative sites report that sponsors aren't even engaged in pretrial work with the sites selected to conduct them. Several sites recently told me that they were forced to write off significantly higher levels of bad debt or uncollectible receivables on their books due to this recession.

The M&A impact

The recent volume of merger and acquisition activity in the biopharmaceutical industry has been high, and it is expected to accelerate in 2009 and 2010, as the climate transitions to that of a buyer's market.

Notable transactions during 2008 include Takeda Pharmaceutical's acquisition of Millenium Pharmaceuticals, Teva Pharmaceuticals acquisition of Barr Pharmaceuticals, and King Pharmaceuticals $1.6 billion purchase of Alpharma. In early 2009, Pfizer acquired Wyeth, Roche made a hostile bid for Genentech, and Astellas made a $1 billion unsolicited bid for CV Therapeutics.

Tufts CSDD analysis of M&A transactions shows that combined entities typically limit or reduce R&D spending to accommodate integration challenges and instability. The rising volume of mergers and acquisitions in the current operating environment highlights another unusual condition of this recession. The period of caution and constraint might be extended beyond historical durations.

Guarded optimism

For now, clinical research professionals remain guardedly optimistic for 2009. A recent survey of the CEOs of PhRMA-member companies finds that one-third is confident they will continue to see revenue and earnings growth this year. The remaining two-thirds project an economic recovery in 2010.

In my informal surveys taken at conferences and presentations, sponsors, CROs, and investigative sites largely anticipate that the clinical research industry will emerge healthier once the global economy has recovered.

Specifically, professionals note that financially distressed markets weed out unhealthy players and free up qualified talent, offering a variety of organizations new or expanded expertise.

The current environment forces all players to restructure and manage their operations more leanly through lowering both variable and fixed operating costs. Dependence on outsourcing will continue to grow and may finally, out of necessity, spur more effective collaboration models.

The uncertainties of a volatile recession speak to the need to improve the quality and frequency of communication between sponsors, CROs, and sites in order to manage project suspensions and terminations responsibly and ethically. And sponsors and CROs must be mindful of site cash flow needs in order to preserve and support their most valued investigative sites.

As I've noted in earlier columns, most sites are operating with very tight margins and poor cash flow—it takes the typical site more than 130 days on average to get paid for work performed.

Most professionals leave me with the impression that no small measure of hope and optimism will be required to ride out this storm.

"Although the current recession may be different," observed one colleague recently, "the name of the game is still about hunkering down, focusing on performance, and making infrastructure and process improvements."

Kenneth A. Getz MBA, is a Senior Research Fellow at the Tufts CSDD and Chairman of CISCRP, both in Boston, MA, email: kenneth.getz@tufts.edu