Innovation-by-Outsourcing: Impact on Solubilization Services

By: Marshall Crew, PhD, President & CEO, Agere Pharmaceuticals, Inc.

In 2008, research utilizing data from the Business Dynamics Statistics of the US Census Bureau challenged conventional wisdom around job creation and small companies. In fact, this relatively recent research shows that new and young businesses – not just small ones – are the primary source of job growth that fuels the economy. A recent report from The Brookings Institution notes that the drugs and pharmaceutical sector of the US economy is differentiated by a steadily increasing rate of new firm formation and net job growth for startups. Impressively, 44 new pharmaceutical sector companies were created in this segment in 2011, representing a gain of 53% when compared with 1990. These results are even more impressive when compared with the total US private sector decline of 15% during this same period.(1)

It’s widely known that the reliance on service providers for research, development and manufacturing services in the pharmaceutical industry has been on a growth trajectory for many years. According to a 2013 report by Frost & Sullivan and as reported in Drug Development & Delivery, worldwide pharmaceutical spent on contract manufacturing services last year totaled $13.43 billion and is forecast to reach $18.49 billion by 2017.(2) Not surprisingly, The Brookings Institute report attributes the “innovation-by-outsourcing” model of research and development embraced by large pharmaceutical companies as being a contributing factor to job growth and new company formation.

Given the growth in number of insoluble molecules in development – estimated at between 2,300 and 3,200 worldwide(3) it stands to reason that we will are seeing an increase in outsourcing formulation development and manufacturing to providers with solubilization expertise and platforms. It can be expected that as the number of insoluble molecules grow in development during this decade, this segment of the contract service market will correspondingly continue to be an attractive business opportunity.

Fragmented Market

A growing demand for services requiring high specialization is a recognized driver for a fragmented market, one in which numerous players offer requisite and varied solutions to overcome an expanding challenge.(4) Such an environment also fosters innovation, as older technologies are applied to the degree possible and new technologies and technological combinations emerge to keep up with the evolving market demand.

It’s not uncommon in industries undergoing dramatic underlying shifts to experience with a high influx of emerging companies offering differentiated services. The relative “newness” of the preponderance of insoluble molecules can be seen to have catalyzed a marketplace in which no single provider dominates, and instead numerous small and medium players offer in-demand services.(5) In addition to fostering new entrants, this environment lends itself naturally to divestitures, consolidations and acquisitions as the market sorts out synergies and individual players refine their strategies.

Solubilization Services: A Rapidly Changing Market

A recent Agere analysis seems to validate that the solubilization segment of outsourcing in experiencing these dynamics. Our study shows that since the 1980s, the industry has over 70 new entrants into the solubilization services market space, with over 50% of those occurring since 2000, nearly 20% forming since 2010 (Figure 1)(6). As noted earlier, in addition to new entrants, also characteristic of a market in rapid growth mode is consolidation.

By new company.PNG
Figure 1.

It’s well understood that the number of new players doesn’t convey market dominance, and that there’s a natural evolution toward consolidation for a variety of reasons. These include the alignment of smaller companies with other players to benefit from economies of scale, or for larger companies to “innovate through acquisition” to provide more comprehensive services to their customers. Since the 1990s, there have been close to 40 acquisitions or mergers in the solubilization outsourcing industry, with nearly 60% of those occurring since 2010 (Figure 2)(7). In some cases, companies have changed hands three times over this period to be where they are today.

acquisitions 1990 to 2014.PNG
Figure 2.

Admittedly, the absolute number of companies and consolidations in the solubilization services space pale by comparison with the number of pharmaceutical companies and their mergers/acquisitions. However, given the preponderance of insoluble molecules in development today, our small industry segment is becoming more broadly relevant. This is truly an exciting time, as this is the type of environment fosters innovation, as familiar and validated technologies are more broadly applied, and new technologies and technological combinations emerge.

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April 2014.
3. Agere analysis of drugs in development and historic percentage of all drugs achieving FDA approval in 2013, and range of estimated insoluble drugs at between 70% and 90%.
Michael E. Porter, Competitive Strategy.
Agere analysis; only new companies formed are counted; acquisitions and renaming of existing entities excluded.
Agere analysis September 2014.

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