Notable, Quotable

In between quarterly reports, the companies I follow often present at various conferences hosted by large financial institutions. The first 2 weeks of September provided fascinating talks hosted by Morgan Stanley, Baird, Citi, and TD Cowen. Here are the topics and dynamics I found most interesting, and most distinct from what I heard and covered in my Q2 quarterly recap. All quotes are from Quartr transcription, often with a tiny bit of cleanup by me.

Share Price Plummet

What caused the share prices of most CROs to drop 5%-10% in ~30 minutes midday last Tuesday?

Charles River Laboratories’ CEO was being interviewed at Baird’s 2024 Global Healthcare Conference. A few minutes in he was asked whether the reduced pharma demand they were seeing was isolated to certain types of customers. As best as I can time things up, below is the part of his response that likely caused the freefall.

Pretty depressing stuff:

“We're finding them pretty much en masse cutting back their spending and hence pausing some drugs that they should have or wanted to file INDs for and emphasize in the clinic big time. So the concerns about the patent cliff and gap in their revenue stream. So they are pretty much all doing that. There's a couple of obvious exceptions of drug companies that may be making GLP-1s that are in a totally different place. I'd say we've had a couple of big ones that we have long-term relationships with that have meaningfully sort of reduced their forecasts. The rest of them are more sort of pausing than, I would say, any sort of major reductions. And the speed with which has happened was really sort of eye watering, right. Last year, pharma was the principal driver of our growth. First quarter of this year was very strong by big pharma. Second quarter started out very strong with a bunch of proposals and bookings and sort of manageable cancellation rates and then sort of at the end of the quarter, there was a fair number of companies that sort of pulled back. They don't talk to each other. They don't plan to do it this way, but I think it's patent cliff, it's IRA. It's the overall economy. It's sort of gaps in the portfolio, it's sort of all the above. So they feel like they're working en masse…given the fact that we have very high-level relationships with all of the pharma companies often ahead of R&D and minimally the head of discovery and development, it's clear that a lot of the people that we're working with and talking to were blindsided as well by cuts in spending, consolidation of sites, reduction of workforce and just pausing some of the work that they were doing.

I've had several people [ask] well, how do you know it's just not going to snap back? The answer is, we don't know that. I don't think that's going to happen. It sort of feels like the spending pattern will persist into 2025, but I don't know how long that will persist. Look, if they don't spend in discovery and in early development, then they've had nothing in the clinic in X number of years, right? So we know that it has to shift back the sort of optimal relationship that we have with our clients is when the spending is pretty balanced, right? There's a lot of spending on sort of early development or very early discovery and substantial amounts of toxin. And periodically, it does what it's doing now, ebbs and flows with either emphasis in the clinic or often emphasis in preclinical.”

Note: those share price drops have all been recovered, alongside the broader stock market rally since then.

IRA Impact

Every quarter, CROs are asked about the Inflation Reduction Act’s (IRA) impact on pharma R&D spending, and every quarter you mostly hear that the effect is reprioritization or slight delays or otherwise nothing super impactful on pipeline growth (excepting the preclinical space).

During these September conferences, however, multiple CROs pointed to an IRA-related dynamic I was not aware of. Per IQVIA’s CFO:

“Under the IRA, if you have a drug that has a potential to have sales for multiple indications…your incentive is to run the clinical trials for multiple indications more or less simultaneously and bring them all to market quickly rather than doing it sequentially because of the way the period of pricing protection works. It's by molecule and not by indication.”

Fortrea and ICON reinforced this in their interviews. If true, to me this dynamic will be undeniably positive for the larger CROs, from a competitive standpoint versus smaller CROs. Running multiple concurrent trials requires significantly more scale of resources across geographies compared to individual trials. Biopharmas will have huge incentive to use the same CROs for those trials, and large CROs are especially skilled in incentivizing those arrangements.

"Trifurcation" of CROs and their largest customers

With respect to the CRO side, IQVIA and ICON have described in recent quarters a “trifurcation” of the competitive landscape, with what they label a top 3 CRO segment, a next-tier segment of larger CROs who are struggling, and then the wide universe and small to midsize CROs. This trifurcation was mentioned against in these conferences. My question is- ok ICON and IQVIA are 2 of the 3, but I would say there’s a top 4, so which of PPD and Parexel are they leaving out? If you know, please tell me!

Now, with respect to their largest customers, CROs expressed a pretty clear “trifurcation” amongst the large biopharma segment, with some CROs pretty brutally honest about certain customers falling down the priority chain quite rapidly.

The 3 categories amongst large biopharma are best described as:

• “Drunken sailors” (to quote ICON's CEO), at the high end of the bell curve, who are seeing enormous success right now are spending for rapid, tremendous growth. Clearly Lilly and Novo Nordisk fall into this camp.
• “Optimizers”, those in the large middle part of the bell curve, who are optimizing their pipeline for ROI and the new world of the IRA. Their spend is healthy and growing, just not at a dizzying rates of the drunken sailors.
• “Rationalizers”, at the small bad end of the pipeline- those who are significantly reducing R&D and attributing it to IRA, bad product sales, etc. Moderna’s recent announcement puts them in this camp.

For me, the importance of these categories is tracking how CROs are signing up new partners and which categories those partners fall into. It’s great that you signed a new top 60 strategic partner, but if it’s Moderna that’s a lot less meaningful than signing up Lilly.

Strength in the (Phase I) Clinic

It’s always been hard to get a read on the phase I CRO clinic space (whom I’ll call CRUs). Most CRUs are privately held, and the publicly traded CROs who own CRUs rarely break out CRU performance, or discuss them at all.

So I was doubly surprised 1) to see them discussed at a bit more length during the September conferences, and 2) those discussions were quite bullish. (2) was a surprise because I thought maybe, just maybe, the weakness in preclinical might bleed over to the CRU space. Apparently not.

Per the analyst leading the discussion with ICON: “I’ve had some incredibly positive channel checks in Phase I over the last month or two. It seems like there’s an uplift across the board on things.”

Per ICON: “we’ve certainly seen some upticks in the awards in early phase and opportunities in early phase.”

Fortrea’s comments were more scattered about, but were clearly positive. Hopefully CRU performance will be covered at more length in Q3 reports.

Pass-through forecasting

A shout-out to my CRO finance peeps who have to forecast pass-through spending. In case you feel like you’ll never get it right, even after years of trying…Fortrea’s CFO (and I) feel your pain. Per Fortrea’s CFO:

“I’ve talked to some of my peers about this over time, and everybody struggles to predict pass-throughs on a consistent basis.”

Personally, I think there’s an AI opportunity here, to create an algorithm that applies a simple forecasting based on study duration, therapeutic area, geography, etc. If you know of one, tell me!

CRM Wars, continued

When it comes to conferences and earnings calls, I take seriously almost everything that executives discuss, especially hard numbers and strategic decisions. What I don’t take as seriously are claims around winning market share, traction with customer segments, and especially competitive positioning.

Here’s a great example why. Veeva and IQVIA+Salesforce are in a fierce battle to win large pharmas and biotechs over to their CRMs heading into next year.

Veeva was at Citi’s Global TMT Conference earlier this month. When Veeva was asked about the sales momentum they’re seeing on the CRM side, they said “we’re winning virtually every deal in the marketplace.”

IQVIA at Morgan Stanley Annual Global Healthcare Conference, when asked about competitive wins for OCE: “wherever we’ve had head-to-head competitions, we’ve won the majority of them.”

Both statements can’t both be true. Time will tell who’s right.

If You Read One Transcript

I implore you to read the full transcript of Walgreens’ Chief Clinical Trial Officer at TD Cowen’s 9th Annual FutureHealth Conference. It’s by far the best glimpse into the plans and progress of the one mega-corp who appears to be making a real impact in clinical research. Stop rolling your eyes at Walgreens- you need to be taking them seriously.

I specialize in pricing and financial strategies for service and technology providers, and provide external benchmarking services for clinical research providers. Contact me to discuss solutions for your organization.