Contract Research Organization Growth and Investment

CROs are consolidating to deliver key discovery and early stage efficiencies in the lab, as well as expert clinical stage trial services, to accelerate drug development.

Much of what the industry has been looking for from its supply chain over the past decade plus, is a way to better manage the risk and cost associated with drug development, and support therapeutic efficacy and commercial performance long after approval.

Rising demand for effective pharmaceuticals has fostered innovation across the industry. With this, business models have evolved to better manage the risk that drug development entails. Some of the world’s leading drug developers are adopting strategies that are centered on creating deeper relationships with contract services providers to support successful drug development from the very beginning. The value of the global CRO market is expected to exceed $32 billion in 2017 and reach $45 billion by 2022, according to a report by Grand View Research.1

Analysts identified patent expiries in an increasing number of partnerships and biologics, as well as new compounds, as the primary reasons behind this growth. Rising R&D costs, in general, were also identified as one of the industry’s top outsourcing drivers. Earlier this year, respondents to the 2017 Nice Insight Preclinical and Clinical Contract Research Survey, indicated that while initially, many companies outsource research, development and manufacturing activities to reduce costs; cost containment goals are no longer a top-line driver. Revealing outsourcing priorities, nearly one-third responding to Nice Insight’s CRO Outsourcing survey (32%) listed access to specialized technologies as the main reason they partner with CROs. They also seek to improve quality (12%), incorporate outsourcing in their strategic plans (11%), look for operational and subject matter expertise (9%) and leverage the regulatory expertise of CROs (7%).2

According to Grand View: “Even government organizations are outsourcing their clinical trial activities to CROs so that they can carry out the clinical trials with the required infrastructure, expertise, and minimize cost and timelines.” For many, speed-to-market concerns further support and spur demand for strategic research and development outsourcing partners.

Globalization Prompts CRO Growth and Consolidation

Capstone Research notes the increasing complexity of clinical trials has boosted the demand for more sophisticated, globalized CRO partners that can offer a broader range of advanced capabilities.3 Commenting to an industry publication in May, Mark Goldberg, PAREXEL’s CEO remarked, “We continue to see an industry focus on specialty indications such as oncology, autoimmune diseases, and rare diseases, which tend to require more complicated trials. We’ve seen trial complexity increase significantly in terms of the amount of data collected per patient, the numbers of studies and tests performed, and the numbers of endpoints included.”4

Nice Insight data supports what many contract research service providers have asserted; contract service organizations that serve as long-term partners deliver better value from the supply chain.5 Comprehensive support, combined with access to novel and proprietary technologies, remains key to accelerating this process, and has become central to many drug development.

Is There a Temporary Pause in Spending?

Nice Insight’s Preclinical and Clinical Contract Research Survey data revealed budgets might be somewhat slowing, noting that the number of drug manufacturers that plan to spend more than $50 million/year on contract research services dropped from 56% in 2016 to 47% in 2017. Similarly, in 2016, nearly 75% of respondents expected spending on contract research services to increase, while in 2017 that number was just 40%, with 50% predicting a decline in spending over the next five years.5

The reduced optimism and slowed spending revealed by the survey paralleled a drop in the number of new drugs approved by the FDA in 2016 – down from 41 in 2014 and 45 in 2015 to just 19 in 2016, as of November 29, 2016. However, about half of the respondents (48%) to the 20176 survey expect the number of research services organizations they partner with to increase. With the FDA back on track logging 32 new drug approvals by September 2017,6 the downward indicator may likely be viewed as a calm period before growth in the demand for CRO services, leading to a sustained CAGR as projected by Grand View.

Faster Development Pathways Ready to Sustain CRO Strategy Past 2018

The FDA is changing the way it does business. The industry Commissioner of the FDA, Scott Gottlieb, is increasingly vocal in articulating the agency’s strategy supporting drug development.6 Recent speeches reflect his and the agency’s desire to fix the economics of drug R&D. Gottlieb and Center for Drug Evaluation and Research (CDER) Director Janet Woodcock, want to streamline the approval process and reduce the cost of bringing new drugs to market. With a speedier, less costly path to approval, their efforts have the potential to unleash a new wave of drug development. An investment increase would sustain the demand for CRO services, especially in the dynamic biologics sector.7

Overall, the high level of M&A activity suggests that competition among CROs appears to be tightening, making it increasingly important for outsourcing partners to grow and acquire the capabilities to meet the expectations of sponsors, drug owners and developers. Nice Insight analysis finds that to be successful competitively, contract service providers should differentiate themselves, deploying unique technologies and structuring operations to increase flexibility, efficiency and sustain quality. This includes fielding a culture that provides excellent customer service and the ability to rapidly acquire new knowledge in response to customer needs.8

M&A Activity Reveals Strategic Positioning

Over recent months, CRO merger and acquisition activity in the CRO sector has lulled to a certain degree. Bloomberg reported in June that M&A spending in the CRO industry in 2017 was $13 billion, down more than half from the $24 billion in deals in 2016.9

CROs are increasingly being acquired by private equity firms, perhaps indicating that investors are expecting CROs to grow over the next decade.10 As Business Insider reports, stocks of public CRO companies are up by more than 25% over the past year, “signaling public-market investors are betting on the companies too, potentially in anticipation of activity to come.” As it stands, in late 2017, eight of the top ten CROs were involved in a major merger or acquisition including:

  • Pamplona Capital Management’s acquisition of PAREXEL International for $5 billion taking the CRO private in June.11
  • Albany Molecular Research Inc. acquired and taken private by Carlyle Group and GTCR for $922 million.12
  • Chiltern’s purchase of Integrated Development Associates.13 Inc Research Holdings merger with InVentiv Health, a $4.6 billion deal.14
  • Charles River Laboratories accelerating its strategy, acquiring Agilux and Phoeninx.15
  • Quintiles Transnational’s 2016 merger with IMS Health in an $8.75 billion deal.16
  • LabCorp’s $6.2 billion deal for Covance in 2015.17

As we near the end of 2017, the CRO industry’s potential to influence the direction and prospects of the larger pharmaceutical research and development effort has never been clearer.

References

  1. http://www.grandviewresearch.com/press-release/global-healthcare-cro-market
  2. 2017 Nice Insight CRO survey http://www.capstonellc.com/sites/default/files/Capstone%%2020Pharmaceutical%20Outsourcing%
  3. 20M%26A%20Report_Q1%202017_0.pdf
  4. http://www.contractpharma.com/issues/2017-05-01/view_features/cros-nextgendrug-development/53328
  5. Changing Expectations in the Pharma Outsourcing Market Nice Insight – Interphex 2017 March 23, 2017- INTERPHEX-NY-2017-Technical-White-Paper-Thats-Nice-2
  6. https://www.fda.gov/drugs/developmentapprovalprocess/druginnovation/ ucm537040.htm
  7. https://endpts.com/scott-gottlieb-vows-to-shake-up-the-fda-backing-a-trend-towardfaster-drug-development/
  8. https://www.pharmasalmanac.com/articles/pharma-contract-services-consolidationwave-continues
  9. https://www.bloomberg.com/news/articles/2017-06-21/biopharma-outsourcing-isgoing-through-deal-bonanza-in-u-s
  10. http://www.businessinsider.com/mergers-and-acquisitions-in-the-contract-researchorganization-2017-7
  11. https://www.parexel.com/company/news-events/press-releases/2017/parexelinternational-enters-definitive-agreement-be-acquired-pamplona-capitalmanagement-8810-share-cash
  12. https://www.carlyle.com/media-room/news-release-archive/amri-signs-definitiveagreement-be-acquired-carlyle-group-and-gtcr
  13. https://www.chiltern.com/about-us/news/chiltern-acquires-japanese-clinical-researchorganization-integrated-development-associates-co-ltd/
  14. http://www.inventivhealth.com/our-ideas/press/2017/inventiv-health-and-incresearch-to-merge
  15. http://ir.criver.com/phoenix.zhtml?c=121668&p=irol-newsArticle&ID=2292131
  16. http://www.criver.com/about-us/news-events/featured-stories/2016/charles-riverlaboratories-acquires-agilux-laborat
  17. http://www.quintiles.com/news/2016/05/ims-health-and-quintiles-to-merge

 

Nigel Walker

Mr. Walker is the founder and managing director of That’s Nice LLC, a research-driven marketing agency with 20 years dedicated to life sciences. Nigel harnesses the strategic capabilities of Nice Insight, the research arm of That’s Nice, to help companies communicate science-based visions to grow their businesses. Mr. Walker earned a bachelor’s degree in graphic design with honors from London College.