American Pharmceutical Review, January 2016
The recovering global economy and continued high demand for advanced medicines in all regions of the world has provided pharmaceutical companies with the cash needed to invest significantly in discovery and innovation for the last several years. That investment has resulted in very robust pipelines and in part the highest FDA approval rates seen in some time. The commercialization of these new drugs will allow this heightened R&D activity to continue.
Companies are increasingly turning to contract research organizations (CROs) for support and to complement their efforts. Indeed, the latest estimates from TechNavio (January 2015) have the CRO market growing at a compound annual growth rate (CAGR) of 9.83%.
A healthy growth rate was certainly realized in 2015, and the factors driving that growth continue to influence the pharmaceutical market in 2016, and increasing demand is expected again this year. In fact, according to the nearly 600 outsourcing-facing pharmaceutical and biotechnology executives that participated in the new 2016 Nice Insight CRO Outsourcing survey, the level of R&D outsourcing by pharmaceutical/biopharmaceutical companies will expand significantly.
Many External and Internal Drivers
Current global economic trends and developments within the pharmaceutical industry are combining to drive the greater use of CROs. The greatest external driver is the growing demand for advanced medicines, not only in mature economies, but also in markets with rapidly improving economies. The key factors influencing this growth are the aging of the global population; the increasing numbers of patients with chronic diseases, including people in once emerging economies that now have established middle classes; and the improving global economy and continued increase in wealth in many emerging markets, which also now have increasingly sophisticated healthcare systems.
The increased consumption of advanced medicines and global economic growth have both had direct impacts on the need for support from contract research organizations. Both pharmaceutical and biopharmaceutical companies have had the cash available to significantly increase investment in discovery and innovation efforts, which are paying off today in the form of very robust pipelines of drug candidates. At the same time, the FDA’s wider use of accelerated approval pathways (Fast Track and Breakthrough Therapy Designations and Accelerated Approval and Priority Review processes), combined with the greater number of drug candidates, has resulted in an increasing rate of FDA NDA/BLA approvals; the numbers in 2014 and 2015 were near-peak, and similar levels are expected going forward.
The above two trends have created capacity issues for pharma companies. They simply don’t have the internal ability to meet demand for testing and clinical trials. In many cases, the drug molecules themselves create a need for external support. Both small- and large-molecule drugs are increasingly complex; poorly soluble compounds, antibody-drug conjugates and highly potent APIs, for instance, require specialized facilities, equipment and operational and technical expertise. The increasing focus on smallvolume, niche and targeted treatments is also requiring access to unique skills and expertise. In addition, traditional pharma companies with no biotech expertise that are now involved in the development of biologic drugs and the growing number of small, virtual status with limited research facilities are all reliant on service partners.
Outsourcing also provides a means for increasing efficiency and productivity and reducing cost, which are of primary interest to pharmaceutical companies for many reasons. The movement towards evidence based medicine continues, with drug companies increasingly expected to provide new treatments that provide significant improvements over existing therapies, and at a reasonable cost. They also face increasingly aggressive competition from generics, and now biosimilars (particularly with the US approval pathway now established), which is also requiring new strategies and often proprietary technology to achieve effective lifecycle management. In addition, demand growth is now occurring in emerging markets, rather than mature economies, and low-cost drugs are expected. Outsourcing at the earliest development stages to CROs with bioanalytical expertise is also helping drug manufacturers identify the most promising candidates much earlier, thus reducing overall R&D expenditures.
The results of the Nice Insight 2016 CRO survey of professionals in the pharmaceutical and biopharmaceutical industries aren’t surprising in the context of these numerous global and industry-specific factors that favor outsourcing. Respondents indicated that their companies dramatically increased year-over-year spending on outsourcing from 2015 to 2016–the fourth year in a row of significant increases.
Most notably, while the percentage of respondents whose companies spent more than $50 million annually on outsourcing remained fairly stable at 24 to 23% from 2012 - 2015, that number more than doubled to 56% for CROs in 2016. Meanwhile, the percentages of respondents whose companies spent less than $10 million and $10 to $50 million on outsourcing to CROs both decreased from 2015 to 2016 from 62% to 32% and 16% to 10%, respectively.
Based on survey responses, that level of growth is likely to continue in 2016 and beyond. Nearly three-quarters of respondents to the new CRO survey expect their companies to increase expenditures on contract research services over the next five years. Another 21% expect their level of outsourcing to remain the same, while just 6% predict a decrease in spending on contract research services. In addition, 75% of respondents to the CRO survey indicated that they use as many as 10 service partners, while an additional 7% use 11-20 and 5% use 21-30. Furthermore, 64% of respondents to the CRO survey expect to increase the number of service partners they hire going forward, with 33% anticipating the number will remain the same, and only 1% expecting it to decrease.
The dramatic increases in outsourcing by respondents to Nice Insight’s survey seem to reflect, at least in part, the strong growth in the number of drug candidates. Just over 50% of respondents to the CRO survey indicated that expanding R&D portfolios are driving their increasing use of outsourcing partners. Company strategies are also shifting towards a larger proportion of outsourced relationships in their supply chains due to the need to address patent life issues, the need for novel delivery forms and other specialized capabilities, and a desire to increase decentralization for greater flexibility. Respondents also indicated that they are increasing their level of outsourcing based on earlier positive experiences.
The reason for outsourcing most often cited by survey respondents is the desired to improve quality. Other important drivers include the desire to increase efficiency, reduce costs, and time to market, improve processes and gain access to specialized expertise. Participants in the 2016 Nice Insight CRO Outsourcing survey are also looking to gain competitive advantage by outsourcing to CROs.
Importantly, they are looking for these benefits at all development phases. The largest percentage of respondents (63%) indicated that they are outsourcing Phase II projects to CROs, while 58% outsource Phase I R&D activities, 53% Pre-clinical (including discovery phase) projects and 51% Phase III R&D work. This strong distribution reflects the recent industry investment in innovation and currently robust drug pipelines, with drugs steadily moving towards commercialization. Indeed, 39% of respondents are outsourcing Phase IV/Post-launch projects, which while lower than the level for other phases due to the attrition that occurs as safety and efficacy are evaluated, is relatively high for the commercialization stage and is likely due to the higher drug approval rates witnessed in the last two years. In addition, the fact that Phase II projects are most often outsourced and the high percentage of participants outsourcing Phase IV projects may indicate that new efforts to weed out unpromising candidates early on and only progress those that are likely to succeed onto clinical trials are achieving the desired results.
CRO Differentiation Still Needed
Based on the results of the Nice Insight 2016 CRO Outsourcing survey presented above, it certainly seems that CROs will have a very successful year in 2016. There is a catch, however. While pharmaceutical and biopharmaceutical companies are indeed increasingly outsourcing R&D activities to CRO, they are very selective about which CROs they are willing to partner with. No longer are the majority of pharmaceutical companies willing to settle for tactical supplier relationships; today service partners that are well positioned to participate in preferred or strategic supplier relationships will capture most of the expanding business.
Specifically, 69% of survey respondents seek “Preferred Suppliers” or “Strategic Partners”, and the preference for tactical suppliers dropped from 35% to 31%. CROs that are chosen offer a combination of high-quality, superior, flexible customer service and novel, proprietary technologies designed to address key customer needs, all at a competitive price (and often through creative contractual agreements).
There are no guarantees of continued business, however. While 82% of respondents indicated that they were somewhat or completely satisfied, 13% were neutral and 6% were somewhat or wholly unsatisfied. Key sources of dissatisfaction: poor product or service quality, cost overruns, inflexibility, inadequate customer service, lack of timeliness in resolving issues and security/confidentiality issues. Notably, 56% of survey participants indicated they would change CROs to receive better quality. Other drivers for switching include better pricing, timeliness, logistics support and operational expertise.
More Details About Nice Insight’s New CRO Survey
For the first time since That’s Nice began gathering data on the pharmaceutical and biopharmaceutical contract services markets, the original Nice Insight outsourcing survey was divided in 2016 into two separate surveys. This approach was adopted in order to focus on the differing aspects of the contract manufacturing and research markets.
The 2016 Nice Insight CRO Outsourcing survey includes responses of 586 outsourcing-facing pharmaceutical and biotechnology executives.
Importantly, the majority (37%) of survey participants are key decision-makers (executive/management positions) in their organizations. Professionals with positions in operations and quality control (31%); R&D, formulation and analytical (15%); regulatory affairs (4%) and contracting, sourcing and purchasing (6%) are also well represented. As a result, the survey is quite balanced with the opinions of both company leaders and those in the trenches. The new CRO survey is also truly global in nature, with 61% of respondents from North America, 20% from Asia and 19% from Europe. It also includes input from representatives of biopharmaceutical and pharmaceutical companies of all sizes–large (>$5 billion in annual sales – 39%), medium ($500 million to $5 billion – 41%), small ($100 to $500 million – 14%) and emerging (<$100 million – 7%).
These statistics clearly suggest that the results of the new 2016 Nice Insight CRO Outsourcing survey should be highly indicative of the conditions in the global pharmaceutical CRO sector. Initial analysis of the data also indicates that survey participants utilize contract research services in all key pharmaceutical and biopharmaceutical markets around the world. Most research projects are outsourced in the US (31%), Europe (14%), China (10%) and India (9%), but a reasonable amount of activity is also taking place in Japan and Korea (9%), Eastern Europe and Turkey (8%), Singapore and Southeast Asia (7%), Argentina and Brazil (7%) and the Middle East (6%).