PharmaChem, October 2011

The contract research outsourcing market is heavily influenced by trends in the general objectives of big pharmaceutical and biotechnology companies — and their corresponding strategies.

As drug manufacturers seek to reduce fixed costs, implement scalability of manufacturing from clinical trials to commercialization, and access proprietary drug delivery platforms, they are looking to form more strategic partnerships with contract research organizations (CROs). This has led to solid growth for CROs positioned to take advantage. In addition, increased regulatory scrutiny has contributed to rapid growth of some CROs in the U.S., with share prices tripling over the past five years.

Another strong indicator for growth in the CRO market is the increasing number of drug makers now conducting post-marketing studies. Following a number of negative stories in recent years concerning drug safety, the FDA is currently encouraging phase IV trials.Dwindling project pipelines have also increased competition in the drug sector, so many pharma and biotech companies are looking to conduct comparative studies to illustrate product superiority over rival companies.

Dwindling project pipelines have also increased competition in the drug sector, so many pharma and biotech companies are looking to conduct comparative studies to illustrate product superiority over rival companies.

The shift in mindset towards strategic partnerships is something observed particularly among large and mid-tier pharmaceutical companies. This type of focus, rather than transactional relationships, centers on the objective of driving long-term growth, while solidifying other important criteria — such as supply chain integrity — which ultimately contributes to cost efficiencies and sustainability. Trends in the data from Nice Insight’s quarterly Pharmaceutical and Biotechnology Outsourcing survey support expectations regarding large-scale and small-scale contract research projects.

Big pharma or biotech companies with larger, long-term projects are seeking strategic alliances with larger CROs that possess both commensurate resources and capabilities. These projects — including phase IV trials — see both parties working with equal vested interest in common goals and successful outcomes. Smaller CROs typically don’t have the capacity to compete for these large-scale projects, leaving fewer companies as options for Big Pharma and biotechs to select and thus contributing to partnering trends illustrated in the data.

The Nice Insight Survey identifies three tiers of customers based on their annual spending patterns. Tier 1 represents companies outsourcing $50+ million USD per year, Tier 2 reflects companies outsourcing $10-50 million USD per year, and Tier 3 is companies outsourcing less than $10 million USD per year. The data shows that respondents from Tier 1 — primarily executives and decision-makers in large cap pharmaceutical companies — indicated they worked with or were most familiar with large CROs such as Covance, Charles River Laboratories, and Quintiles.

A similar trend was seen at the opposite end of the spectrum with small-scale projects. The smaller projects are likely one-offs that tend to reflect short-term, tactical projects involving a trade off between timing and cost. Pharmaceutical or biotech companies with these types of projects tend to favor small CROs as they are set up to handle the work and offer financial efficiencies. Once again, data supports this theory, with respondents from Tier 3 companies in the survey demonstrating the highest familiarity with smaller or niche CROs such as Blue Sky Biotech, Inc., Advion and Lambda Therapeutic Research.

These trends pose a challenging question for mid-tier CROs regarding how they position themselves and the business they pitch. Many have capabilities that can serve larger strategic relationships or smaller tactical projects — but the choice of which to go after has inevitable pros and cons. The survey data even supports this conundrum — as Tier 2 respondents reported working relationships or familiarity with a much more ambiguous range of CROs, from relatively large companies such as ICON to smaller organizations like Calbiotech and BioRasi.

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Many mid-tier CROs have the capabilities to enter into strategic partnerships or large-scale projects with big pharmas or biotechs, but they risk monopolizing their capacity and limiting opportunities for diversification. The possible downsides are that the CRO may become reliant on that single customer, which is questionably stable, and in some instances additional capital investment may be required to engage in the relationship, representing further risk.

The possible downsides of strategic partnerships with big pharma and biotech must be weighed against positives like a more stable source of income with potentially higher revenue attached to it, a higher percentage of guaranteed capacity utilization, greater occupation for labor, and less investment in marketing.

Many mid-tier CROs — as well as larger ones — also have the option to take on smaller projects, but this strategy has its own risks and rewards. With the lack of longevity or continuity, there is inherently less stability. This may increase the reliance on financial investment or support to keep working. More projects will be required to maintain capital utilization at a sustainable level, which requires more marketing and potentially all the hoops involved in winning new customers.

On the positive side here, the pipeline would not be dependent on one client, so if it robust enough, the diversification increases sustainability. This may require a higher marketing investment; however, capacity may be utilized without much expansion or capital investment.

So how does a mid-tier CRO determine the best strategy? Some may already have a philosophy based on their own market research or position, and others may go indiscriminately for whatever work they can acquire. Another philosophy is to look at specific types of work aligned with specialties. However, information gathered in the Nice Insight surveys provides further guidance on strategy development.

The surveys look at proposed spending breakdowns among Tier 1, Tier 2 and Tier 3 companies and in various project categories. Three main categories throw up some consistent and interesting trends. From the survey responses, the total annual budget being allocated by Tier 1 to outsourcing of pharmaceutical analytical testing was $133M, bioanalytical testing was $129M and clinical research was $133M. For small-scale projects emanating from Tier 3, the amounts were $43M, $41M and $39M respectively. And for Tier 2 (mid-tier), the anticipated spending was lower than Tier 3 spending at $34M, $28M and $37M respectively.

If revenue is king, mid-tier companies should seriously consider positioning themselves to attract strategic relationships with big pharma and biotechs, since the survey indicates a greater spend per project and a larger outsourcing budget.

The only category to buck this trend somewhat was regulatory support, but only to the degree that the gap in budget allocation among Tier 1 and Tier 3 respondents was less pronounced. The key takeaway being that the pure figures for mid-tier outsourcing were the lowest in every category and indicate that mid-tier CROs should be looking to win projects from businesses outside this range to find sufficient opportunities.