Sales growth in the contract research industry accelerated to around 16% year on year in 2010, generating a worldwide market worth some US$27 billion, a new report from Biopharm Knowledge Publishing says.
While the increase in estimated growth from 13% in 2009 was welcome news for a sector in which a number of major players took a battering from global economic contraction and the belt-tightening that followed in the biopharmaceutical industry, profits were once again squeezed in 2010, notes the Contract Research Annual Review 2011.
There was also a high volume of mergers, acquisitions and joint ventures among contract research organisations (CROs). Consolidation in the sector is being driven at least in part by a string of broad-ranging strategic alliances between pharmaceutical multinationals and (usually) large, publicly quoted CROs.
“While biopharmaceutical companies will look to complete more and more of their R&D process in flexible and cost-effective ways, the business is becoming more and more about partnership, rather than simple outsourcing – 13 major pharma companies announced 22 contract research alliances in the last year,” Biopharm Knowledge Publishing comments.
Not good for profit
In profit terms, 2010 “was not a good year in general for the publicly quoted companies where we have data”, the report observes. Some companies “may be trying to address this problem by downsizing their workforces” but this could bring up “quality issues if increases in the use of automated processes in CROs are not introduced”, it cautions
Many of the mergers and alliances seen in the sector have been international in scope and many of them have involved developing countries, “although the USA continues to dominate”, the Contract Research Annual Review 2011 points out. “We have also noted a sustained but reduced interest from private equity and investment banks in the sector.”
If the trend towards strategic alliances continues, it “looks set to have a major impact on the size of the outsourced sector and we would predict significantly greater growth in the market once these deals get underway”, the report predicts.
What is not clear, though, is how this trend will affect the declining profitability of the sector and “whether the economies of scale that in other industries have accompanied strategic deals will be forthcoming”.
Moreover, small to medium-sized CROs may find themselves edged out of relationships with Big Pharma “if the deals produce the benefits that the sponsors expect”, the report suggests.
There may be an upside, it adds, “in that the small and medium-sized CROs will be increasingly attractive to small and medium sized-companies who may feel like second-tier clients of those major CROs which have consummated strategic alliances”.
No one-stop shop
While is still something of a trend towards therapeutically specialised CROs, this is overshadowed by the growth of the major publicly traded players, the report observes.
The ‘one-stop shop’, however, “has almost disappeared so that outsourcing the complete development of a drug to a single CRO is now quite unlikely although not impossible, unless the CRO is permitted to outsource in its turn without reference to its strategic partner or sponsor”, the Contract Research Annual Review 2011 suggests.
Whatever the shifts in relationships within the sector, CROs are “now indispensable” to a pharmaceutical industry that continues to struggle with challenges such as government price controls, a dearth of new block buster candidates, personalised medicine and patent expiry, the report says.
“The rising and rapid trend to strategic outsourcing has been a sudden and somewhat unexpected response to the industry’s pressures,” it comments. “Perhaps in 2011/12 we will see a pause in the strategic deals while their effectiveness and benefits are assessed.”