Clinical Research Organisations (CROs) are now well-established as part of the pharma and biotech landscape – so much so that it’s difficult for anyone involved in clinical research to imagine life without them, writes Mark Greener.
Indeed, CRO’s rapid growth – both in the number of the studies they perform and the value of the market – has been one of our sector’s hallmarks over the last few years. The growth is testament to the considerable added value that CROs bring to their clients. But with leading CROs becoming bigger than most of their clients, can they grow any larger? Can they continue to identify new areas in which they can innovate – or has it all been done before? And with all the pressures facing their clients, will the next few years see evolution or revolution in the CRO market?
Certainly, investors feel the CRO market has considerable potential for growth – as the recent purchase of Chiltern by a private investment group underscores. Estimates vary, but the worldwide CRO market is worth between $10 billion to $14 billion a year. And it’s growing by between 10% and 16% annually. Covance, to take just one leading CRO as an example, recently announced net revenue growth of 14.0% and, in the second quarter 2006 alone, record net orders of $555 million. In other words, CRO market is growing faster than overall development spending, which is rising by around 10% annually. “The demand for capacity, speed and cost containment will continue to drive strong growth in CRO usage,” says John Watson, vice president of corporate sales and marketing, Covance Inc.
In the short term, such bullish optimism seems justified. In May, the Tufts Centre for the Study of Drug Development reported that the number of new clinical studies started by the top 10 drug companies in the USA had risen by 52% between 2003 and 2005. This compared to a 21% decline from 1993-7 and 1998-02. CROs will perform most of these studies. According to Tufts, CROs now perform around 70% of clinical studies. Academic centres account for most of the remainder.
Nevertheless, CROs keep a wary eye on some bear-like shadows massing ominously on the horizon. Watson, for example, notes that pharma and biotech are “under extreme pressure from several fronts – political, environment, societal and technological.” He cites numerous examples: Pharma companies need to optimize operations, reduce R&D costs, refill their pipelines as patents expire and globalize the clinical trial base to find treatment-naive patients. “Those CROs that are attuned to this dynamic environment, build strong relationships with their clients, and deliver innovative solutions will be the best positioned for continued growth,” he says.
CROs also need to keep attuned to the changing dynamic between biotech and big pharma. The Tufts Centre reported in May that leading firms increased the proportion of licensed in compounds from one in seven between 1993 and 1997 to one in four between 2003 and 2005. And biotech is becoming increasingly savvy in its commercial outlook, hanging on to potentially lucrative molecules for as long as possible. If biotech companies support their molecule with human data in phase 1 and beyond, the NCE becomes a more valuable proposition when it comes to thrashing out a licensing deal.
“Increasingly, emerging companies are holding onto their molecules longer before out-licensing to established companies,” says Tony Cork, President of Covance Early Development in Europe. “At the same time, a greater proportion of new molecules are coming from these emerging companies. As these organizations have limited in-house resources, we expect these trends to drive increasingly higher outsourcing ratios.”
Covance’s Programme Management Services are tailored specifically to help these emerging companies. "Through these services, Covance provides the scientific, logistical and tactical support to help clients achieve their goals," said Cork. "These could be submitting the investigational new drug or clinical trial application, initiating first-in-human dosing or conducting a proof-of-concept clinical trial. The result is a streamlined development process that allows clients to make faster decisions and meet their key milestones."
Given the likelihood that the sector will continue to prosper, CROs represent a tempting prospect for consolidation and takeovers. In July, the private investment group Czura Thornton acquired Chiltern International. Less than a month later, Charles River Laboratories completed the sale of its phase II to IV clinical service business to Kendle International for $215 million in cash. Biotechnology Healthcare suggests that there are around 12 major CROs and perhaps 800 smaller players world wide. So it seems there is considerable room for this trend to continue. Faiz Kermani a former Marketing Manager at Chiltern expects the next few years to bring greater consolidation and takeovers.
Certainly, it seems that the bigger CROs will need to attain and maintain a large critical mass to compete globally. “Regulatory pressures in the pre-clinical area are raising the bar in terms of the capital required to operated and maintain compliant facilities,” Cork at Covance adds. “We expect these pressures to restrict the growth of smaller CROs that have limited access to capital. Larger CROs will benefit from this.”
Furthermore, Kermani argues, full-service CROs will need to offer a worldwide service, allowing clients to access cheaper regions and those with ready access to suitable patients, such as those in Central and Eastern Europe, India and Asia. “Pharma companies will want to have a presence in these markets, partly as a response to their rivals being there but more importantly to widen their own opportunities in the global market.”
This expansion creates, Watson says, “great opportunities for those CROs that already have a significant global presence. New markets create the need for global resources, capacity and solutions from CROs, including expertise in logistics and current knowledge of local regulations, customs, etc.” For example, Covance offers a Virtual Central Laboratory service, which allows sponsors to conduct clinical trials in the most remote parts of the world.
“Nevertheless, there will always be some scope for niche providers in certain areas that the bigger organisations feel are not profitable enough,” Kermani suggests.
Watson agrees adding “There will always be a need for niche companies providing specialized services to support the industry. On the other hand, as the industry goes through continued consolidation and providers move more towards a full-service model, there may be less potential for niche providers to emerge. How that will ultimately play out in the marketplace remains to be seen.”
It’s a safe bet, however, that data management will become an increasingly important area for CROs. Nevertheless, the deal between Wyeth and Accenture is probably the most radical in this area. Accenture took over Wyeth’s entire clinical data management operation for 10 years. Accenture agreed to base a portion of its compensation on attaining certain performance objectives such as positioning Wyeth in the top 5% of companies based on clinical data management efficiency; reducing data processing cycle times by 50 to 75%; and reducing CRF processing costs by more than one-third. It’s still relatively early in the ten year deal: but Wyeth seems to be benefiting from the wholesale outsourcing and is seeing improved R&D productivity and returns on its investment.
And that brings us full circle: cost always has been, is, and is likely to remain the most important factor driving the CRO market. CROs will continue to help their clients improve their return on investment, but it will be through evolution rather than revolution. Radical as it was, the deal between Wyeth and Accenture was a logical evolution rather than revolution. It plays to both companies’ strengths: Wyeth in innovative R&D and Accenture’s heritage in streamlining complex transactional operations.
“Cost was and is the major driver,” Kermani concludes. “It's just too expensive to do everything yourself and companies have become very cost conscious - even big pharma. If you can show that you can carry out a particular task for a lower cost but maintain standards, companies will be interested.”