Globalisation of clinical trials, pressure for cost efficiencies in pharmaceutical research and development, and limited capacity in the fast-growing biotechnology sector are all helping to fuel a compound annual growth rate of 12.6% in the worldwide market for contract research organisations (CROs), say healthcare analysts from Turner Investment Partners.

As long as “the drug development process remains costly and risky, as long as drug R&D spending continues to increase, and as long as cost control and outsourcing remain priorities with biopharmaceutical companies, we think CROs should flourish”, the analysts say in a recent commentary, Contract research helps keep drug pipeline flowing.

They cite data from Goldman Sachs projecting that the global CRO market should swell from US$16.3 billion in 2006 to US$29.4 billion in 2011. What is more, the analysts note, Goldman Sachs calculates that earnings before interest and taxes at CROs are more than US$20,000 per employee, one of the highest rates in any industry.

“That level of profitability is even more remarkable in light of the heavy hiring that CROs have done since 2004,” add analysts Heather Flick McMeekin, Frank Susteric, Vijay Shankaran and Theresa Hoang. During that period the six largest CROs have boosted their headcount by 57%, to 37,300 staff in total.

The biggest CROs have also pushed up their book-to-bill ratio (net new business divided by revenue) to around 1.4 to 1 over the past year. Such a healthy ratio “provides high earnings visibility, i.e., a good picture of CROs’ favourable future profit trends”, the analysts believe.

Among the key drivers of this trend, they point to tougher drug approval requirements, notably from the US Food and Drug Administration, that are elongating the development cycle and exacerbating the current financial and operational problems at biopharmaceutical companies – “problems that the outsourcing services of CROs are proving uniquely able to address”.

In essence, the analysts comment, “pharma companies are turning to CROs as an outsourcing solution in an effort to optimise their R&D spending”.

International trials

Regulators worldwide also prefer biopharmaceutical companies to conduct international multicentre clinical trials, while it is often much easier to enroll patients for certain types of trials overseas.

“These trends are benefiting CROs that have dozens of international locations,” the Turner Investment analysts observe. “Today, more than 40% of CROs’ revenue is generated outside the US, according to industry data. Kendle International, a leading CRO, anticipates that more drug R&D will migrate from the US to Europe, Asia and Latin America, with the company’s revenue there rising to 60% by 2010.”

In parallel, the all-important small biopharmaceutical companies that are supplying much of the R&D impetus for the wider industry are hard-pressed to fund all of the internal capabilities, laboratories and equipment needed to develop new drugs, especially in the preclinical phase.

As a result, the analysts point out, “these smaller companies have found it more practical to pay CROs … to handle preclinical testing. For instance, biotechnology companies now furnish more than 30% of CROs’ revenue, up from 21% in 2003. As we see it, that percentage should continue to rise steadily over the next few years.”

In light of these factors, the Turner Investment analysts see “a great deal of growth both domestically and internationally for CROs to pursue. Altogether, less than 25% of all drug R&D spending is outsourced, in our estimation.”

Possible barriers to future growth could include a diminishing customer base due to consolidation in the biopharmaceutical industry; lack of access to capital among early-stage, unprofitable biotechnology companies; or a surge in contract cancellations, which have averaged less than 6% per year.

“But we think that none of these risks are great in the near term, and we anticipate that CROs will continue to help their biopharmaceutical customers and apply technical expertise to the drug development process in a highly cost-effective way,” the analysts conclude.