While more than 40% of drug discovery and development (D&D) is now outsourced to contract research organisations (CROs), there is a “striking perception gap” between CROs and their clients over the direction this relationship is taking, a new report claims.

As Finding alignment: Opportunities and obstacles in the pharma/CRO relationships, a new report from the Economist Intelligence Unit (EIU) points out, many CROs are expanding their services across the D&D spectrum, particularly in the earlier stages.

In a survey of 251 senior executives from the life sciences industry that informed the report, sponsored by Agilent, 48% of CRO respondents said they intended to start or expand assay-development services and 64% screening services.

Yet other companies in the life sciences industry “expect to increase their use of CROs largely in fields in which they are already most frequently used, such as drug trials”, the EIU says. “It appears that the dominant model in the industry has yet to be defined.”

Cheap labour

Pharmaceutical companies “too often view CROs as sources of cheap labour rather than as true partners”, the EIU suggests.
Despite this perception, the report found there was “no longer outsourcing at the margins” in the life sciences sector, but rather a “fundamental shift away from the industry’s tradition of strong vertical integration”.

More than half of pharmaceutical manufacturers, for example, now conduct their Phase I, II and III clinical trials primarily through CROs.

Unproven and uncertain

In making this shift, though, biotechnology and pharmaceutical companies are betting on an unproven and as yet uncertain model, the EIU warns. “The ability of this approach to deliver improved innovation at a reduced price will require strategic vision rather than simple cost cutting.”

What life sciences companies are increasingly keen on is global alliances with CROs, as these companies strive to improve their return on investment in D&D. Just in the last two years there have been 22 such major alliances, the report notes.

While the most common client-CRO relationship remains one involving ad-hoc contracts, “the preferred relationship on both sides would be global alliances or partnerships that are regional or disease-specific” it says.

However, smaller biotechnology and pharmaceutical players – defined as those with annual revenue of less than US$100 million – lack the volume of business to make these arrangements worthwhile, favouring continued arm’s-length relationships with CROs that have local operations, the EIU points out.

“You almost need two different types of service for two different types of client,” John Ratliff, president and chief operating officer of Quintiles, is quoted as saying.

Ripe for consolidation

The report also found that the CRO market was ripe for further consolidation. A full 74% of CRO respondents to the survey said the trend towards alliances with biotech and pharma companies would drive consolidation in the short term.

Yet the indications are that CROs are not gravitating towards a unified business model. In the survey, 41% of CRO respondents planned to expand their range of services over the next three years to make themselves attractive as all-purpose partners, while the same proportion said they would focus on a single area or a limited number of specialised segments.

According to Tyco Peterson, industry analyst at JP Morgan, a “bifurcated market” is in the offing.

“At the high end, a handful of large global CROs with a substantial geographic presence and, at the low end, niche providers (in areas such as oncology) should be OK,” he believes.

“Those in the middle tier that are not unique enough or do not have appropriate breadth or scale will have difficulty.”