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As the size, complexity, duration, cost, and globalization of clinical trials has grown, pharmaceutical and biotech companies have moved to outsource clinical activities to CROs to achieve a wide range of objectives.
As the size, complexity, duration, cost, and globalization of clinical trials has grown over the last several decades, pharmaceutical and biotech companies have increasingly moved to outsource clinical activities to contract research organizations (CROs) to achieve a wide range of objectives. From achieving scale to accessing deep domain expertise in a given therapeutic area, CROs enable the flexibility that sponsors rely upon to deliver on increasingly demanding clinical research objectives and timelines. Large CROs are particularly well-suited to offer a one-stop shop of service offerings, in an attempt to expand both specialized capabilities and geographical reach to service the large Phase III global studies that have become commonplace. As a result, demand for CRO-conducted clinical trials is on the rise. In 2014, the global drug discovery outsourcing market was USD 14.9 billion and is expected to reach USD 25 billion by 2018, while the market for CRO-conducted clinical trials in 2014 was USD 23.1 billion and is expected to increase to USD 35.8 billion by 2020,.
In response to intense competition and the need to offer a comprehensive portfolio of service offerings, the CRO industry has been undergoing significant consolidation in recent years. As such, a number of noteworthy mergers and acquisitions (M&As) have occurred recently:
In 2016 alone, $24 billion was spent on CRO M&As. Additionally, according to a 2017 report by Industry Standard Research (ISR), 60% of the market share in clinical trials is controlled by the top 9 CROs. With all the M&A activity happening in the CRO industry, does this trend have benefits that extend beyond just CROs into the pharmaceutical industry as a whole?
Benefits of CRO Consolidation for Sponsors
Sponsors of large, global Phase III clinical trials want a competitive CRO market with plenty of quality CROs with global reach to choose from. These sponsors are also looking to form strategic partnerships and preferred provider arrangements with just a few large CROs, as this is far easier to manage.
From a CRO perspective, winning one large $200-300 million Phase III study can be a huge benefit for the bottom line. As a result, there is pressure within the CRO industry for mergers as a way to quickly expand reach into places like the Middle East, North Africa, and parts of Asia other than China and India, in order to be attractive to large sponsors. Additionally, mergers can provide a quick way for CROs to expand their offerings beyond clinical services in order to attract business from all aspects of the drug development lifecycle.
This M&A trend in the CRO industry provides a number of benefits for sponsors:
Drawbacks of CRO Consolidation
While the CRO consolidation phenomenon is overall a positive trend for the pharmaceutical industry, there are some drawbacks to consider:
While CRO consolidation may create some disruption in the short term, having less CROs available for sponsors may ultimately provide some benefit. With less options available, pharmaceutical companies and CROs may be forced to create more long-lasting, win-win partnerships. Collaborative partnerships will inevitably lead to more operational efficiencies in the drug development process, ultimately reducing the time required to get effective therapies to patients in need.
Mergers in international enterprises are difficult to accomplish due to a myriad of issues (e.g., cultural differences, IT, tax considerations, etc.) That said, CRO mergers have the potential to be significantly beneficial to both sponsors and CROs, as well as the clinical trials industry as a whole. A fact that will continue to fuel the consolidation trend, with mergers of large CROs and smaller “boutique” CROs that have a specific therapeutic focus accounting for much of the activity. As aptly noted by Henry Levy in the Journal of Commercial Biotechnology, “What has been outsourcing on demand with many external service providers and redundant internal functions will become an integrated model of outsourcing with a limited number of strategic partners and long-term relationships.”
But CRO consolidation comes with its share of new challenges for the industry. While the Tufts CSDD research indicates that technology adoption in the CRO industry is higher than with sponsors, CRO merger activity may actually hinder efforts to adopt new technologies due to organizational bureaucracy and enterprise integration challenges. Additionally, as CROs grow in size, their ability to maintain shorter cycle times as indicated in the Tufts CSDD research may be challenged due to lack of organizational agility. In the end, these are familiar operational challenges also faced by sponsor companies involved in M&A activities. When implemented effectively, CRO mergers can add significant value to the pharmaceutical product development lifecycle, and ultimately provide benefits to sponsors, CROs, and the patients who rely on their life-saving medicines.
Craig Morgan, Head of Marketing for goBalto
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