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A look at how the current financial crisis has established more opportunity for the contract research organization industry.
The focus on outsourcing of not only small and medium sized entities but also big pharma companies due to cost containment and regulatory pressures has led to several years of double digit growth for contract research organizations (CROs). According to the Contract Research Annual Review 2008, the CRO market grew by an extraordinary 28% last year while the pharmaceutical industry struggled with growth of around 5%. Headcounts in clinical development departments at pharmaceutical companies have been static or even decreasing (in the case of mergers and acquisitions) in the past few years, while CROs expanded their offers toward full service.
Norbert Clemens, MD, PhD
Strategic outsourcing allows pharma companies to focus on their partner's core strengths and long-term goals. This route allows the sponsor to maximize internal resources and capacities of the vendor. Tactical outsourcing relates to short-term projects that cannot be handled internally due to the lack of internal capacity or resources, allowing for streamlining processes, fast turn around times, and access to additional equipment.
Forecasts predict that there remains a sufficient growth opportunity for the CRO industry until 2012. The last months have been turbulent for the economy with increased merger and acquisition activities of pharmaceutical companies in order to expand market capitalization and tackle the problem of thinning pipelines.
Complete R&D portfolios have been subject to thorough reviews. Sanofi-Aventis, for instance, announced the discontinuation of 14 development programs, four of these had reached Phase III, leaving 51 projects in the development pipeline.
The economic downturn will certainly have an impact on CROs, but how substantial and how long will this last?
Short-term effects induced by delays in payments, shifting of projects, backlogs, and prioritizations with fewer projects have reached the CRO industry already. Kendle, for example, reported a 78% drop in profit compared to the same period last year. Top executives at Kendle categorize the Q1 results as unique and view them as a near-term, manageable event.
The recession might result in reduced growth rate, but the mid- and long-term effects of downsizing of R&D in the pharmaceutical industry will create opportunities for contract researchers.
The current outsourcing market is different compared to other industries, such as steel or car production where two or three companies represent the majority of sales in the market. The CRO market is highly fragmented and the number of CROs worldwide has reached over 1100.
A consolidation of the customer base through mergers/acquisitions should therefore not pose a problem for the majority of CROs. Large global contract research providers like Quintiles, Covance, PPD, Charles River Labs, and ICON—holding 45% of the total market—will expand their capabilities in emerging markets for cost reduction purposes.
Unmet medical needs in oncology, CNS, cardiovascular, and infectious diseases will continue to be major drivers of drug development. CROs focusing on full-service offerings in these therapeutic areas will continue to grow profits.
In conclusion, one could state that unlike in other industries, the current financial crisis will create opportunities for contract research organizations.
Norbert Clemens, MD, PhD Head of Clinical Development CRS Clinical Research Services Mannheim GmbH www.crs-group.de