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Yesterday's SMOs have given way to a new service provider that should be recognized.
The market for managed site networks has been quietly and steadily changing during the past five years. With the exception of Radiant Research, classic site management organizations (SMO) appear but a remnant of their former selves. At the same time, new decentralized site networks have taken a dominant position within this small—and shrinking—study conduct segment. Given widespread and rising levels of sponsor–site relationship ineffectiveness, it is critical that biopharmaceutical and CRO companies understand how managed site networks are evolving in order to more effectively manage collaborations with this particular service provider.
Kenneth A. Getz MS, MBA
Sponsors are spending less on managed site networks in favor of individual part-time and dedicated investigative sites, a reversal of the trend observed in the late 1990s and early 2000s. In 2006, research sponsors will spend in total an estimated $7 billion on study grants to investigators. This level of spending has grown 10.7% annually since 2000. In that same period, spending on study conduct services provided by managed site networks—including SMOs—has grown only 2.5% annually, from $281 million in 2000 to $325 million in 2006.
This year, community-based part-time and dedicated investigators capture 56% of the market for investigator grants; academic center-based investigators capture 39% of the market. Managed site networks capture only 4.6% of the total study grant market, down from 7% six years ago. Despite all of its promise, traditional SMOs never fully took hold in a study conduct market characterized by fragmentation and high levels of inefficiency, and one that lacks sophistication and standardization. So what happened?
Radiant the Outlier
In the mid-1990s, SMOs appeared well positioned to meet growing demand for faster development cycle times, improved data quality, and controlled clinical trial costs. Few argued with the numerous conceptual benefits offered by SMOs including:
But since their introduction 15 years ago, SMOs have struggled to deliver on these conceptual promises and have been through a wide variety of incarnations. The first SMOs emerged under a cloud of scandal, when Future HealthCare, an early entrant, was indicted for manipulating its financial records in order to influence investors.
The mid-1990s saw a wave of new entrants—owned-site and affiliation model SMOs offering single-and multi-specialty expertise—including Affiliated Research Centers (ARC), Clinical Studies Limited (CSL), Collaborative Clinical Research, Hill Top Research, Health Advance Institute (HAI), InSite Clinical Trials, Protocare, Integrated Neuroscience Consortium (INC), Rheumatology Research International (RRI) and several hybrid CRO/SMOs such as Clinicor, MDS Harris, and Scirex.
In the late 1990s, SMOs entered their most active period of venture capital fund-raising and aggressively pursued expansion and diversification strategies. Collaborative Clinical raised $42 million in a 1996 initial public offering. ARC, INC, InSite, and HAI each closed rounds of venture capital financing. Phymatrix, a $200 million physicians practice management group, acquired CSL for $85 million. nTouch Research (formerly Novum) raised $8 million in venture capital funding in order to double the size of its investigative site network through the acquisition of HAI. And having raised more than $14 million in 1999, Radiant Research purchased SMO Hill Top Research.
By the early 2000s many SMOs had exited the market, while others further diversified their services, venturing into traditional CRO and patient recruitment offerings. To name but a few:
With the exception of Radiant Research, industry observers and scholars have concluded that traditional SMOs failed to demonstrate and deliver the value of centralized investigative site operating controls. SMO management structures were cumbersome and challenged each organization's ability to operate profitably for a sustainable period of time. Traditional SMOs struggled to compete for sufficient levels of new business and manage positive cash flows, and they failed to achieve revenue and earnings growth that would satisfy their investors.
SMO insiders express the failures of traditional SMOs differently. "Trial sponsors never gave SMOs the opportunity to prove their worth," explained Eric Hayashi, chief executive officer of LabConnect and former head of business development for Radiant Research. "Sponsors have an investigator-centric method of selecting sites. Changing that purchasing behavior is difficult given the paucity of successful SMOs. Only a few brave sponsors ever relied on an SMO to manage an entire study."
"Many owned-site SMOs went into this business with the belief that they could wring excessive expenses out of large, successful sites run by frugal physician entrepreneurs," added Hayashi. "Instead, most SMOs added layers of administrative burden that ultimately made them less profitable."
"I agree that sponsors want to deal directly with the investigator. As a result, there's little glue holding SMOs together," said Mark Hovde, senior vice president of marketing for Mountain View, CA–based Pharsight. "Once a sponsor is introduced to a good site, it sees no reason to keep paying the middleman."
"Site selection and management was always a problem for SMOs because performance was predicated on so many variables, including staff turnover and the competitive landscape," said Beth Harper, a Dallas, Texas-based consultant and former manager of operations for RRI. "Half the problem is that SMOs could never reach a consensus on contract language and definitions, leaving sponsors unable to understand what an SMO does."
The past several years have seen strong growth in a new structure among managed site networks: decentralized site networks. The Tufts Center for the Study of Drug Development has been tracking this development. These new players tend to operate regionally and have extremely lean operations. They are comprised of small networks of sites—on average five—loosely connected and supported by minimal standardized management services provided across the network by one site, from which that network originated. Basic management services include contract, budget, and regulatory assistance.
Although many decentralized site networks have established exclusive arrangements with their investigators, they encourage autonomy and direct interaction with study sponsors. As a result, they address sponsor's "investigator-centric" preferences while offering minimal—though essential—operating support. Examples of decentralized site networks include Pivotal Research, Benchmark Research, ResearchAcrossAmerica, and RxTrials.
Decentralized site networks are building momentum. They generated $215 million in study grant revenue in 2006, and they are growing 9.3% annually. This highly fragmented group appears well positioned to capture growing market share over the next several years while containing operating costs.
"Less venture capital and private equity funding means that sponsor companies are much more likely to see smaller, regional site networks like Pivotal and RxTrials take hold," concluded Hayashi. "Sponsors and CROs want to work more closely with the investigator and study staff, they want a responsive and effective relationship with fewer intermediaries. These [decentralized] site networks may be the next SMO."
Kenneth A. Getz MS, MBA, is a Senior Research Fellow at the Tufts CSDD and Chairman of CISCRP, both in Boston, MA, email: firstname.lastname@example.org