The biopharmaceutical industry is facing significant pressures. The blockbuster era is over, development costs are skyrocketing and uncertainty exists around regulation and reimbursement, while patent cliffs, generic erosion and a sluggish global economy all have industry executives losing sleep. In response, biopharmaceutical companies have been changing the way they approach virtually every aspect of their business, including research and development. To remain competitive, drug makers are focusing intensely on generating more value and productivity out of every dollar spent on R&D. However, the challenge of accelerating pharmaceutical product development while controlling costs creates a difficult balancing act for industry executives. Through the use of strategic outsourcing with third-party vendors, drug makers can maximise their internal resources while at the same time entering into risk-sharing agreements with CROs to generate significant cost savings.

Strong growth in the CRO sector

According to GlobalData’s ‘PharmaSphere: Global Dealmaking and Operations Strategies in the CRO Market’ report, the total combined peer group revenue from the leading CRO companies increased by 10.2% year to year, from $12.4 billion in 2011 to $13.6 billion in 2012 (see Figure 1, page 8). Largely fuelling the growth in the CRO sector was Quintiles, which independently contributed approximately $397 million to the $1.2 billion peer group increase. Its revenue grew by 12.1% year on year to $3.7 billion in 2012, which was considerably more than its closest rival, Covance, at $2.1 billion. Quintiles was effective at turning its order backlog into revenue and garnering new orders in its clinical services business, especially in the European and Asian markets. In fact, most of the companies GlobalData reported on saw positive year-on-year growth rates in 2012, ranging from 4.0% (Covance) to 22.8% (WuXi), with the exception of Charles River, which saw a slight revenue decline of 1.1%, largely due to unfavourable foreign exchange rates. The sector posted strong growth in 2012, outpacing the 6.8% increase in aggregate corporate revenue the same peer group recorded in 2011.

Strategic acquisitions and partnerships carried out by CROs also helped to drive up revenue. Just before the close of fiscal year 2012, Patheon completed its $269 million deal to acquire Banner Pharmacaps, one of the world’s largest manufacturers of proprietary softgel capsules for the pharmaceutical and nutrition industries. The purchase of Banner fills gaps in Patheon’s current product lines and also expands its geographic reach into markets in Latin America.

The globalisation of clinical trials has led many CROs to expand their strategic investments in emerging markets, especially in Asia.

Catalent Pharma Solutions made significant investments in its clinical trial business when it bought Aptuit’s Clinical Trials Supplies (CTS) business in February for $410 million. The all-cash transaction transformed Catalent into one of the largest global providers of clinical supply solutions, and added analytical chemistry, respiratory product development and regulatory consulting services to its mix.

The private CRO sector also saw its fair share of acquisitions. Clinipace Worldwide broadened its therapeutic expertise and regional footprint in Europe with its purchase of Paragon Biomedical. Known principally as an oncology CRO, Clinipace will now have the talent and resources to offer its clients services for managing clinical trials in the areas of immunology, infectious disease, cardiovascular and CNS.

While traditionally known for its work in IT outsourcing, the industry giant Accenture purchased Octagon Research Solutions, complementing its data management capabilities with Octagon’s proprietary software platform and deep regulatory knowledge. Accenture now has a fully integrated global business service empowered by customisable technology, which will give its pharmaceutical clients the ability to bring drugs to the market more quickly.

The peer group average operating margin increased to 8.2% in 2012 from 7.6% in 2011 (see Figure 1, right). GlobalData attributes the rise not only to higher sales revenue, but also to service providers implementing reorganisation plans. Companies such as Covance and Parexel shuttered operations and laid off hundreds of employees across the globe in efforts to help stem the profit losses in their early-phase segments – a trend that will continue in the near future as demand for early-stage work is being tasked to niche CROs and academic research labs.

Delivering service value to SMBs

CROs are adding new capabilities specifically aimed at helping small and mid-sized biopharmaceutical businesses (SMBs) optimise value and minimise risk. In a post-patent cliff world, these companies will become the heart and soul of the drug industry, and will be responsible for the lion’s share of the innovation it will see in the future. GlobalData believes CROs are ramping up their services to meet the requirements of SMBs, which tend to have varied needs and much smaller budgets than their ‘Big Pharma’ brethren, and hence require different outsourcing strategies.

Allume is a comprehensive go-to-market service introduced by Quintiles that combines consulting, clinical services, commercial expertise and information technology. It helps SMBs efficiently launch new products and shorten timelines to peak sales, while retaining strategic and corporate control of their assets. Biopharma companies are looking for new ways to optimise product value, expedite market access and mitigate commercialisation risk. Allume achieves this by simplifying and organising the complex, resource-intensive launch-planning process drawing on Quintiles’ 15 years of market-entry experience. To maximise value, companies must plan product launch much earlier in the drug development process, especially when preparing to enter new geographic markets. Through Allume, Quintiles provides the strategic thinking, deep therapeutic insight and local market access knowledge to help its customers design road maps to navigate a pathway to successful commercialisation.

"With lower overall costs, better recruitment and retention rates, strong investigator networks, and populations in need of novel treatments, conducting studies in the emerging markets is a strategic necessity."

Not surprisingly, Parexel followed suit. However, instead of launching a service line, it created the Parexel BioPharm Unit – a division dedicated to focusing on the needs of SMBs to help them achieve their development goals. Parexel’s internal research found that 81% of all ongoing development programmes originate from sponsors outside the top 25 pharmaceutical companies – a significant growth opportunity that Parexel wants to capitalise on with its new delivery model. Under a collaborative team-based approach, the BioPharm Unit provides SMBs with the opportunity to accelerate patient recruitment, increase the speed of study start-up, and improve overall efficiency for meeting critical development milestones.

Over the past five years, a wave of strategic partnerships between biopharmaceutical firms and CROs has been put in place to drive more flexibility, reduce costs and extend expertise. Collaborations have evolved from simple transactional relationships into multiyear, highly integrated strategic engagements focused on shared objectives, mutual investment, and involvement in clinical trial design and drug-plan development. The growth of contract research outsourcing will primarily be driven by the need of biopharmaceutical companies to improve R&D in mature and emerging markets. Today, many biopharmaceutical firms are engaging clinical research organisations through this more integrated approach aimed at optimising performance and minimising risk.

While the number of licensing deals fell slightly, from 40 in 2011 to 36 in 2012, the total licensing deal value soared to
$958.9 million in 2012 (see Figure 2), a 159% increase on 2011 figures. GlobalData attributes the growth in deal value to a number of significant partnerships having been struck over the past few years, for which contract revenues are now beginning to be realised.

GlobalData believes that strategic partnerships provide companies with higher levels of integration, alignment and collaboration that will support industry success. For example, Merck engaged Quintiles in a five-year clinical development collaboration to essentially reshape its entire R&D machine, and the pharma giant has also announced a major shake-up to streamline its operating model and aggressively manage its cost structure. The company spent $8.2 billion in R&D in 2012 (down from $11.1 billion in 2010), yet has very little to show for it, as it has a very weak late-stage pipeline. However, GlobalData expects the partnership with Quintiles to play a major role when the company reviews its R&D apparatus at the end of 2013.

Covance was also busy signing deals with large pharma outfits. Over the past couple of years, it booked multiyear outsourcing deals with Bayer HealthCare, Eli Lilly and Sanofi to conduct a variety of market access and R&D services, including discovery support, toxicology, central lab and managing phase I-IV clinical trials. Covance will be paid handsomely for its work over the next ten years – the contracts from these three drug makers alone will add close to $4 billion to the company’s coffers.

Emerging regions

With lower overall costs, better recruitment and retention rates, strong investigator networks, and populations in need of novel treatments, conducting studies in the emerging markets is a strategic necessity. Biopharmaceutical companies with less experience in conducting trials in the emerging markets may need on-the-ground expertise to ensure their projects are tailored to local patients and comply with regional regulations. Other drug makers that already have the experience in the region may need operational support or advice on how to ensure locally conducted trials satisfy the needs of global regulatory bodies in order to mitigate costly clinical trial disruptions. CROs with the ability to deliver cost and time-saving efficiencies to clients without compromising patient safety and data quality will be able to yield higher returns from emerging markets.

GlobalData’s ‘PharmaSphere: Global Dealmaking and Operations Strategies in the CRO Market’ report estimates that total peer group revenue in the emerging markets from the leading CRO companies increased by 14.6% to $394.1 million in 2012 (see Figure 3, opposite). The emerging markets in Asia, Central America and Eastern Europe have remained attractive regions for pharmaceutical outsourcing due to easy access to large patient pools, low labour and manufacturing costs, and highly skilled medical talent.

The globalisation of clinical trials has led many CROs and other service providers to expand their strategic investments in emerging markets, especially in Asia. Most CROs are growing their infrastructures in China, while others take a different approach, deciding to acquire the capabilities of domestic companies or launch subsidiaries to handle the workload. In May 2013, Parexel announced it opened its sixth facility in China, in the town of Shenyang. The site will not only add to the company’s presence in the region, but will serve as a hub for driving its MyTrials clinical informatics platform. Meanwhile, Charles River Laboratories purchased a controlling stake in Vital River, China’s largest provider of laboratory animal models for use in preclinical research, and PPD (BioDuro) and Quintiles (Kun Tuo) established subsidiaries in China to strengthen their ability to provide biopharmaceutical clients in Asia with a comprehensive range of capabilities, from drug discovery services to regulatory submissions preparation.

More information can be found in GlobalData’s new report, ‘PharmaSphere: Global Dealmaking and Operations Strategies in the CRO Market’, available from GlobalData is a leading source of actionable insight into the pharmaceutical industry.

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