World Contract Research Organisations (CROs) Market: Poised for strong growth despite challenges
CONTRACT RESEARCH ORGANISATION (CRO) revenues have been growing strongly as a result of drug developers’ need to reduce R&D costs while shortening product evaluation times. However, as demand for more efficient pre-clinical and clinical testing services has risen, so too have pressures on CROs as a result of heightened regulatory scrutiny and consolidation within the pharmaceutical industry. Additionally, CROs are also facing internal challenges including shrinking supplies of appropriately trained personnel and a diminishing group of attractive acquisition candidates. Although CROs are taking steps to improve their efficiency, these factors will mitigate future industry growth.
Outsourced research historically evolved from a need of drug developers to augment their in-house testing resources, particularly during times of quickly increasing workload when adding such capabilities would be a long and expensive process. As technology evolved, CROs became known for their ability to specialise in certain aspects of drug evaluation and add scientific and technological expertise that drug developers did not possess internally. Over the past several years, however, economic pressures on drug developers have grown and CROs are now seen as a key means to contain ever-expanding R&D costs and shorten time to market by virtue of their ability to achieve economies of scope and scale in the testing process. CROs’ ability to shorten testing times by as much as 30 percent are particularly important since manufacturers can lose $1 million or more in sales for each day a blockbuster drug is delayed. About 19 percent of all testing is now outsourced, accounting for worldwide CRO revenues of approximately $7.8 billion in 2002.
Despite Strong Growth, Challenges Abound
Mitigating these growth drivers, however, are a variety of factors that make the CRO business more challenging than ever. Chief among these are heightened regulatory scrutiny and pharmaceutical consolidation. Regulators around the world are increasingly asking for more detailed safety assessments on drug candidates. This is a result both of embarrassing recalls of unsafe products such as Redux and Pondimin as well as the preponderance of new drug candidates that address chronic and/or complicated conditions requiring more intensive study. In addition, regulators increasingly ask for details about the molecular effects of new scientific approaches. This requires more carefully designed studies evaluated by teams with greater expertise in specific therapeutic and scientific areas. At the same time, however, pharmaceutical firms are consolidating in an effort to enhance their own efficiency. When this happens, R&D projects are often re-evaluated and outsourced research may be temporarily suspended, resulting in cancellation of CRO contracts. This can wreak havoc with CRO staffing, as contract research companies are usually unable to re-deploy staffers to other projects quickly. In the past, such fluctuations have led to industry-wide cycles of staffing-up and staffing-down as CROs adjust their personnel levels to correspond to changing workload. The two leading CROs, Quintiles and Covance, have each eliminated hundreds of positions over the last several years.
While downsizing has saved CROs the cost of paying idle employees, it has had the unintended effect of causing a brain drain in the industry. Staffers seeking greater job security have left CRO positions for jobs in seemingly more stable pharmaceuticals and biotechnology companies. This is now resulting in CROs’ diminishing ability to staff projects with experienced scientists, potentially jeopardising quality of data and the CROs’ relationships with clients.
Looking Ahead
To address these challenges and pave the way for continued growth, CROs are taking a number of steps. These include continued geographical expansion, deepening of service offerings and enhancement of technological expertise.
Although more than half of all drug evaluation fees are earned in the U.S. and this share continues to grow, CROs continue to follow their pharmaceutical and biotech clients as they extend their global reach. In addition to positioning CROs to capture a greater share of client business, this also gives them access to low-cost clinical testing in areas such as Eastern Europe, Latin America and China. These cost savings can be passed along to clients, further enhancing CRO competitiveness. The largest contract research companies maintain worldwide networks of 30 or more offices. Many, however, are expanding their presence in Europe and Asia through alliances with and acquisitions of local providers. This is an important way of quickly accessing local expertise and relationships, which may otherwise take years to establish. Quintiles, Covance, ICON Clinical Research, Kendle, Pharmaceutical Product Development,PAREXEL and Omnicare have all taken this route.
Another strategy is deepening service offerings through acquisition of specialised providers and experts in various therapeutic areas. This has resulted in some CROs being able to offer a far more complete range of pre-clinical or clinical services than competitors, thus positioning them for strong future growth.
Lastly, CROs continue to upgrade their technical capabilities through the acquisition of time saving technologies such as voiceresponse data collection systems and web-based clinical trial platforms. Such enhancements position CROs as cutting-edge service providers who can deliver technological advantages not readily available clients on their own.
Background
Frost & Sullivan, an international consultancy firm, has been supporting clients’ growth for over four decades. Our market expertise covers a broad spectrum of industries, while our portfolio of advisory competencies include strategic consultancy, market intelligence and management training. Our mission is to work with our clients’ management teams to deliver market insights and to create value and drive growth through innovative approaches. Frost & Sullivan’s network of more than 500 consultants, industry experts, corporate trainers and support staff, spans the globe with 19 offices worldwide.
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