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Is bigger always better in clinical outsourcing?

Opinions differ on whether size is an advantage when working with a CRO
CRO outsourcing balancing beam

One of the key features of the clinical outsourcing market in recent years has been its concentration, with the biggest players securing high-level contracts with pharmaceutical companies.

There is no sign of this trend letting up. In recent weeks Pfizer revealed that it has added PPD as its third preferred provider - joining Parexel and ICON - while late last year Parexel and GlaxoSmithKline consolidated their relationship dating back to 2010 with the creation of a dedicated GSK business unit within the contract research organisation (CRO).

Meanwhile, with the tough operating environment during the financial crisis starting to recede, clinical outsourcing is now growing at around 10% a year with more and more studies being outsourced by a resurgent biopharma industry that is trying to cut R&D expenses in order to boost profitability.

Smaller biopharma companies are benefiting from a surge in financing from venture capital, secondary offerings and public listings, with 2014 well up on 2013 in terms of dollars raised, which is helping to boost volumes and pricing outsourced services.

The top seven CROs accounted for more than half the $23bn-plus industry spend on CRO services last year, according to a recent blog post from PharmSource president Jim Miller. While the sector as a whole grew 40% over that period, the big players grew almost 60%, showing that “size has proven to be a major competitive advantage”, he notes.

Strategic alliances are the main driver for that growth, with most of the top 25 biopharma companies moving towards that model and throwing their lot in with two clinical CROs, with an emphasis on late-stage clinical trials, data management and central laboratory.

Overall biopharma R&D spend has been flattening, however, so latterly CROs are having to work harder to increase the share of trials they service and jostle for market share with their rivals.

The latest deal between Parexel and GSK is centred on the CRO taking over responsibility for former GSK workers and is “a prime example of how partnerships with big pharma are deepening,” according to the CRO's chief executive Josef von Rickenbach, who discussed the deal with investors on a conference all recently.
The absorption of GSK staff is part of an ongoing cost-efficiency drive at the pharma major aimed at driving annual costs down by around $1.6bn within three years and of course only the largest CROs have the financial capacity and infrastructure to absorb hundreds of staff.

So is this dominant position by companies in a growing market a good thing? Big pharma can clearly see the benefit, but others believe the value is still unproven, despite the fact that most of the deals are now between three to five years old.

The increase in M&A activity among biopharma companies also means CROs have to stay alert

“Speed and efficiency improvements and cost savings remain the exception,” according to Ken Getz, associate professor and director of sponsored research at the Tufts Center for the Study of Drug Development (CSDD), citing results from a survey carried out by the organisation towards the end of last year.

“Old habits are slow to change and most drug developers are supporting practices that prevent them from integrating their strategic relationships and leveraging the value of these important collaborative models,” he said.

One of the ways in which strategic alliances can be improved is through the use of scorecards - based on defined metrics - that can be used by both parties to monitor and adjust the way the relationship is working, according to Tufts, which says typically a minimum of two to three years is needed to bring partners into alignment.

There have been anecdotal reports that some large preferred provider deals have not worked as hoped - forcing pharma companies to increase in-house resources for oversight and in some cases bring some projects back in-house. Some market observers also point to the risk of complacency among CROs given the difficulties associated with untangling a high-level alliance while, for CROs, dependence on just few high-profile clients can be equally risky.

Smaller drugmakers also have a slightly different perspective on the issue of size. Speaking at the recent Clinical Outsourcing World conference in London, Dorte Arnbjerg, vice president of global study management at Lundbeck, said it is worth questioning whether bigger is always better and - as a medium-size pharma sponsor - it is important to gauge whether your study will get the full attention of a large CRO.

Small is also beautiful
While much attention has been spent attracting big pharma clients, there are signs that even the largest CROs are starting to reap the benefits of courting smaller biopharma companies.

Demand for services is strong at the moment from both big and small drug developers, according to von Rickenbach, who believes this reflects both health in pipeline innovation as well as capital flow into the smaller firms.

In pharma's “post-blockbuster world”, small biopharma companies are increasingly developing new drugs and are acquired by larger, more established firms, which in turn are looking for ways to become leaner and more competitive, and clinical outsourcing is an integral part of this emerging order, he said.

Similarly, Thomas Pike, Quintiles' chief executive, said recently the company has been re-focusing a proportion of its activities to help small companies through the clinical development process and through to the commercial stage, and is now seeing SMEs account for a rising share of its revenues.

As might be expected, smaller CROs insist there is room for all, particularly where they have a strong focus in a specific therapeutic area, geography or the type of service provided.

Typically at least 2-3 years are needed for partners to align

“While we are sure that the trend of preferred partnerships with large CROs is here to stay, we believe that there is a distinct role that niche vendors will continue to play and be an important part of the provider ecosystem,” says Chitra Lele, chief scientific officer at India-based CRO Sciformix.

Niche regional providers are also more likely to work with the local affiliates of large pharma companies and with mid to small size pharma companies, according to Lele, who says there are also increasingly opportunities for smaller players to work with larger CROs.

“CROs have to continuously invest in human and other resources to ensure delivery as per client expectations, and this can add to their overheads and impact the cost benefit of the deals,” she notes, adding: “they sometimes partner with niche providers who are able to provide the right skills at the right price and assume part of the responsibility of ensuring quality and timeliness of projects.”

Consolidation
Of course, larger CROs have become large in no small part by swallowing up smaller players, mainly to extend geographic reach and service breadth, and consolidation remains a perennial feature of the sector.

One significant departure from the usual M&A activity was Covance's $5.7bn takeover of LabCorp, which completed in February and was unusual in that it married a diagnostic specialist with a CRO. The rationale is to combine LabCorp's database of 70 million patient records with Covance's clinical services and overcome the longstanding issue of slow patient recruitment in clinical research.

Critics have suggested that LabCorp's US focus makes the combination less attractive to companies seeking global clinical programmes. However, the partners claim to have already secured a $45m new contract on the strength of the database component on offer, specifically access to around 1,000 patients with a rare genetic mutation for enrolment into a non-small cell lung cancer (NSCLC) programme.

Both LabCorp/Covance and Quintiles have said they are now looking for 'tactical tuck-ins' rather than large-scale M&A deals, and analysts have suggested this is typical of the larger CRO players with few expecting big changes in the coming months.

Meanwhile, an increase in M&A activity among biopharma companies also means that CROs have to stay alert and make sure they prepare for situation when a long-standing, stable relationship comes under scrutiny and may be downsized or in a worst-case scenario terminated.

That means keeping lines of communication secure and being agile enough to adapt to the new operating culture.

Phil Taylor is a freelance journalist specialising in the pharmaceutical industry

29th July 2015

From: Research

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