Hemamalini Kulasekaran Analyst IQ4I Research & Consultancy

A Surge in Externalization and Outsourcing Activities Is Creating Boom for CROs

Over the last two decades, the pharmaceutical/biotech industry has undergone radical changes. The unprecedented downsizing of internal discovery of pharmaceuticals, patent expiration, and the shift toward biologics have resulted in a surge in externalization and outsourcing activities. As the industry is looking for new sources of discovery and innovation with limited resources, there is a growing preference to move toward externalization and a willingness to embrace the concept of discovery outsourcing.

IQ4i estimates that 8-10% of pharmaceutical/biotech R&D spending goes into drug discovery. Almost all of the major pharmaceutical/biotech companies are considering outsourcing as a core strategy to fill their discovery pipelines. However, industry prefers outsourcing companies that have precise capabilities and greater flexibility.

The global pharmaceutical outsourcing market was estimated to be $95.5 billion in 2013; of that a little less than 50% went to CROs. IQ4I estimated the global drug discovery based services market at $12.9 billion in 2013; the rest accounts for biology-related service and clinical services. Current R&D outsourcing penetration is estimated to be approximately 50% of global pharmaceutical and biotech industry spending but it is poised to grow at CAGR of 12.5 % in the coming years. The top 50 pharmaceutical/biotech companies accounted for more than 95% and the top 20 accounted for 84% of the total R&D expenditure among the top 100 companies considered.

Biologics are expected to grow faster at a CAGR of 23.6% during the forecast period 2013-18, compared to small molecules. The growth is attributed to the increase in biologics R&D spending and quicker approval time; on the other hand factors such as a tedious discovery process and high cost are restraining biologics growth. GVK’s recent acquisition of Aragen and Vanta bioscience shows their growing interest in the biologics area and is in sync with the increasing preference for new biological entities (NBEs).

In terms of contract drug discovery research outsourcing (CDDRO) market segments, the chemistry segment commanded the largest share in 2013 and is expected to grow at a CAGR of more than 10% from 2013 to 2018, to reach $8.7 billion by 2018. Biology is the fastest growing segment in the drug discovery outsourcing market. The leading therapeutic areas of focus for top CDDRO players are: oncology, inflammation, CNS, and infectious and metabolic disorders.

Fast growth in the APAC region is a result of efficient CRO hubs, especially in India and China, and the lower costs of CROs in these regions compared to their European and American counterparts. However, experts feel that these CROs should build their capabilities to differentiate in the area of target identification and validation (TI/TV), and on how to use human disease pathology knowledge/primary tissues combined with omics knowledge to further validate the concepts. Because most CROs propose targets from the literature, and sponsor companies consider it a risky option to invest in such projects without substantial evidence, as a de-risking strategy some CROs are investing internally and validating the concept and then approaching sponsor companies who are working in similar areas.

Pharmaceutical companies should consider several factors before finalizing a CRO partner like therapeutic area expertise, business model, scientific pool, infrastructure, data security, IP policies, and last but not least, cost efficiency. Along with CROs’ expertise in drug discovery, the most important aspect pharmaceutical/biotech companies should look for in a CRO is a verified track record of successfully working in the discovery program of relevant therapeutic area.

Considering the number of discovery programs running at large pharmaceutical company, it is often difficult for sponsor groups to manage all of their vendors and as a result some groups are narrowing their service provider pool to fewer CROs with integrated services into key therapeutic areas.

Another interesting trend is the consolidation of CROs and the proliferation of small, start up CROs, which are changing the. For example, clinical CRO giants such as Charles River Laboratories (CRL) and Pharmaceutical Product Development (PPD) have made recent acquisitions of drug discovery services. In March 2014, Biofocus and Argenta, subsidiaries of Galapagos were acquired by CRL for $179 million. Similarly, PPD acquired X-chem in September 2014.

Hemamalini Kulasekaran is an analyst for IQ4i. For more information contact [email protected].

Previous articleHeart-on-a-Chip Gets Drug Screeners Pumped
Next articleOpthotech Wins Second $50M Enrollment Milestone from Novartis