January 1, 2013 (Vol. 33, No. 1)
Clinical research organizations are forging more strategic and integrated deals.
Clinical research organizations (CROs) have never had greater clout. As drug sponsors raced to shed fixed costs while simultaneously struggling to replenish anemic pipelines, CROs stepped in to shoulder more of the development workload.
Business boomed (even if profits sometimes haven’t) and CROs grew steadily in size and the scope of services offered. Making sense of this new reality was a central theme at the “Partnership in Clinical Trials Congress” (PCT) held last month in Hamburg, Germany.
“We have data that now suggests CROs globally employ more personnel to support drug development than do the pharma and biotech companies,” said Ken Getz, senior fellow, Tufts Center for the Study of Drug Development, and a keynote speaker at PCT. “We’re seeing profound changes in the CRO-biopharma relationship.”
CRO market size estimates vary, but it’s broadly agreed there are at least 1,100 CROs worldwide and that CRO revenue now exceeds $20 billion, with some predicting revenue could reach $30 billion in 2015. A handful of giants—Quintiles, Covance, PPD, Parexel, ICON, etc.—dominate the landscape, but many more small and medium-size CROs also serve the market.
The biggest change, said Getz, is a shift toward strategic, integrated relationships that place “much more operational risk and resource risk” on CROs. “Whereas in the past companies used to engage CROs primarily for capacity or expertise in a very specific task—it might be a medical writer or a study monitor for a specific project—now many major and mid-size pharma and biotech companies engage a preferred CRO to provide a whole suite of activities for an entire portfolio.
“A company like Pfizer, for example, might choose to work with two CROs, and give one of them an entire program to do everything soup to nuts. The CRO will have or engage all the investigator sites, monitor all the sites, collect, clean, and manage the data. It will analyze the data and write up the submission. You are really giving the CRO all of the operating activities in the program,” Getz said.
“It’s really the largest CROs that have been able to service these strategic alliances. They have the scale,” said Getz. “These are longer-term relationships and there’s a very high cost for the sponsor to switch and change that relationship, so the largest CROs are securing and locking up that part of the market.”
CROs’ Rising Prominence
How much of clinical development CROs will gobble up is a hotly discussed question and was tackled throughout PCT’s agenda. Michael Ryan, vp, business development (Europe & Asia) for CRO PharmaNet/i3, chaired PCT’s track, Critical Examination of Strategic Outsourcing Models, which included presiding over a session—“Debate: Are CROs going to take over clinical development entirely?”.
Few observers, including Ryan, think CROs will capture all of development. For starters, sponsors are generally adamant in retaining control over protocol development and regulatory agency interactions.
Moreover, it’s not always the most cost effective, said Matthias Evers, Ph.D., principal, McKinsey & Company, originally scheduled to participate in the debate. (Dr. Evers had a conflict and his colleague Emiliano Rial Verde, Ph.D., a McKinsey engagement manager, stepped in.)
“I would say it’s not a proven case that clinical CRO outsourcing is always more cost effective than internal delivery. Leading pharmas have definitely delivered clinical trials at similar cost levels, but it’s a hard business case to make,” said Dr. Evers. “Usually the opportunity that comes from CRO flexibility outweighs the advantage for doing things internally.”
For most drug companies, the reality is their pipelines don’t provide a sufficiently constant stream of work to easily support full-time clinical development resources, noted Ryan, who made the case for CROs. “We have multiple customers giving us work and have become quite expert in monitoring our backlog and understanding what is going to come in. As a consequence we offer a flexible resource that’s immediately available to work on their projects, but can be turned on or off without necessarily having a lot of the negative fallout with respect to media reporting, head count cuts, morale, and so on.”
Getz noted that virtually every development project has some level of CRO support today. Specific services used vary widely so metrics such as average spend can be misleading.
“It’s a very hard measure to gauge. I think if you look at total spending we estimate that about 45 cents of every R&D dollar is going to pay for outsourcing today. If we were to look at chemistry, manufacturing, and controls in the whole contract manufacturing tarea it is going to be higher. The preclinical area may be a little bit higher as well; for a lot of the small animal model testing it may be closer to 50%,” he said.
Is M&A Frenzy Slowing?
Many observers say the CRO merger and acquisition activity is losing steam. “It’s reached its peak for the time being,” said Ryan, whose own company (PharmaNet/i3) is itself an M&A product created to build a CRO with the heft needed to compete with giants. “There are only so many of those types of large CROs that can exist.” Instead, he sees two strengthening trends. The first is an effort by pharma customers to reduce their supplier bases and use fewer CROs. The second is CROs working to diversify their revenue streams.
“Clinical development is risky; drug development programs are cancelled regularly, there are more delays, and projects get started but not moved forward. For CROs, a broader service offering from clinical development to services involving commercialization and market expansion can reduce risk and provide real value to clients.”
McKinsey’s Dr. Rial Verde is inclined to agree M&A activity will slow. “There might be some opportunistic acquisitions but most have acquired the varied capabilities needed.” His colleague Dr. Evers added a caveat, “There might be one or two instances where acquiring a midsize CRO would enable a step change in market share; that might happen. Also, the situation for small CROs is different. There are quite a number of investors in this field who own CROs and have roll-up desires. If you add it all up, M&A activity is still at a reasonable level, especially for the small CROs.”
Most bullish was Getz, “The CRO market is fragmented, and I don’t think we are out of this (M&A activity) at all. I think it’s going to probably accelerate. Some of it may come on through acquisitions by major CROs to move into R&D domains. You may see some consolidation and some roll-up on the part of midsize CROs to get scale to compete for these integrated relationships. You may also see a number of CROs start to migrate into other areas of R&D as a way of rounding out their portfolio and expanding their revenue potential.”
Taking Risk & Pursuing Reward
True risk and reward sharing remains rare, reported Ryan, echoing a general consensus. “We don’t hear of sponsors willing to hand over revenue from a drug in return for a CRO performing some elements of the clinical trial,” said Ryan. “A big clinical trial with perhaps 1,000 patients will cost whatever it costs, $50 or $60 million or whatever, whereas if that drugs hits the market, $50 or $60 million could be the daily revenue from the drug. Sponsors think, ‘Okay so we get a $50 million trial for free but we don’t want to hand away 2% or 1% or .5% of a potential blockbuster.’”
Dr. Rial Verde agreed. “Risk sharing is a gray zone. Today, it’s really more incentives or penalties around operational metrics. If the CRO delivers high quality, it gets over 100 percent of the payment; if they are too slow they get less, maybe 70 percent of payment. What I see is that both CROs and pharma still seem to be averse to sharing equity in the asset.” Occasionally a resource-constrained small or mid-size pharma will include some equity stake, but not often, added Dr. Evers.
Historically CROs haven’t had enough control over the molecule to really benefit from equity or revenue sharing incentives, said Getz. “Right now the drive is to lock in a specific price for work performed and transfer the operating and resource risk to the CRO. Let CROs do whatever it takes to deliver an adequate or reachable margin on that program. So the real incentive for them is to drive their own efficiency.”
To a considerable degree, said Dr. Rial Verde, the evolving CRO-drug manufacturer relationship is following a similar path to any industry where outsourcing grows. Fixed unit costs contracts represent the starting point with varying degrees of risk and reward sharing leading eventually to co-development activities. CROs are about midway along in that journey.
“You see more companies going into variable contract with some incentive/penalty strategies, and sometimes even to risk sharing, but this is much rarer. The journey to true risk and reward sharing is far from over,” said Dr. Rial Verde.
New Approaches Needed
Everyone interviewed emphasized that reshaping the CRO-sponsor relationship— while important—must occur in the greater context of all stakeholders seeking ways to control soaring clinical development costs. Ryan was particularly impressed with the industry keynote, given by John Orloff, M.D., svp and CMO at Novartis, who noted a “70% rise in per patient clinical trial costs between 2008 and 2011.” Such a trajectory is unsustainable for CROs or sponsors.
“Dr. Orloff suggested the current model for conducting trials is antiquated,” said Ryan, “and I think he’s right. There is a lot of opportunity to develop new ways of conducting clinical trials.”
New technologies overwhelm old business models and drive the creation of new ones. Dr. Orloff pointed to the music business, which has been transformed from a provider-centric activity to a consumer-centric one by widespread adoption of digital technologies.
Big chunks of clinical development are undergoing a similar shift. New ideas and tools are needed. CROs are well positioned to help, particularly with regard to driving operational efficiency.
“We can do the up-front research and development work with device vendors, for example, to develop ways of capturing data directly from patients or in ways that sort of involve minimal change from the patients’ routine,” noted Ryan.