Increased outsourcing, particularly among smaller biopharmaceutical companies, is helping to drive growth in the global market for contract research organizations (CROs), according to a recent industry analysis by Turner Investment Partners. The report points to strong underlying fundamentals, particularly among some of the top CROs, as they expand globally and in preclinical and early-stage development activities.
Market value and growth
The global CRO market is valued at $16.3 billion and is expected in increase at a compound annual rate of $12.6% to reach $29.4 billion by 2011, according to data from Goldman Sachs (1). Demand for CRO services is coming from the large pharmaceutical companies as well as from smaller biopharmaceutical companies. The report estimates that biotechnology companies provide more than 30% of CROs’ revenues, an increase from 21% in 2003. CROs also are generating more of their revenues from outside the United States as the number of clinical trials conducted globally increases. The report estimates that more than 40% of CROs’ revenues are generated outside the US. And future prospects are strong. The report estimates that collectively, less than 25% of all drug research and development (R&D) spending is outsourced (1).
Composition of the market
There are approximately 500 CROs globally. The large CROs generally offer two kinds of services (preclinical and clinical) that in effect provide one-stop shopping. Preclinical activities include chemistry and animal-testing services in laboratories to assess drug safety before clinical or human testing. Clinical services include functions such as project planning and management, patient recruiting, and trial monitoring and analysis to test the safety and efficacy of drugs (1).
Most CROs work under fixed-price contracts. Preclinical contracts typically have lower values than clinical contracts and also are shorter in duration. A typical preclinical contract may be valued at $2 million or less and last for months. Clinical contracts, however, may total as much as $100 million or more and be multiyear in length. The report says that preclinical contracts have been the most profitable (1).
The report points to strong fundamentals for the CRO sector, which has experienced sustained profitability during a recent high period of expansion. Since 2004, the six largest CROs have increased headcount by 57% to 37,300 employees but have increased their book-to-bill ratio to about 1.4 during the past year. “Such a high book-to-bill ratio, in our judgment, provides high earnings visibility, i.e., a good picture of CROs favorable future profit trends,” concludes the report (1).
The report cites five large CROs with especially good growth prospects over the next two years. These include: Covance (Princeton, NJ) with a market capitalization of approximately $5 billion; Icon (Dublin, Ireland), market cap of roughly $2 billion; Kendle International (Cincinnati, OH), market cap of $540 million; Parexel Laboratories (Waltham, MA), market cap of $1.5 billion; and Charles River Laboratories (Wilmington, MA), market cap of $4.4 billion.
These major players are making strategic investments to expand globally as well as to augment their capabilities in preclinical and early-phase development.
In June 2008, Covance announced that it is partnering with WuXi PharmaTech (Shanghai) in preclinical services. The two companies entered into a memorandum of understanding to create a 50-50 joint venture to provide preclinical contract research services in China. WuXi is building a 323,450-ft2 facility in Suzhou, China, for the joint venture. The facility is expected to be completed in 2009. Covance also plans to make an initial investment of approximately $30 million. The move not only positions Covance in China, but also complements its preclinical operations with WuXi’s drug-discovery and development services.
WuXi is one of the leading contract CROs in China. The company was formed in December 2000, and last year had an initial public offering on the NY Stock Exchange. In 2007, its China-based operations provided services to more than 80 pharmaceutical and biotechnology customers, including 9 of the top 10 pharmaceutical companies, according to the company.
To strengthen its preclinical service offerings for biopharmaceutical companies, Covance purchased a partially constructed manufacturing facility located on a 47-acre property in Prince William County, Virginia, from Eli Lilly (Indianapolis, IN) in November 2007. Covance plans to transform the facility into a 410,000-ft2 early drug-development laboratory offering safety testing and chemistry-analysis services. Covance plans to relocate approximately 450 current employees from its existing operations in Vienna, Va., and Chantilly, Va., to this facility by 2011, and hire an additional 100 employees by 2014. The total planned investment for this project is approximately $175 million.
In June 2008, Kendle acquired DecisionLine Clinical Research (Toronto), a privately owned, early-phase CRO that specializes in Phase I studies involving the measurement of pharmacodynamic effects of central nervous system (CNS) drugs. The move is part of Kendle’s strategy to enhance its position in Phase I testing.
"With Phase I growth expected to outpace the broader outsourcing market at approximately 15%, early-phase development remains an important need for our customers and an area of significant growth opportunity for Kendle," said President Simon Higginbotham, in a company release." The addition of DecisionLine is an important step in building Kendle's global capabilities for exploration of early-phase drug candidates and supports our strategic initiative to drive growth in our Phase I business.”
In June 2008, Parexel announced it was expanding its clinical logistics capabilities to support its clients' global clinical trial supply requirements. The company's clinical logistics services provide centralized coordination of clinical study supplies, laboratory services, and ancillary supplies. Also in June, Parexel agreed to acquire ClinPhon (Nottingham, UK), a clinical technology organization.
To further expand globally, Parexel acquired a minority interest ownership in the clinical pharmacology business of Synchron Research (Ahmedabad, India), a privately held CRO, in March 2008. The move builds on the company’s previous relationship with Synchron. In 2004, Parexel formed an strategic collaboration with Synchron and in 2006, the company acquired a majority stake of Synchron’s clinical trials business operations in Bangalore, India, and a minority equity interest in Synchron’s clinical pharmacology business in Ahmedabad. In 2007, Paraxel opened an office in Hyderabad, India.
In September 2007, Parexel also acquired Taiwan–based APEX International Clinical Research to strengthen its global capabilities throughout the Asia-Pacific region, including mainland China, Hong Kong, India, Taiwan, Singapore, Indonesia, South Korea, Malaysia, Thailand, the Philippines, New Zealand, and Australia.
Other CROs are expanding globally as well. Charles River Laboratories formed a joint venture with Shanghai BioExplorer to form Charles River Laboratories Greater China, Preclinical Services Shanghai Company. Charles River owns a 75% stake and control in Charles River Laboratories Greater China. The venture includes a new 50,000-ft2 facility in Shanghai, which is expected to open in the second half of 2008.
Charles River is also building a new facility in Sherbrooke, Quebec, to support the company's preclinical services business. When completed, the new facility will be approximately 300,000 ft2. Approximately 25% of the facility will be constructed in a first phase and will be dedicated to one or two clients. The first phase is scheduled to be opened by the first quarter of 2009. The timing of construction of the remaining phases will be dependent on market demand. The Sherbrooke facility is eventually expected to employ 1000 people, who will work collaboratively with 1600 staff members in the company's Montreal facility.
In June 2007, Icon acquired DOCS International , a leading European based clinical research staffing organization, for $40 million. DOCS International, which operates in eight European countries, focuses on the training and supply of contract and permanent clinical research personnel to the pharmaceutical and biotech industry.
1. T. Hoang et al., “Contract Research Helps Keep Drug Pipelines Flowing Sector Focus Report” (Turner Capital Investment, Berwyn, PA, 2008).