CRO Shifts in the Outsourcing Market

The CRO market is going through major and unanticipated structural changes. Given high sponsor dependence on contract clinical services, it is essential that biopharmaceutical companies monitor and anticipate these changes in order to anticipate and manage them effectively.

Financial analysts and outsourcing consultants predicted that niche and mid-sized CROs would steal a growing share of the market for contract clinical research services between 2000 and 2005. They anticipated that sponsors would increasingly seek higher levels of specialization and service quality that could only be offered by niche companies. The opposite occurred—according to the results of a recent study that Julia Wenger and I conducted at the Tufts Center for the Study of Drug Development (Tufts CSDD).

Kenneth A. Getz

In our study, we arranged CROs into one of three segments: Largest, Next 10, and All Other Companies, based on their annual revenues from clinical services. Tufts CSDD compiled and analyzed financial and headcount data on companies in the three segments.

The largest CROs

We found that the Largest CROs—primarily publicly-traded companies with the exception of Quintiles—have expanded their dominant position in the outsourcing market. The Largest companies captured nearly 80% of the market in 2005. Companies in this segment saw their revenues increase 15.7% annually—from $3.4 billion in 2002 to $5.2 billion in 2005 (see Table 1 for a list of companies in this segment). The Largest segment accounted for 76% of total headcount employed by CROs to provide contract clinical research services in 2005.

Table 1: Leading CROs from the three segments for the years 2002 to 2005.

The Next 10

The second segment, the Next 10 companies—also primarily publicly-traded entities—captured 11.5% of the total outsourcing market in 2005 and generated approximately $754 million, up from $495 million in 2002. Companies in this segment grew 14.9% annually between 2000 and 2005.

Analysts projected that the middle market for contract clinical services would struggle the most to maintain revenue growth through its inability to dominate either full or niche positioning. These projections were mistaken. The Next 10 segment accounted for 11.9% of total headcount employed by CROs for clinical research outsourcing services in 2005 (Table 1 lists companies in this segment).

All Other Companies

Very little is known about the All Other Companies segment. This group is highly fragmented, comprising nearly 100 organizations of which most are niche service providers, founded in the mid-1990s or later. This segment is also comprised of more than 100 freelance consultants. Companies in this segment are privately-held, making it difficult to compile information about them.

Tufts CSDD gathered data on 93 representative companies in this group. In 2005, the typical company in this segment generated average revenues of $3.1 million. This compares with average 2005 revenues of $568 million per company in the Largest segment and $42 million in 2005 revenues per company in the Next 10 segment.

The All Other Companies segment captured an 8.5% share of the total market for contract clinical research services in 2005.

Contrary to analyst projections, this third segment is growing at a substantially slower rate than the other two. In 2005, companies in this segment generated a total of $561 million in revenue. This represents 6.6% annual revenue growth since 2002—less than half the average annual growth rate for the CRO market overall. This segment accounted for 12.1% of the total headcount employed by the CRO market for clinical research services in 2005.

Drivers of growth

Since 2001, development sponsors ranging from biotech companies to mid-sized and large pharmaceutical companies have all become more dependent on outsourcing. In total, biopharmaceutical companies spent $6.6 billion on contract clinical services in 2005 (net of pass-through costs, such as central lab fees and investigator grants). The rate of growth in outsourcing spending by sponsor companies has outpaced the growth rate in overall global development spending—16% and 11% annual growth respectively since 2001.

There are many drivers of demand for outsourcing drug development activities: Biopharmaceutical companies have largely frozen their global development headcount to contain rising fixed costs while maintaining earnings growth.

Most of the headcount growth among sponsors has been in Phase IIIb–IV functions. Phase I–III headcount growth has been essentially flat during the period 2000 to 2005. During this same period, the volume of clinical trials conducted worldwide increased substantially, as did the number of geographically dispersed locations of clinical trials.

There has been a dramatic proliferation of small- and mid-sized biotechnology and pharmaceutical companies engaged in clinical trials around the world. Smaller companies, many of them biotechnology firms, typically outsource greater proportions of their clinical research budgets, as they look to contract expertise that falls outside their core capabilities. And according to the results of a Tufts CSDD study conducted last year, high levels of CRO usage are translating into greater efficiencies for sponsors, including faster development cycle times with comparable data quality.

Higher relative growth in sponsor spending on CRO services provided by companies in the Largest and Next 10 segments—typically more mature companies—is driven by a number of key factors. Whereas some sponsors are moving toward functional service provider models that may favor niche CROs, a growing number of biopharmaceutical companies are outsourcing broader combinations of contract clinical services that can be provided on a global basis.

Leading full-service companies offer infrastructure and experience in conducting large-scale clinical trials worldwide. Demand has been particularly strong from sponsors currently engaged in multinational Phase III and Phase IV programs.

Sponsor companies—particularly the largest biopharmaceutical companies—also strive to deliver continuous improvements in efficiency. Companies in the Largest and Next 10 segments may be well positioned to offer more favorable pricing, as they can spread their costs across scaled operations. Many sponsors have entered into preferred pricing arrangements with many of the larger CRO companies.

In all, the CRO market is doubling the headcount capacity of clinical research personnel engaged in managing Phase I–IV global drug development programs. Tufts CSDD estimates that in 2005, there were a total of 50,877 people employed by the Largest, Next 10, and All Other Companies combined. This is up from 41,510 in 2002 and represents an annual headcount growth rate of 7% between 2002 and 2005, more than three times the rate of growth in clinical research personnel employed by PhRMA member companies during the same period.

Forecasts and predictions

Slower relative growth among the small companies that make up the All Other Companies segment is indeed a surprise. Being relatively resource poor, many companies in this segment are pursuing a variety of strategies to stimulate growth and differentiate themselves. Based on our analysis of reports from companies in this segment, there are four primary strategies being pursued:

• acquisitions of, or joint ventures with, site management organizations and managed site networks

• geographic expansion

• acquisition and/or licensing of Phase I facilities

• collaborations with software developers to e-enable development programs.

Based on the current and anticipated operating environment for drug development companies, over the next three to five years the Largest and Next 10 segments are expected to continue to grow at or near recent levels. Although the All Other Companies segment is the most difficult to forecast, we expect growth to accelerate as these companies reposition themselves and as biopharmaceutical companies become more adept at managing smaller full and niche service providers.

Kenneth A. Getz MS, MBA, is a Senior Research Fellow at the Tufts CSDD and Chairman of CISCRP, both in Boston, MA, email: kenneth.getz@tufts.edu