CROs Expand Services Beyond Clinical Research

The CRO industry has experienced a notable amount of growth over the past decade with more biopharmaceutical and medical device enterprises demanding the expertise and operational infrastructures that CROs offer. CROs have experienced a 10% annual growth rate from 1999-2014¹, and was valued at $34 billion in 2014.² This growth rate is forecasted to continue, as the market is expected to expand to $59 billion by 2020.²

Albeit much of this growth is derived from the biopharmaceutical industry increasing investments in R&D, as Pharma R&D spend increased from $128.3 billion in 2010 to $138.4 billion in 2014, and is forecasted to grow to $149.4 billion in 2018³, new funding from the government should bolster the development of new therapies (and demand for CROs) with the 21^st Century Cures Act, which was signed into law by President Obama in December 2016. This law funds several initiatives: $1.4 billion towards the Precision Medicines Initiative, $1.8 billion towards Cancer Moonshot, and $1.6 billion towards the BRAIN Initiative (Alzheimer’s).

Despite revenue stability from R&D, some CROs appear to be undergoing momentous shifts in order to diversify their business and revenue portfolios, and QuintilesIMS might provide some hints as to how the CRO sector is advancing in the biopharmaceutical services industry. In this article, we will evaluate QuintilesIMS, and attempt to uncover its strategy.

QuintilesIMS Financials

QuintilesIMS derives its revenue from two main streams: Product Development (PDEV), which consists of clinical trial service offerings (i.e., project management, clinical monitoring, clinical trial support services, strategic planning & design, and consulting services),^{4, 5} and Integrated Healthcare Services (IHS), which includes commercial functions, such as sales, commercialization, outcomes-based research, payer and provider services, and marketing strategy.^{4, 5} In 2015, PDEV represented 74% and IHS, 26% of QuintilesIMS’ total revenues, respectively.⁶Figure 1 illustrates that QuintilesIMS’ revenue has increased from $4.3 billion in 2011 to $5.7 billion in 2015, and nearly doubling its operating income (or profit before interest and taxes). QuintilesIMS’ operating income as a percentage of revenue ratio (profitability efficiency) has also increased from 8% to 11% from 2011 to 2015, respectively.

Figure 2 demonstrates QuintilesIMS’ cash and liquidity ratios (figures of financial stability). QuintilesIMS’ quick ratio (gauge of QuintilesIMS’ ability to liquidate assets and generate a profit over its liabilities) marked an improvement from 1.0 to 1.34 from 2011-2015, suggesting that its assets are increasing in value (possibly because QuintilesIMS has invested in new technology systems that are becoming more valuable, or it is reducing its debt relative to its assets), and cash flow per share increased from 1.38 to 3.87, respectively, suggesting efficiency in cashflow management and profitability.

Figure 3, however, indicates that QuintilesIMS has become less efficient in generating profits from its assets; total asset turnover reduced from 2.0 to 1.6 from 2012-2015, respectively, and revenue/employee declined from $181K to $159K, from 2013 -2015. These signs might be indicators that QuintilesIMS is investing in innovative initiatives that are not necessarily generating expected returns (i.e., clinical trial technology investments, hiring higher salaried employees, innovation initiatives, etc.).

Despite asset turnover inefficiencies, and a temporary reduction in productivity (due to reorganizations) industry analysts speculate that growth will continue for QuintilesIMS in the mid-long term, as biopharmaceutical enterprises will realize continued efficiencies in outsourcing, and an increase in strategic partnerships.

IMS Health’s Capabilities

IMS’ offerings appear to supplement Quintiles’ IHS solutions, which enable QuintilesIMS to offer a fully comprehensive biopharmaceutical services from the beginning of development through post-marketing. IMS has strong capabilities in technology and data, as it has access to data pertaining to medical claims, EMR, prescriptions and social media,⁷ which biopharmaceutical enterprises leverage in order to understand medical product positioning, competition, prescription intelligence, and insights on online marketing campaigns by competitors. Moreover, IMS Health has numerous technology platforms that are used to manage commercial workflows (i.e., CRM technologies and workflows).⁷

The QuintilesIMS merger not only bolsters IMS’ commercial solutions with Quintiles’ IHS solutions, but, it also enables IMS to penetrate clinical research with PDEV. For example, the merger enables QuintilesIMS to leverage IMS’ technologies in order to enhance subject recruitment and enrollment outcomes, optimize protocols with EMR queries, and competitively design protocols with better endpoints and strategies to target unmet medical needs. Additionally, IMS’ commercial workflows can be incorporated into PDEV’s site startup processes in order to better track site performance with improved metrics, analytics and outcomes.

Threat of Insourcing/Vertical Integration

QuintilesIMS is not the only enterprise advancing its analytical capabilities; biopharmaceutical companies are also improving their internal technological infrastructures in order to better access their data in clinical operations and throughout the enterprise. Some biopharmaceutical enterprises have advanced to the point where they have launched internal data science departments in order to evaluate clinical trial metrics, and predict clinical operational outcomes.

Access to aggregated data has empowered biopharmaceutical companies to reorganize their centralized analytics functions in order to execute RBM and enhance study oversight from within. This move poses a threat towards CROs, as biopharmaceutical enterprises may not necessarily see a need for outsourcing centralized monitoring functions, however, CROs will still be needed for on-site monitoring and site management.

With threats to minimizing site monitoring costs (which currently represent around 14% of a total study’s budget⁸), and threats arising from an influx of competitive niche CROs, large CROs have attempted to further diversify their service offerings by investing in analytical solutions, such as Quintiles’ InfoSario, PPD’s Preclarus, and ICON’s ICONIK for clinical operational insights; the success and effectiveness of these technology platforms are neither known, nor are they publicly available.

A New CRO Model?

With new unmet medical needs continuing to emerge in the market, the biopharmaceutical industry is poised for continued growth. From 2010-2014, worldwide industry prescription and generic sales grew from $676 billion to $760 billion, respectively, and is expected to grow to $885 billion in 2018.³ With this growth comes escalating pressures from not only competitive medical products, but also from payers, who are focusing their efforts on delisting specialty drugs that do not offer justifiable value, or are hyperinflated.⁹

QuintilesIMS’ is an example of a new CRO; a hybrid end-to end service provider for the biopharmaceutical industry aimed at capturing revenue not only from R&D but also from commercial budgets. This positioning can add significant value to biopharmaceutical enterprises, especially when it comes to leveraging post marketing analytics for rigorous medical product targeting and positioning early in the drug development process (i.e., through studies with better endpoint design). This model brings CROs into an entirely realm that will likely attract more biopharmaceutical enterprises, and increase strategic partnerships.

Disclaimer: the contents of this article are not investment advice.

References:

1. http://www.appliedclinicaltrialsonline.com/why-are-cro-profits-shrinking-while-industry-growing-leaps-and-bounds
2. http://www.fiercebiotech.com/r-d/global-cro-market-expected-to-rocket-to-59b-by-2020
3. Evaluate Pharma, “World Preview 2018: Embracing the Patent Cliff,” June 2012
4. https://www.quintilesims.com/
5. https://www.sec.gov/Archives/edgar/data/1478242/000119312515045845/d831296d10k.htm
6. https://www.sec.gov/Archives/edgar/data/1478242/000156459016012629/q-10k_20151231.htm
7. http://www.imshealth.com/
8. Key cost drivers of pharmaceutical clinical trials in the United States, Aylin Sertkaya, Hui-Hsing Wong, Amber Jessup, Trinidad Beleche, Clinical Trials, Vol 13, Issue 2, pp. 117 – 126, First published date: February-08-2016; DOI 10.1177/1740774515625964
9. http://investors.cvshealth.com/~/media/Files/C/CVS-IR-v3/documents/02-aug-2016/2017-standard-formulary-list-of-removals-and-updates.pdf