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European Biopharmaceutical Review

Merging Markets

Pharmaceutical companies are in the midst of a transition, having seen profits diminish in the last decade due to generic erosion, as well as the rising costs and declining productivity of R&D. Two key challenges continually plague pharma businesses: the pressure to demonstrate the clear therapeutic benefits of newly developed drugs over those currently marketed, and to contain R&D costs while maintaining an innovation advantage.

Globally, governments and third-party payers are trying to curb the ever increasing costs of healthcare. In the US, payers have the biggest influence over market access, and now demand that new drugs under development be therapeutically superior to existing options, as well as better value for money. In response, large pharma companies often outsource certain stages of clinical development to CRO partners, which can provide specialised skills in preclinical and clinical research, combined with the benefit of economies of scale. This enables pharma companies to optimise their R&D investment by identifying leads on which to continue clinical development, or unsuccessful compounds that should be discontinued.

The CRO industry has thrived in the last decade due to growing pressure on pharma companies to demonstrate increasing value from their R&D. According to industry estimates, outsourcing penetration was over 35% in 2013, and the value of the CRO industry is expected to grow at a compound annual growth rate of 8% until 2016. Although, worldwide, there are several firms of varying size that provide CRO services to biopharma companies – making for a highly fragmented industry – the market is dominated by a few large players from the US and Europe.

Market Domination

Most CRO businesses are based in the US and Europe, although there is an increasing trend of outsourcing clinical trials to companies from emerging markets such as India, China and Latin America (most prominently Argentina). It is estimated that 77.1% of global CRO market revenue is from the US and Europe, and that just 11% is from Asia (1).

Covance reports that 45.6% of its 2013 revenue was from the US and 37.5% from the UK, the Eurozone and Switzerland (2). For the same year, PAREXEL reports that 50% of its total revenue, or $837 million, was from the US market; 36% was from Europe, the Middle East and Africa; and 14% was from Asia-Pacific (3). This is not surprising, as the US and EU represent the two largest pharma markets by revenue, and companies prefer clinical research to be conducted within the same geographical region.

One of the most significant factors when selecting a CRO partner is regulatory compliance with global standards. Industry standards for conducting clinical trials and maintaining data are governed by ICH Guidelines for Good Clinical Practice, and trials are inspected for compliance by regulatory authorities, such as the FDA and the EMA.

Finding a CRO partner which ensures such compliance with international standards is one of the key challenges involved in outsourcing to Asian countries, although lower costs and access to large patient pools pose a lucrative proposition. Political and economic uncertainties also add to the complexity of dealing with smaller companies in emerging markets. As a result, most pharma companies prefer outsourcing to CROs that are geographically close to their target markets, to ensure compliance that is crucial to gaining regulatory approval from regional authorities.

Merging and Consolidation

Consolidation has led to a handful of large players dominating the market; although the CRO industry is fragmented, the top 10 companies account for more than half of the total revenue, and the industry has witnessed much player consolidation in the last few years. The top five companies accounted for over $10.7 billion in revenue in 2013, of which $3.4 billion came from Quintiles (31%), the current market leader. Other CROs in the global top 10 are Covance, PPD, ICON, PAREXEL, inVentiv Health, PRA and Charles River.

inVentiv Health acquired two other CROs in 2011 – i3 and PharmaNet Development Group – consolidating its position in the top 10 companies. Similarly, INC Research attained Kendle in 2011. Since 2011, Quintiles has assimilated six companies – it acquired Outcome to strengthen its late-phase research capabilities, and Novella in 2013 to expand its expertise in oncology.

In late 2013, PRA merged with ReSearch Pharmaceutical Services (RPS) to become one of the top five CROs, partly to expand its capabilities in the emerging markets of Asia and Latin America. Meanwhile, in May 2014, ICON acquired Aptiv Solutions, along with its subsidiary, Niphix, an oncology-focused, Japanese CRO. In the preclinical space, two key players – Huntington Life Sciences (HLS) and Charles River – have recently announced acquisitions. HLS bought Harlan to form the third largest preclinical CRO, just behind Covance and Charles River. In 2014, Charles River revealed its plan to buy two discovery services firms, Argenta and BioFocus, in order to expand its capabilities in in vitro drug discovery.

Even the smaller firms have seen a spate of consolidations in the CRO industry in the last year. This continuing trend is expected to see small companies merging to form large central players. Most CROs see mergers and acquisitions as a key route to faster expansion, either extending their reach into newer geographies, or broadening their capabilities to add to their service portfolio.

Late-Stage Development

While early-stage development (discovery and preclinical) accounts for the largest share of the R&D pipeline – over 60% – for biopharma companies, R&D cost allocation is highest for late-stage development. In 2012, late-stage R&D cost distribution (Phase 3 and submission) was 55% (4). This same trend is reflected in outsourcing revenue; Covance reports that just 35.2% of its 2013 revenue is from early-stage development, while 64.8% is from late-stage clinical development contracts (2). CRO revenue is also higher in the later stages due to the fact that early-stage candidates are often acquired or in-licensed from other companies when they seem promising.

One of the key benefits of outsourcing to a CRO is that overheads can be made variable, and discontinuation can be a strategic decision, while costs of in-house capabilities are mostly fixed, compared to divestiture which involves more expenses and effort. As late-stage trials are more costly and the decision to pursue later-stage development is dependent on many factors, outsourcing allows companies to make tactical choices based on their strategic priorities.

Emerging Markets

Although the US and Europe dominate the CRO market, Asia and Latin America are emerging as popular destinations for clinical trials. With growing patient pools and rising healthcare access and affordability in Asia – in particular India and China – demand for innovative drugs is also increasing. China is expected to become the largest market for pharmaceuticals in the coming decade. As companies look towards new domains, this presents a big opportunity.

Both regulatory hurdles and logistics demand that clinical development takes place close to target patients. Emerging markets have become new destinations for many CROs, and although there has been a certain level of outsourcing to India and China in the last decade, there is now a pressing need to strengthen clinical development in these geographies. This is becoming the key rationale behind some of the largest deals in the CRO industry in recent years. As mentioned previously, PRA hopes to strengthen its position in Asia and Latin America through its merger with RPS. Last year, Charles River acquired a 75% share in Vital River to expand its reach in China, while Quintiles announced a $14 million investment in partnership with the Shanghai Clinical Research Center in 2012, demonstrating growth ambitions in this region (5-6). Furthermore, Quintiles reported earnings of $774 million; or 23% of total revenue, from its Asia-Pacific operations in 2013, up from 10% in 2011 (7). PAREXEL opened a new office in Shenyang, China, and also launched a new clinical trials solution, PAREXEL Ding Hui, to support growth in Asia (8). All of the major CROs are investing aggressively in the Asia- Pacific to expand their ability to cash-in on the opportunities it presents.

In the emerging R&D models, CROs play a major part in enabling drugmakers to narrow down and strengthen their area of therapeutic focus. With pressure mounting to demonstrate clear clinical benefit and economic value in innovation, companies have relied on their capable CRO partners to weather the tough times. Clinical development is challenging, with increasing costs and the uncertainty presented by high failure rates leading to continuous pressure on margins – companies cannot invest in drugs that do not meet high-performance criteria.

Therefore, partnering with a CRO often gives the flexibility required to respond quickly to innovation needs in the healthcare market, and streamline investment into more profitable routes. The risk of failure is shared by both partners, lessening the burden, and a CRO can also escape by deploying resources to another project. Although there is a level of risk involved in partnering, a trustworthy CRO partner could provide economic and strategic agility.

Strategic Investment

CROs are certainly making the most of the testing times that pharma has had to face in the last decade. Armed with expanded capabilities through consolidation, CROs are now poised to meet the increasing demand from larger and more varied customers in a wide array of services across many locations – and this market is expected to witness strong growth in the coming years due to its increasing partnership with the pharma industry.

References

1. GBI Research, Contract research organizations market to 2018 – publicprivate partnerships to strengthen research capacities and advance clinical development programs, April 2012
2. Covance, Covance to present at the UBS Global Healthcare Conference, 2014. Visit: www.covance.com/docs/investors/ cvd_ubs_may14.pdf
3. PAREXEL, 2013. Visit: http://phx.corporateir. net/External.File?item=UGFyZW50SUQ9 NTIyNjg4fENoaWxkSUQ9MjA3ODk0fFR5c GU9MQ==&t=1
4. CBR pharma insights, R&D productivity – The state of research and development in the biopharmaceutical industry, April 2013
5. Charles River, Company press releases, 3 January 2013
6. Shanghai Clinical Research Center, Company press releases, 18 June 2012
7. Quintiles, 2013. Visit: http:// investors.quintiles.com/files/ doc_downloads/2013%20quintiles%20 annual%20report%20-%20final.pdf
8. PAREXEL, Company press releases, 23 September 2013


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Vijaya Vulapalli is a Senior Analyst with GBI Research. She has industry research experience within life sciences and healthcare, working with Satyam Computers and later with Deloitte. Vijaya holds an MBA degree from the University of Bradford and a Bachelor’s degree in Life Sciences from Osmania University. She also attended an Executive Business Management Programme at the Indian Institute of Management in Calcutta.


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