CROs juggle uncertainty, optimism

August 10, 2010 – 6:29 pm by Michael Christel

The latest earnings season for the top publicly traded contract research organizations is over (Parexel released fiscal year 2010 results yesterday), leaving eyes now focused ahead at just what path clinical outsourcing will take the rest of the year and beyond.

Many CROs are unsure whether continued market conditions will allow sponsors to revive pipelines or launch new programs, and prospects of a new round of M&A activity could slow demand as well. At the same time, recent signs such as strong book-to-bill showings, dropping cancellation numbers, biotech funding improvement, and increased strategic partnership movement should enable a revival of sorts toward the end of the year and into 2011, although most CROs realize near-term revenue growth will likely remain slow.

“I’m still optimistic around the growth of the industry,� says John Hubbard, Ph.D., group president for global clinical research services at Icon Clinical Research. “It’s a little lumpy for the public CROs, but for different reasons. There’s been some challenges in capacity in the preclinical space and that’s affected CROs that have a big preclinical capacity. I’d say in the clinical space right now, certainly in the later phases, things are definitely looking up compared to last year.�

One life sciences consultant told me that he sees clinical outsourcing activity picking up through the rest of the year and particularly in 2011 as pharmaceutical and biotechnology companies make more decisions around reallocating their spending based on reevaluated budgets, recent acquisitions, the possibility of unexpected attrition, and reprioritization.

In June, Business Insights reported that contract research revenues are expected to reach $24 billion this year, doubling 2004 earnings.

Opinions differ over whether the flurry of pipeline consolidation that took place across big pharma in late 2008 and 2009 is indeed over, and a potential Sanofi-Aventis and Genzyme union around the corner will likely ignite further debate. While R&D spending has been down and will probably remain relatively flat in the months ahead, CROs are not necessarily handcuffed as a result, but can instead focus on opportunities to gain market share.

“Growth in our industry doesn’t have to just be limited by the R&D spending growth if the penetration of outsourcing increases, which is what we’re clearly seeing,â€� says Mark Goldberg, M.D., chief operating officer, Parexel. “The projections are that the CRO industry will continue to grow even though the growth rate of R&D spending might be a bit slower.”

According to Jefferies and Company Inc., most of the public CROs have recently cited an outsourced penetration percentage in the high-20s to low-30s. Many are predicting a much higher ceiling ahead.

“It’s clearly going to rise up into that 60% to 70% figure,� William Sharbaugh, chief operating officer, PPD Inc., tells me. “There’s growth and room for the leading CROs to run.�

Doing so in the preclinical and early-stage space, however, won’t be easy. Demand and profitability for services such as toxicology continued to suffer across the industry in the second quarter, the results also a product of lower than historical prices.

“We continue to feel a significant degree of turbulence and uncertainty in the market and I think we would be amongst many of our peers in saying that,â€� says Stephanie Wells, corporate senior VP, marketing and chief marketing officer, Charles River Laboratories, which specializes in research models and early-stage services. “While we are continuing to see healthy pipelines from some of our clients, many of them still seem to be in this very uncertain mode.â€�

A difficult global regulatory environment has impacted early-stage efforts as well, CROs in some cases being saddled with delays at Phase I units for trials already started.

For much more on the state of clinical outsourcing, look for our 15^th annual CROs report in the September R&D Directions.

Tags: CRO, outsourcing