After years of painfully diminishing return on investment (ROI) from discovery and development (D&D) programmes, pharmaceutical and biotechnology companies are taking a calculated risk at the heart of their businesses with the production of their most valuable asset—intellectual property. Within the last decade, outsourcing to contract research organisations (CROs)—companies that offer the industry a wide range of research services—has grown to such an extent that it now encompasses over 40% of the entire sector’s D&D. More than one-half of drug makers conduct their Phase I, II and III trials primarily through CROs.
This is no longer outsourcing at the margins, but a fundamental shift away from the industry’s tradition of strong vertical integration. In making this change, however, biotechnology and pharmaceutical companies are betting on a model that is not only unproven, but is still being defined. The ability of this approach to deliver improved innovation at a reduced price will require strategic vision rather than simple cost cutting.
The interest of biotechnology and pharmaceutical companies in global alliances with contract research organisations has reshaped an important part of the CRO market. Pharmaceutical and biotechnology companies are increasingly entering into global alliances with CROs as they seek to improve their ROI in D&D; in the last two years, 22 such major alliances have been formed. According to Economist Intelligence Unit survey respondents, although the most common client-CRO relationship remains one that involves ad-hoc contracts, the preferred relationship on both sides would be global alliances or partnerships that are regional or disease-specific. Yet smaller biotech and pharma firms defined here as those with annual revenue of less than US$100m—lack the volume of business to make such arrangements worthwhile. These firms prefer continued arm’s-length relationships with CROs with local operations. John Ratliff, president and chief operating officer (COO) at Quintiles, an integrated biopharmaceutical services company, says, “You almost need two different types of service for two different types of client.”
CROs and their potential clients have different expectations of the shape of partnerships.
A striking perception gap exists between CROs and their clients as to the direction of the market in future. In order to become more attractive partners and tap into the potential market such relationships provide, many CROs are expanding services across the D&D spectrum, particularly in the earlier stages. Forty-eight percent of CRO respondents, for example, intend to begin or expand assay development services and 64% screening services. Other companies in the life sciences industry, however, expect to increase their use of CROs largely in fields in which they are already most frequently used, such as drug trials. It appears that the dominant model in the industry has yet to be defined.
CROs will continue to consolidate and gravitate towards becoming either all-purpose partners or niche specialists.
Contract research remains a fragmented industry ripe for further consolidation: 74% of CRO survey respondents say that the trend towards alliances with biotechnology and pharmaceutical companies will drive consolidation in the short term. Moreover, 41% say that in the next three years they will expand their range of services to become better potential partners. Highlighting the industry’s duality, the same percentage will focus on a small number of specialised areas (29%) or a single niche (12%).
All sides still have work to do in shaping partnerships and alliances to their own broader interests.
As the nature of alliances and partnerships is redefined, CROs will need to demonstrate to biotechnology and pharmaceutical companies the value of working with the former as partners rather than as sources of cheap labour. John Watson, president of strategic partnering and chief commercial officer at Covance, a US-based CRO with global operations, says, “Supplier consolidation can create short-term value. It is up to the CRO industry to put forward a broader value proposition.”
Pharmaceutical interviewees indicated that companies within the industry are open to new ideas. Such firms, however, need to approach the use of CROs as an opportunity for strategic renewal rather than mere cost cutting.
