Is there a CRO bubble? Analysts say yes, with caveats

27-Apr-2015 - Last updated on 28-Apr-2015 at 21:33 GMT

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With sky-high valuations and soaring M&A prices, the question of whether there’s a biotech bubble continues to crop up, though now some analysts are saying this so-called bubble and its inevitable pop may be a cause for concern for CROs (contract research organizations).

John Kreger, an investment analyst at the banking firm William Blair, told attendees last week at the Partnerships in Clinical Trials conference in Boston that he does believe there’s a bubble for CROs as “this is about as good as I’ve ever seen it” for the industry.

“And because the biopharma industry is a growth industry again,” Kreger said, “We’re seeing pharma outsoucing as a nice de-risked way to play the market,” especially as new technologies deployed by CROs are changing business profiles to make them more compelling.

‘Strong Cycle’

But, similar to what CRO executives have told Outsourcing-Pharma.com in the recent past, the bursting of a biotech bubble and the decline of a number of biotech companies’ share prices won’t spell immediate trouble for CROs, especially as most build up backlogs of work worth billions of dollars.

David Windley, analyst at Jefferies, told Outsourcing-Pharma.com that “CROs have tended to trade in relation to biotech more than pharma. I think it is fair to say that strongest biotech funding environment since the early 2000s has extended a very strong cycle for CROs, particularly on the Phase II-IV side.”

But Windley notes that we should take a closer look at biotech cash because when “the biotech bubble bursts, so to speak, biotech stocks will drop, but a bunch of companies will have just completed financings. They won’t be out of cash the next day.”

There are also some major differences between this latest bubble and previous infusions of funding into the industry.

“I’m certainly not one to deny that this funding cycle will eventually come to an end,” Windley said. “However, key differences would be that FDA approvals have improved” and innovation is changing in a couple of ways, such as sponsors bringing actual cures to market in some key cases, such as in Hepatitis C, while the leveraging of genomics “is delivering some payoffs.”

Other experts seem to think that this wave of biotech cash could also cause more CROs to go public.

Michael Mortorelli, director of Fairmont Partners, noted that the low cost of borrowing is driving investments into both the biotech and CRO industries, though he added that when “you look at the amount of PE [private equity] money in the industry, something is going to give in the next couple of years in terms of [companies] going public. That’s the nature of what PE does.”