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CROs to profit from large slice of $91bn biotech pie, say analysts

By Dan Stanton+

10-Apr-2014
Last updated on 10-Apr-2014 at 12:43 GMT

Much of the $91bn (€66bn) raised in biotech capital over the last twelve months will end up in the hands of the CRO industry, according to a survey from analyst firm Jeffries.

At last month’s Society of Toxicology (SOT) meeting in Phoenix, Arizona , commentators spoke of the strong funding environment for biotech companies contributing to a possible turnaround of the preclinical sector.

However, such investment is also driving growth in the later stage sector according to a survey by analyst firm Jeffries, who – after initially predicting a slowdown - now expects the market to grow 350-400 base points faster in 2014 than in 2013

“During the 12-months ending March, $91B was raised globally, up 44% over the same period one year ago,” said David Windley in an analyst note. “Given the type of companies raising capital, much of this should end up in the hands of the CROs.”

Furthermore, such investment is likely to drive outsourced R&D spending – both early and late-stage – for a number of years to come, he continued, adding “this biotech funding creates new core demand,” and “not just a shift from internal to outsourced study execution.”

The “strong biotech funding environment” was also cited by ISI analyst Ross Muken in a pre-Q1 reporting note as one of “several secular tailwinds boosting fundamentals in the CRO space.”

However, Muken did note the current volatility in public biotech shares meant the effect on CROs was “increasingly debatable.”

Strategic Alliances?

On the whole, Muken was mostly upbeat about the sector, especially on the late-phase side due to its superior visibility and free cash flow potential.

Furthermore, he noted there is an increased push towards the strategic partnership model, supported by speculation from last week’s Partnerships in Clinical Trial’s Conference (PCT) that Biogen Idec was moving to a single-source model and Pfizer would soon add a third CRO to its current alliances with Icon and Parexel.

Whilst Pfizer told this publication it was currently “exploring the option of bringing in a third alliance partner,” a third third-party it is yet to be announced, though Muken told us he though “Quintiles has a great shot” at being selected by the Pharma Giant.

Windley, however, viewed this anecdotal evidence as an indication that CRO share consolidation is slowing, with more vendors seeing a slight re-expansion.

“In those specific examples, we do not believe the changes have a negative revenue impact for the existing vendors near-term,” he said. “However, our survey work backs up these anecdotes with additional indicators that could alter the partnership trend that propelled bookings from 2010-12.”

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