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Growth in outsourcing expected to ramp up for CROs says analyst

By Zachary Brennan , 03-Mar-2014
Last updated on 03-Mar-2014 at 13:46 GMT

Citi: CRO sector book-to-bills suggest health demand
Citi: CRO sector book-to-bills suggest health demand

Despite investor concerns about growth in R&D dollars for big pharma, CROs (contract research organizations) will benefit from the continued outsourcing, according to Citi analysts. 

There is an emphasis that recent R&D cuts are not necessarily unfavorable to CROs, and sometimes positive as they look to pick up assets and employees as they are offloaded” Citi analysts said in a statement. “We also note that book to bills across the board are reflecting stronger demand for CRO services.  We like the CRO sector, but valuation and the lumpiness in contracts gives us pause.”

Joe Herring, CEO of Covance, said at a Citi conference last week, “We are clearly market leader in lab portion of that” growth. Investments in IT infrastructure and driving new orders have delivered for Covance, he added.

IT projects are largely done and we’re in the implementation phase” of those projects, he added. “We generate more drug safety and efficacy data than anyone on the planet. Our efforts to mine that data…rated at the top of CROs as the preferred choice because we can meet deadlines and come in under cost. We’re the market leader in preclinical and central labs – [and our] ability to create valuable strategic relationships are what we value,” Herring said.

John Lewis, VP of public affairs at ACRO (Association of Clinical Research Organizations) added, “I think the recent earnings reports from the four public CROs - Parexel, Icon Covance and Quintiles - were very strong.”

As far as disruptive innovations, Herring said, “The time to drug development is unacceptable – to give an example, one client wanted more clinical work – 900 investigator sites and 24 months to enroll this trial – we’ve done the work to know which countries and patients to go to – you don’t need 900, they needed about 700 and we can do it in 18 months. And they agreed and reduced the upfront costs by $10m. Saved them time and money – to me, that’s disruptive.”

Disruptive thinking bodes well for our company and the industry, he said.

It’s undeniable that outsourcing is here to stay” as late-stage trials are growing in the 15-20% range and even preclinical is beginning to grow as the industry shifts from insourcing to outsourcing, he added.

The back pressure on all of this is that revenue has to be replaced for drugs that have gone generic,” he said, noting that what they’re doing is getting rid of fixed cost infrastructure. “Once they cut internal staff, what is the likelihood that they’ll add these employees back – there will be more outsourcing as more cuts to R&D increase.”

It’s interesting how the model is developing, Herring noted, adding that small biopharma companies are driving the bottom lines of many outsourcing companies. “I think there’s less risk in the biotech space than before,” he said.

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