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Pharma consolidation a boon to CROs, but only the larger ones, report says

By Dan Stanton , 19-Feb-2014
Last updated the 19-Feb-2014 at 16:05 GMT

Mid-tier pharma mergers and a shift to more complex trials will benefit broad-based CROs, whilst smaller outsourcing partners will be forced to consolidate, an industry report by Citi Research predicts.

Vice President of Healthcare Technology & Distribution at Citi Research Garen Sarafian told Outsourcing-Pharma.com the Citi Group was launching into the contract research organisation (CRO) industry “as part of Citi’s commitment to covering the healthcare space,” and has prepared a report on the state of the industry as it prepares to cover Quintiles, Parexel, Charles River Lab and Covance – “the four largest US based and publically traded CROs.”

The environment of mega mergers from the likes of Pfizer and Wyeth, and Merck and Schering-Plough seen in the mid-to-late 2000s is unlikely to return, the report suggests, as the plunge in sales from the patent cliff is expected to reach its trough this year and pipelines begin to recover.

However, as recent mergers between Amgen and Onyx , Valeant and Bausch+Lomb , and – just yesterday – Actavis and Forest show, consolidation is continuing but is now being driven by mid-sized pharmaceutical and biotech companies.

Such a shift in the pharma environment is a boon to the CRO industry, the report says, as though mid-tier clients have provided a lot of pipeline growth in the last few years offsetting the smaller volumes the Big Pharma sponsors provide.

However, whilst larger CROs will reap the benefits of a more consolidated client base, the report suggests “consolidation within CROs will occur to offset numerous factors inherent in dealing with a consolidating client base,” including negotiating leverage, limited economies of scale, and the indirect consequence of lumpy revenues as larger contracts lead to greater variance as contracts flow in and out of financials.

More Complex Trials

Furthermore, the evolving nature of clinical trials requires a broader base of services, the report continues to predict, and as the cost on average of getting a New Molecular Entity (NME) to market is now on average $1.83bn, compared to $48m in 1970, the CRO industry, “more complex trials should correlate into greater revenue opportunities” for CROs.

However, it will once more be the large CROs who reap the benefits. “As trials become more complex, increasingly global, and generally more burdensome, we believe a wider range of skill sets across the various phases of development will be required of CROs.”

Increased Scrutiny

Greater requirements from regulators in clinical trials, for example, create opportunities for CROs to provide additional services. “When required, drug development efforts must not only demonstrate that the desired surrogate marker is significantly improved, but that improved patient outcome is being achieved.”

This “requires a much higher patient count for statistically significant analyses, leading to longer trial times, higher costs and greater required scale to run the trials.”

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