Outsourcing penetration set for double-digit growth in ‘11

By Nick Taylor

- Last updated on GMT

Related tags Percentage point

Outsourcing penetration growth will hit double-digits, above analyst expectations, in 2011 and offset flat R&D budgets, found an RW Baird survey.

Respondents from biopharm of all sizes said the percentage of research and development (R&D) budget outsourced will rise in 2011. Overall penetration is predicted to reach 41 per cent in 2011, with small firms outsourcing more, and this figure could increase significantly in coming years.

We have believed that the ultimate end game is for outsourcing penetration to at least hit 60 per cent, and possibly 80 per cent, in the distant future​”, said Eric Coldwell, managing director, healthcare equity research at RW Baird. Some believe penetration could go even higher.

To reach the upper end of these predictions outsourcing must continue to evolve and mature. As it stands, even the largest outsourcing deals are yet to “scratch the surface of what pharmas could do to change the game​”, said Coldwell.

Evolution of, and beyond, strategic partnerships is needed. Coldwell said: “The real key to making strategic alliances powerful will be when we see CROs’ scientific involvement increasing and when pharmas relinquish their patriarchal control of vendor process​.”

Growing outsourcing penetration through closer relationships will help CROs offset flat R&D budgets. Predictions for R&D spend in coming years vary, a little, by geography and company size but overall growth is expected to be modest, beginning with a one per cent rise in 2011.

Pricing surprise

Outsourcing penetration growth predictions were a few percentage points above, but broadly in-line with, RW Baird expectations. A more surprising finding, and the only one that went against expectations, related to change in CRO pricing over the past three months.

Price increases were reported by 35 per cent of respondents. Aggregating and averaging all data, across company size and developmental stage, a mid-single digit increase in outsourcing price was reported.

We are shocked by this pricing feedback​”, said Coldwell. RW Baird, and other observers, believed client cost management, volume discounts and excess capacity are still a drag on CRO pricing.

If accurate the finding would be a “big positive​” for CROs and see performance beat expectations in 2011. However, while it “appears to be more than a statistical anomaly​”, more work is needed to confirm the finding.

China, clinical, oncology

Other findings were much closer to expectations. The survey asked respondents how and where they would invest if they ran a global CRO. Overwhelmingly, China was the most selected country, clinical the most popular R&D phase, and oncology the therapeutic area of choice.

CROs with strength in these areas are positioned to prosper in coming years. “We believe that CROs which have greater scale and scope in Asia, Central and Eastern Europe and the US will outperform those with a larger presence in the UK or Western Europe​”, said Coldwell.

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