Strategic deal renewals a opp to push pricing, switch partners
After Eli Lilly kick-started the strategic trend by partnering with Covance a number of three to five-year deals were inked by other biopharm companies. In the next few years all these deals will come up for renewal, creating a slim opportunity for other contract research organisations (CRO).
“We think most incumbents will be in the throes of too much work to swap them out, unless the incumbent really falters, which certainly can, and is happening” said David Windley, equity analyst at Jefferies & Company.
Extending and tweaking contracts with incumbent CROs should be less disruptive for both vendor and sponsor than the original deal making. CROs will already have a flow of work from the partner but changes to volume, based on performance, and pricing are to be expected.
“We expect pharma to turn the pricing screws another revolution, either explicitly or implicitly via higher resource utilisation targets or additional “investments””, said Windley. As the deal renewal period and patent cliff overlap Windleyexpects sponsors to “extract a fresh pound of flesh”.
CROs renegotiating existing partnerships may want to push for longer deals. “We find a three-year duration borderline unreasonable”, said Windley. Objections to the shorter-term deal relate to the length of late stage trials and the time taken for strategic partnerships to get going.
Combined, these factors, according to Windley, mean three-year deals are too short for strategic agreements. “The earliest awards under these strategic partnerships are not likely to conclude until 12-24 months after the contractual end of the initial partnership term”, said Windley.
Upcoming deal renewal dates are plotted on the timeline below. Points are only plotted when a renewal date, to the nearest quarter, is known and consequently many deals are excluded.
Strategic deals – good or bad?
From the timeline it is clear the next few years present an opportunity, however slim, for CROs to win deals that passed them by in the first period of negotiations. However, getting deals up and running has, in some cases, been challenging and costly, prompting some to question their value.
“Are strategic deals good or bad for the industry? If companies could have the “good old days” back, they should take them, in our opinion. The deals bring baggage with the benefits”, said Windley.
Baggage associated with strategic deals includes upfront resource investments, volatile study starts, and pricing pressure, said Windley. In financial filings and conference calls management at CROs have said the benefits outweigh the baggage, but Windley is less convinced.
