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Consolidation among small CROs could drive up prices, says analyst

By Dan Stanton contact

- Last updated on GMT

Citi Research survey finds CRO pricing has been flat, but expert says consolidation could lead to increase
Citi Research survey finds CRO pricing has been flat, but expert says consolidation could lead to increase
Competition among small CROs kept prices steady in 2014 despite higher sponsor R&D spending and greater outsourcing penetration, according to a Citi Research survey.

Some 59% of respondents said pricing neither improved nor weakened over the past six to nine months, and the other respondents equally split as to whether pricing has risen or fallen. Citi analyst Garan Sarafian commented that the results were less positive than expected and more consistent with the cautious trends seen in the preclinical sector.

“One explanation is the size of firms driving more aggressive pricing,”​ Sarafian noted. “Smaller CROs were highlighted as the most price aggressive, when compared to mid-sized and large CROs. We suspect it is due to their increasing inability to compete against global CROs on service offering.”

He suggested smaller CROs, due to their limited capabilities and geographic reach, were pushing the price down and, in the long-term, such companies will find it difficult to compete as pharma outsources additional services requiring broader skill-sets.

Consolidation to drive up prices

Neal McCarthy, Managing Director at investment banking firm Fairmount Partners, told Outsourcing-Pharma.com consolidation within the industry should drive better prices going forward.

“Historically, the very large CROs have carried more overhead, and require higher pricing to cover those costs. As the number of smaller and mid-sized CROs decreases, I think we will see some shifting toward the large company pricing.”

One example cited was PRA’s acquisition of RPS in 2013​. “RPS was a mid-sized company which completed largely on pricing. When a company like that gets purchased by PRA, they discontinue that pricing model,” ​he told us.

McCarthy was also surprised pricing had remained flat, as increased regulations in the CRO industry which have led to greater compliance and QA costs which are generally passed on to the clients.

“Perhaps this will be offset by improvements in trial efficiencies that will come from risk-based monitoring, and the efficiencies of a growing group of large dedicated research sites, but too early to tell.”

The Citi Research survey was taken by 50 senior executives within the industry, though 80% of these respondents came from small CROs. With this in mind, Outsourcing-Pharma.com is operating its own poll among our readers, to find out a more general outlook on how pricing is set to change over 2015:

Survey

How do you think pricing in the CRO industry will change in 2015?

  • Increase

    62%
  • Decrease

    9%
  • Remain the same

    29%

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