MARKET BRIEF - Financial Performance Benchmarking & Competitive Landscape Assessment of Leading CROs

INTRODUCTION

The biopharmaceutical industry is currently facing significant headwinds. The blockbuster era is over, development costs are skyrocketing, uncertainty exists around regulatory and reimbursement, patent cliffs, generic erosion, and a sluggish global economy all have industry executives losing sleep at night. To respond to these pressures, biopharmaceutical companies have been changing the way they approach virtually every aspect of their business, including research and development. To remain competitive, drug makers are intensely focusing on generating more value and productivity out of every dollar spent on R&D. The challenge of accelerating pharmaceutical product development while controlling costs creates a difficult balancing act for industry executives. Through the use of strategic outsourcing with third-party vendors, drug makers can maximize their internal resources while at the same time entering into risk-sharing agreements with CROs to generate significant cost savings.

CRO SECTOR POSTED STRONG GROWTH IN 2012

According to GlobalData’s 2013CRO Benchmark Report, the total combined peer group revenue from these leading CRO companies increased 10.2% year-to-year, from $12.4 billion in 2011 to $13.6 billion in 2012. Largely fueling the growth in the CRO sector was Quintiles, which independently contributed approximately $397 million to the $1.2-billion peer group increase.

Quintiles’ revenue grew by 12.1% year-on-year to $3.7 billion in 2012, considerably larger than its next closest rival, Covance, at $2.1 billion. Quintiles was effective at turning its order backlog into revenue, and garnering new orders in its clinical services business especially in markets abroad, in Europe and Asia. In fact, most of the companies in this report saw positive year-on-year growth rates in 2012, ranging from 4% (Covance) to 22.8% (WuXi), with the exception of Charles River, which saw a slight year-on-year revenue decline of 1.1% largely due to unfavorable foreign exchange rates. The sector posted strong growth in 2012, outpacing the 6.8% increase in aggregate corporate revenue the same peer group recorded in 2011.

Strategic acquisitions and partnerships carried out by CROs also helped to drive revenue higher for the peer group. Just before the close of FY12, Patheon completed its $269-million deal to acquire Banner Pharmacaps, one of the world’s largest manufacturers of proprietary softgel capsules for the pharmaceutical and nutrition industries. The purchase of Banner fills gaps in Patheon’s current product lines and also expands its geographic reach into markets in Mexico and Latin America.

Catalent Pharma Solutions made significant investments in its clinical trial business when it bought Aptuit’s Clinical Trials Supplies (CTS) business in February for $410 million. The all-cash transaction transformed Catalent into one of the largest global providers of clinical supply solutions and adds analytical chemistry, respiratory product development, and regulatory consulting services to its mix. The private CRO sector also saw its fair share of acquisitions.

Clinipace Worldwide broadened its therapeutic expertise and regional footprint in Europe with its buy of Paragon Biomedical. Known principally as an oncology CRO, Clinipace will now have the talent and resources to offer its clients services for managing clinical trials in the areas of immunology, infectious disease, cardiovascular, and CNS. While traditionally known for its work in IT outsourcing, the industry giant Accenture purchased Octagon Research Solutions, complementing its data management capabilities with Octagon’s proprietary software platform and deep regulatory knowledge.

CROS FOCUSING ON DELIVERING SERVICE VALUE TO SMBS

CROs are adding new capabilities specifically aimed at helping small and midsized biopharmaceutical companies (SMBs) optimize value and minimize risk. In a post-patent cliff world, small and mid-size pharma and biotech companies will become the heart and soul of the drug industry, and will be responsible for the lion’s share of the innovation the industry will see in the future. GlobalData believes CROs are ramping up their services to meet the requirements of small and mid-size pharma and biotech companies, who tend to have varied needs and much smaller budgets compared with their Big Pharma brethren, hence requiring different outsourcing strategies.

Allume is a comprehensive go-to-market service introduced by Quintiles that combines consulting, clinical services, commercial expertise, and information technology. The service helps SMBs efficiently launch new products and shorten timelines to peak sales, while retaining strategic and corporate control of their assets. Biopharma companies are looking for new ways to optimize product value, expedite market access, and mitigate commercialization risk. Allume Quintiles achieves this by simplifying and organizing the complex, resource-intensive launch planning process, leaning on Quintiles’ 15 years of market entry experience. To maximize value, companies must plan product launch much earlier in the drug development process, especially when preparing to enter new geographic markets. Through Allume, Quintiles provides the strategic thinking, deep therapeutic insight, and local market access knowledge to help its customers design roadmaps to navigate a pathway to successful commercialization.

Not surprisingly, Parexel followed suit. However, instead of launching a service line, Parexel created the Parexel BioPharm Unit – a dedicated division of the company to focus solely on the unique needs of small and midsized biopharmaceutical companies to help them achieve their development goals. Parexel’s internal research has found that 81% of all on-going development programs are originating from sponsors outside of the top 25 pharmaceutical companies – a significant growth opportunity that Parexel wants to capitalize on with its new delivery model. Under a collaborative team-based approach, Parexel’s BioPharm Unit provides SMBs the opportunity to accelerate patient recruitment, increase the speed of study start-up, and improve overall efficiency for meeting critical development milestones.

EVOLVING STRATEGIC PARTNERSHIP MODEL

Throughout the past 5 years, a wave of strategic partnerships between biopharmaceutical companies and CROs has been put in place to drive more flexibility, reduce costs, and extend expertise. Collaborations have evolved from simple transactional relationships into multi-year, highly integrated strategic engagements focused on shared objectives, mutual investment, and involvement in clinical trial design and drug plan development. The growth of contract research outsourcing will primarily be driven by the need of biopharmaceutical companies to improve research and development in mature and emerging markets. Today, many biopharmaceutical companies are engaging clinical research organizations through this more integrated approach, aimed at optimizing performance and minimizing risk.

According to GlobalData’s Pharma eTrack, the number of licensing deals fell slightly, from 40 in 2011 to 36 in 2012, the total licensing deal value soared to $958.9 million in 2012, a 159% increase when compared with 2011. We attribute the growth in deal value to a number of significant partnerships being struck throughout the past few years for which contract revenues are now beginning to be realized.

GlobalData believes that strategic partnerships provide companies with higher levels of integration, alignment, and collaboration that will support industry success. Merck engaged Quintiles in a 5-year clinical development collaboration to essentially reshape its entire R&D machine.

The pharma giant just announced a major shakeup to streamline its operating model and aggressively manage its cost structure. The company spent $8.2 billion in R&D in 2012 (which was down from $11.1 billion in 2010), yet has very little to show for it, as the company has a very weak late-stage pipeline. However, GlobalData expects the partnership with Quintiles will play a major role when the company reviews its R&D apparatus this year.

Covance was also busy signing deals with large pharma outfits. Throughout the past couple of years, Covance booked multiyear outsourcing deals with Bayer Healthcare, Eli Lilly, and Sanofi to conduct a variety of market access and R&D services, including discovery support, toxicology, central lab, and managing Phase I-IV clinical trials. Over the next 10 years, Covance will be paid handsomely for its work. The contracts from these three drug makers alone will add close to $4 billion to the company’s coffers.

BRICS & OTHER EMERGING REGIONS REPRESENT HUGE UNTAPPED MARKETS FOR CLINICAL R&D

With lower overall costs, better recruitment and retention rates, strong investigator networks, and populations in need of novel treatments, conducting studies in the emerging markets is a strategic necessity. Biopharmaceutical companies with less experience in conducting trials in the emerging markets may need on-the-ground expertise to ensure their project is tailored to local patients and complies with regional regulations. Other drug makers that already have the experience in the region may need operational support or advice on how to ensure locally conducted trials satisfy the needs of global regulatory bodies, to mitigate costly clinical trial disruptions. CROs with the ability to deliver cost- and time-saving efficiencies to clients without compromising patient safety and data quality will be able to yield higher returns from emerging markets.

The emerging markets in Asia and Eastern Europe have become attractive regions for pharmaceutical outsourcing due to easy access to large patient pools, low labor and manufacturing costs, and highly skilled medical research talent. However, due to regional differences in commercialization and regulatory pathways, the need to partner with local expertise is a critical plank in any company’s globalization strategy.

For instance, AstraZeneca (AZ) formed a strategic partnership with Beijing’s Pharmaron, a provider of R&D services for the pharmaceutical and biotech industries. AZ inked the multi-year drug discovery deal with Pharmaron in October 2012 for services in the area of chemistry, drug metabolism and pharmacokinetics, and efficacy screening. Pharmaron will conduct these services with a team consisting of several hundred scientists at its newly opened state-of- the-art research laboratory in Beijing. GlobalData expects the services provided, combined with the close proximity of the Pharmaron staff, will open communication channels with AZ scientists, therefore helping them drive their drug development programs with greater efficiency and transparency.

One of the fastest-growing emerging markets for clinical trial work outside of China is South Korea. According to Outsourcing-Pharma.com, the number of clinical trials initiated in South Korea increased from 206 in 2006 to 513 in 2009, a 150% increase throughout the 4-year span. While Korea’s pharmaceutical industry is competitive in terms of chemical and synthesizing technologies, it is considered less competitive in drug screening, safety evaluation, and clinical development. Therefore, companies have found partnering to be an ideal way in which to become more involved in R&D.

To enhance its bioanalytical service offerings in Korea, Quintiles announced an exclusive partnership with BioCore, a leading Seoul-based bioanalytical CRO. BioCore is South Korea’s largest provider of bioanalytical liquid chromatography-tandem mass spectrometry services. BioCore was South Korea’s first GLP-compliant certified bioanalytical CRO, and the first to be certified by Korea’s Food and Drug Administration. Under the 2-year agreement, BioCore will provide Quintiles with liquid chromatography and mass spectrometry services. The partnership with BioCore is part of Quintiles’ plan to add local capabilities as needed in order to gather high-quality bioanalytical data earlier in clinical development, which is crucial for biopharmaceutical companies making informed decisions that increase their probability of success in more expensive later-stage trials.

In March 2013, PRA announced it had acquired ClinStar, LLC, a privately held CRO that manages Phase I-IV clinical research trials in Russia. ClinStar is the largest independent, geographically focused CRO in Eastern Europe, providing clinical development services to a wide range of pharmaceutical and biotechnology companies. GlobalData believes the ClinStar acquisition illustrates PRA’s dedication to support its growth in Russia and in Eastern Europe. The purchase is well-aligned with PRA’s goals of meeting the needs of its clients by establishing a stronger presence with one of the most well-established CROs in the region. The acquisition will include ClinStar’s stand-alone clinical trial warehousing and logistic division, IMP Logistics, which has operations in Russia, the Ukraine, and in Belarus. Through IMP Logistics, PRA will now be able to offer its clients top-quality cold chain logistics services that include the importation of investigational products, clinical supplies, laboratory kits, and storage in multiple temperature zones. GlobalData expects PRA to integrate the approximately 300 ClinStar and IMP Logistics employees, thereby augmenting its operations and expertise to create a significant competitive advantage in the region.

Two niche CROs based in the US grew their respective footprints in emerging European markets. BioRasi completed its acquisition of Sponsors Clinical Research Group (SCRG), a CRO based in the Ukraine, established in 2004. SCRG has been conducting clinical studies in various therapeutic areas, including cardiology, neurology, oncology, endocrinology, and pulmonology. The business combination enhances BioRasi’s geographic footprint, addressing the ever-increasing demand for optimizing global clinical trials. The purchase will also build upon BioRasi’s presence throughout Eastern Europe, which currently includes a site in Moscow, Russia.

Meanwhile, QPS a Delaware-based CRO, bought a controlling stake in JSW, Austria’s largest provider of drug development services, focusing on central nervous system disorders, such as Alzheimer’s, Parkinson’s, and Huntington’s diseases, and schizophrenia. While the financial terms were not disclosed, all of JSW’s business will be conducted under the QPS-JSW moniker from here on out. QPS’ acquisition of JSW added to the company’s capabilities in Phase II-IV drug development and expanded its market share in Central and Eastern Europe.

SUMMARY

GlobalData believes the dynamics of pharmaceutical outsourcing and location decisions in emerging markets are changing. Cost reduction is being augmented and will gradually be eclipsed by footprint growth as a major factor shaping decisions. CROs are realizing that the ability to be on the ground closer to their customers is a key building block to establishing sustainable, long-term relationships with clients. With the economic balance shifting from mature markets in the west to emerging markets in the east, regions in Southeast Asia, like Singapore, South Korea, Taiwan, and Vietnam, have become important destinations for conducting clinical trials. Singapore, for example, is often considered the nucleus for clinical research in the Asia-Pacific region – with mainland China and the Korean peninsula to the north and Australia and Oceania to the south, Singapore is a natural hub for clinical outsourcing. The government of Singapore promotes translational and biomarker research and it has put in place laws protecting intellectual property and adheres to Good Clinical Practice (GCP) guidelines, offering a sense of security and assurance to pharma clients looking to conduct trials in the country. However, with a small patient pool, clinical trial opportunities in Singapore (and small countries like it) are limited to mostly Phase I/II trials, leaving the heavily populated countries of China and India to grab the bulk of late-stage trials where large patient numbers are required.

The Chinese CRO market has been rapidly growing throughout the past few years as Big Pharma looks to tap into the region’s burgeoning drug market. However, pharmaceutical companies and service providers are entering China (and certainly India) with caution, and for good reason. Both countries have lax standards around patient safety, which is of concern to pharmaceutical companies looking to conduct clinical trials. While both India and China offer access to large pools of treatment-naïve patients and cheap labor, each country’s regulatory structure lacks the transparency seen with the US and EU agencies, and both are riddled with hurdles. China and India offer byzantine regulatory regimes that make each country far more complicated than originally thought. As a result, the labor savings is China and India is commonly juxtaposed with longer approval timelines for bringing a drug to market. This is beginning to change how pharmaceutical companies and CROs do business in these regions.

REPORT DESCRIPTION

GlobalData’s PharmaLeaders: CRO Benchmark Report: Financial Performance Benchmarking & Competitive Landscape Assessment of Leading CROs – applies GlobalData’s proprietary ranking methodology to compare the competitive position of 11 leading CRO companies on 17 financial metrics. These companies are analyzed based on financial performance, cost-containment, capital structure, and firm utilization to illustrate the different strategies these companies are using to gain a competitive advantage.

In addition to the financial metrics, this report discusses trends impacting the CRO marketplace, along with partnering and acquisition activity, and operations strategy. This report also provides a drill-down analysis of three service lines and four geographies to examine each segment’s revenue and growth leaders. Lastly, this research provides GlobalData’s outlook on the CRO sector and each company’s future competitive position.

GlobalData’s PharmaLeaders report series is targeted to both the scientific and investor communities. Clients that have leveraged these reports come from industry R&D and strategy teams, private equity and venture capital firms, and professional and financial services consultancies.

Companies Financially Benchmarked: AMRI, Catalent, Charles River, CMIC, Covance, EPS, Icon, Parexel, Patheon, Quintiles, and WuXi.

Other Companies Covered: Accelovance, Accovion, Aptuit, Asklep, BioRasi, Chiltern, Clinipace, ClinStar, CromSource, DKSH, Frontage, INC Research, Novella Clinical, Novotech, Ockham, Octagon Research Solutions, Paragon Biomedical, Pharmaron, Pharm-Olam, PPD, PRA International, PSI, QPS, ReSearch Pharmaceutical Services, Synexus, Syngene, SynteractHCR, and TFS International.

Adam M. Dion is an Analyst in the Healthcare Industry Dynamics Team at GlobalData. Mr. Dion is an author of GlobalData’s PharmaLeaders benchmark reports, which rank the competitive positions of the top companies in the pharmaceutical, biotech, and CRO/CMO sectors. He is the lead author of the Pharmaceutical Benchmark Report and the Innovative Mid-Cap Biotech Benchmark Report and also provides coverage of trends in the healthcare IT space, including mHealth and cloud computing. Prior to joining GlobalData, Mr. Dion was an Analyst with Technology Business Research, a leading market research and consulting firm. In this role, he was responsible for coverage of bluechip hardware, software, and BPO companies, such as Dell, Apple, SAP, Acer, Wipro, and Tata Consultancy, analyzing these companies’ go-to-market and vertical integration strategies, financial forecasting, and competitive benchmarking. He also has been involved in a number of primary market studies in the consumer space, analyzing the market penetration of tablets, Netbooks, e-readers, and mobile devices. His analytical commentary has been quoted by leading sources, such as The Wall Street Journal, Bloomberg, Forbes, Financial Times, The Guardian, PharmaLive, CenterWatch, FierceCRO, Outsourcing -Pharma, Drug Discovery News, ComputerWorld, and eWeek. Mr. Dion earned his BS in Neuroscience from Merrimack College, and MS in Marketing from the University of New Haven. For commentary, he can be reached at adion@globaldata.com.