The Contract Research Organization (CRO) competitive environment is evolving, as outsourcing demand from large pharmaceutical companies has picked up, following the completion of the Pfizer (PFE - Free Analyst Report)/Wyeth and Merck (MRK - Free Analyst Report)/Schering-Plough mega mergers. Preferred partnerships between Big Pharma and CROs are becoming more common, with the benefits of increased efficiency, expanded developmental capabilities, and significant cost savings. Although partnerships have previously existed in various situations, the concept is only now becoming more prevalent throughout the industry. Indeed, the recent announcement of a partnership between Bristol-Myers Squibb (BMY) and both PAREXEL (PRXL) and ICON (ICLR), is likely the first of numerous large exclusive partnerships of this kind. Under the terms of the agreement, PAREXEL and ICON will provide all the external work for BMY’s entire development pipeline over the next three years. In addition to the substantial recurring revenue that partnership deals generate for CROs, any significant collaboration with Biopharma companies increases the likelihood of an eventual longer-term pact.
Although the Bristol-Myers announcement represents the first major publicized partnership, there are smaller agreements that are currently in place including deals between Pharmaceutical Product Development, Inc. (PPDI) and Eisai Pharmaceutical Company, and Covance (CVD) and Otsuka. Moreover, there are various types of “partnerships”, with many long-term relationships between companies remaining unpublicized. The primary beneficiaries of additional deals will likely be the larger CROs, which should result in fewer RFPs across the industry, as partnerships lead to a narrowing of the vender base. However, there should still be opportunities for smaller, specialized CROs to participate in the development process.
The Asia/Pacific region, especially China, is quickly emerging as a significant market in the drug development/outsourcing business. Pharmaceutical companies have increased their R&D spending in the region, while CROs have been actively engaged in M&A, as a means of gaining exposure to the Chinese market. Small, strategic dealmaking in 2009 has culminated in the recently proposed $1.6 billion merger of Charles River Laboratories (CRL) and WuXi PharmaTech (WX). Other activity includes ICON’s alliance with Tigermed Consulting, a leading provider of clinical development in China, and PPD’s acquisitions of BioDuro and Excel PharmaStudies. The BioDuro deal provided ICON with an immediate foothold in the Discovery subsector, which is important since currently most of the Chinese outsourcing market is early stage. Meanwhile, the acquisition of Excel PharmaStudies helped position ICON in the later-stage, clinical side of the business.
The attraction to China can be attributed to significantly lower costs, along with the large potential of an untapped trial population. Furthermore, the region is particularly appealing to Pharmaceutical companies, given the rapidly expanding consumer drug market. Although numerous CROs have exposure to the Chinese market, companies with an early-stage focus, including discovery, chemistry, and toxicology, such as Charles River and Covance should be the primary beneficiaries in the short term. However, the clinical outsourcing business should expand over time, as overall investment in the region increases.
In addition to the Asia/Pacific region, most CROs have taken steps to expand their global presence, as global capabilities have become a differentiating factor in winning new business. It is now increasingly common for pharmaceutical companies to run multiple, simultaneous trials/projects in different countries. Global platforms enable greater speed and efficiency, while reducing overall development costs. All indications point to further acceleration of this trend, with the larger, global CROs like PAREXEL gaining market share. This should also result in continued M&A activity over the next few years, as CROs look to expand their international presence.