According to a recent survey from William Blair, about 80% of big pharma companies either are in the process of restructuring or have already completed restructuring plans to strategically outsource more of their trials to CROs.
That’s a substantial amount, but not shocking in this day and age of increased outsourcing, said analyst John Kreger, author of the report, which asked 174 pharma and biotech companies about their use of and thoughts about CROs in an effort to identify trends and changes.
Of the 167 companies that responded to the question, said Kreger, “What is shocking is that 21% of respondents said they had no plans to outsource.”
Among the remaining 79%, just 12% said they’ve completed their restructuring. That means many more companies are poised to announce deals similar to those of summer 2011 between Pfizer, Icon and Parexel, back to the one that started the trend in 2008—Eli Lilly’s huge strategic alliance with Covance.
Or we may not see public announcements of such deals, as many pharma companies prefer to keep them quiet, said Kreger.
Either way, the survey teased out that—public or not—several more large strategic-partnership deals between big pharma and CROs are on the horizon.
Another survey of sponsors—this one undertaken by Baird Equity Research and released just before William Blair’s—showed the 2011 outsourcing rate among sponsors increased 9% over 2010. The Baird report, which surveyed 164 sponsors, further showed the large sponsors surveyed had a 13% increase in the amount of outsourcing undertaken in 2011, while small and mid-sized firms reported 8% and 5% increases, respectively.
Bill Taaffe, recently retired president and CEO of Icon’s U.S. operations and now a consultant to the industry, said it’s not surprising such restructuring is taking a while. “There remains a lack of sophistication in the outsourcing process, with pharma still often trying to treat it like a commodity with tasks that can be broken down into infinitesimal units instead of focusing on what it really wants at the end of the day: a complete set of data. That’s definitely changing, though slowly.”
It’s anyone’s guess who might be next to choose from the top tier of CROs to be strategic partners, but Kreger said many eyes are watching Merck, which, having bought Schering-Plough in 2009, seems ripe for a strategic outsourcing deal.
The survey, which William Blair has undertaken annually for the last seven years but more recently increased to every six months, also asked pharma and biotech companies which CROs were best positioned to win future work. The top responses for early-phase work: Covance and Charles River Laboratories. For later-phase work, Quintiles was among the top, along with Covance, which is usually considered an early-phase heavy hitter.
“People are generally surprised that they fight above their weight in clinical,” said Kreger. “But they’ve worked hard to become a bigger force in clinical, and maybe their success in other areas has had a spillover effect in terms of reputation.”
The report also showed that, while the financial markets have taken a downturn since July, that hasn’t had a negative effect on R&D spending. The majority of respondents said they expect spending to continue to increase this year and next, with both large and small companies indicating more projects are being funded rather than fewer, said Kreger.
The same was true among respondents to the Baird survey, who reported 8% R&D budget growth. The report’s authors said R&D growth was likely up 2% to 4% in the aggregate.
“All the doom and gloom everyone’s been talking about since July doesn’t really show up in the numbers,” said Kreger. “There’s no retrenchment or change in the pipeline. Among big pharma, it’s pretty much business as usual.”
But Kreger said a deteriorating financial macro-environment typically hits the biotech sector first. That hasn’t happened yet, but it’s likely coming.
The normal pattern, he explained, is that the capital markets follow the broader economy and biotech’s ability to raise capital follows the capital markets. When things get worse, investors get more cautious and the biotechs can’t raise money. “We’re not seeing that yet, but it could be the logical next step,” said Kreger.
The survey was undertaken in conjunction with the Life Science Strategy Group and will be conducted again in spring 2012.