Globally, the pharmaceutical industry is facing high pressure to contain costs, as all of the big pharma companies are currently lowering their internal capacities in manufacturing, R&D and marketing. The expense is largely being diverted toward outsourcing. CROs have become an integral part of every pharma company as they tend to heavily rely on outsourcing service providers to perform even their basic tasks and improve their productivity. Growth for CRO revenues is even outpacing R&D spending. This signifies an increased penetration of CRO services.

Overall, the share of other functional and allied services, such as data management, consulting, patient recruitment, labs, logistics and translation, is also rapidly growing. Geographic outsourcing to lower-cost locations is likely to result in smaller margins in the short term, but increased volume share. However, with increased capacity and scale, companies are expected to improve their margins during the rest of the forecast period. India, China, and countries in Eastern Europe, Africa, and Latin America are the likely beneficiaries from increased outsourcing volumes. When looking at the disease areas where most of the outsourcing is tracked, they are mostly for drug candidates for oncology, central nervous system and cardiovascular diseases.

Access to State-of-the-Art Technologies
Availability of specialized research technologies by large and well-established CROs caters to the rising demand for drug development in a diligent manner against in-house R&D services. An organization exclusively set up for conducting clinical trials and clinical testing post-development at each given stage in drug manufacturing, is certain to produce a higher success rate. Constant improvisations in research tools in regular pharmaceutical companies are unfeasible due to budget restrictions that could increase the overhead expenditure of a product or drug being developed. Access to state-of-the-art technologies at a CRO set up is expected to accelerate the market through the short term.

Demand for Late-stage Services
Due to depleting new molecules in the R&D pipeline, it is becoming imperative for pharmaceutical companies to have a better success rate in late phase clinical trials than ever before. Also, due to reimbursement constraints, which require additional data, companies are bound to focus on the late phase of clinical trials for better success of a drug. Most of the sponsors have clearly indicated that their focus would be on late-stage clinical trials in current and future R&D strategy.

Rise in Innovative Therapeutic Options, Efficacy and Safety
Innovation and improvisation in drug formulations in both chemical and biological drugs have been widely observed in the market. A rise in disease incidence cases across predominant therapeutic categories like oncology, autoimmune, cardiovascular and infectious diseases, generates demand for improved treatment. Drugs, besides their functionality, are also tested on their efficacy and safety across a global environment to cater to the needs of patients across different ethnic groups.

Financial and commercial constraints
Cost-cutting measures are the prime market drivers across any outsourcing-led organization. Cost benefits from not setting up research laboratories for developing new drug formulations exclusively promote CROs. Budget restraints from several healthcare cost-cutting policies, expensive developmental costs, lack of need for improvising existing research tools, and investing in skilled manpower to conduct research encourages manufacturers to contract R&D. This trend is largely seen across big pharma and biotech companies.

Top Five Therapeutic Areas Outsourced by Region
Studying the clinical trials outsourced within each therapeutic area globally, oncology was the area that topped the list across all geographies. The other areas were ranked in different order of their importance in those relevant regions. Other diseases such as ophthalmology, specialty disorders, orphan diseases and neurology also received substantial interest but did not find their spot within the top five areas (see Figure 1).

A Glance at the Preclinical Outsourcing Market
Frost & Sullivan values the global CRO market at $28.75 billion in 2014. Approximately 13.1% of the total share arises from the preclinical segment. Globally, in recent years, preclinical outsourcing had experienced a surge in growth rate, leading to capacity constraints. Companies have made large investments in expanding capacities. Capacity issues are likely to result in declining growth over the long-term forecast period. One of the areas leading volume growth within the preclinical outsourcing market is preclinical toxicology. Earlier preclinical outsourcing was predominantly conducted in-house by pharma companies, but it has been observed that sponsors are becoming more open to the idea of outsourcing more of these services to CROs to reduce the price burden. Although this area is likely to be driven by volume growth, due to pricing issues, the market will tend to remain flat (see Figure 2). Majority of the revenues for this segment arise from North America, followed by Europe, APAC and ROW.

Future Trends
Early stage clinical trial services such as bioanalytics will witness a major boost in coming years due to its increasing role in eliminating unpromising drug candidates at an early stage, thereby saving R&D cost.

Demand for functional services, such as data management, consulting, logistics, translation, regulatory and consulting, is also experiencing strong growth. The co-drug development model will be the future of the drug development industry, wherein CRO companies will join hands with pharmaceutical companies to develop a drug. As personalized medicine emerges, the co-development of a drug and the diagnostic marker will go hand in hand. This will compel the CROs to partner with pharmaceutical and diagnostic companies in the future.

The eClinical trial solution is gaining popularity. It helps in reducing the time and cost of clinical trials, and in streamlining the regulatory process and audit trials for faster approval.

Additionally, since there is also an immense need for real-time, evidence-based data, this has paved the way for eClinical technologies that will play a vital role in the way data is being managed in these CROs.

Market Watch
The current focus strategy has centered around the concept of bigger equals better; companies are gearing up to broaden the breadth of services offered. With personalized medicine becoming a focus, central laboratory testing will also add value to a CRO. One of the recent M&A deals is the acquisition of Covance by LabCorp for $5.6 billion. Covance is a CRO with annual revenue of $2.5 billion with about 12,500 employees in over 60 countries, and stands second after Quintiles, which had annual revenue of $3.8 billion in 2013. LabCorp is a diagnostic reference laboratory with annual revenue of $5.8 billion in 2013, with over 34,000 employees worldwide.

Within the U.S. Clinical Laboratory Market, Quest Diagnostics was a market leader with annual revenue of $7.1 billion in 2013. The combined revenue of both LabCorp and Covance is aligned to make LabCorp a market leader and number one in the U.S. Clinical Laboratory Market. Within the U.S., both LabCorp and Quest Diagnostics contribute to about 20.7% of the market share in the clinical laboratories market, while Covance and Quintiles contribute to about 24% of the market share in the U.S. CRO market. Also, global expansion continues to remain the area of priority for many Tier I CROs today.

In terms of annual revenue and market share, this strategic long-term alliance is aligned to beat the market leaders. The combination of safety and efficacy data for drug approval from Covance and diagnostic data from 75 million patients from LabCorp will be an effective way to a more cost-effective approach toward improving patient diagnostics and also advancing personalized medicine. Clients will be able to see more value for their products.

Covance generates more safety and efficacy data for the approval of innovative medicines than any other company in the world, and LabCorp has longitudinal diagnostic data from more than 75 million patients. This combination leads the way to more cost-effective healthcare by improving the safety and efficacy of drug therapies, enabling accurate patient diagnostics and advancing evidence-based medicines, which will enable their clients to demonstrate the value of their products and services to patients and payors. As a result, there will be greater opportunities for both companies because they will now have a broader universe in which to compete. 

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Divyaa Ravishankar is a Senior Industry Analyst for Frost & Sullivan’s Life Sciences practice. She has diverse expertise within healthcare IT and life sciences with a focus on in vitro diagnostics. Her expertise constitutes of laboratory research and management consulting. For more information on Frost & Sullivan’s global Life Sciences practice and offerings, please email jennifer.carson@frost.com or visit www.frost.com.