The pharmaceutical contract research organization (CRO) industry valued at $26 billion in 2015 is expected to grow at a 7% CAGR to $40 billion by 2020. Industry estimates suggest that only 40% of clinical development is currently outsourced. This is expected to rise to 50% by 2020 amid rising cost and complexity of therapeutic development in an increasingly burdensome reimbursement and stringent regulatory environment.
The CRO industry is highly fragmented with hundreds of small to mid-sized companies amid low industry barriers to entry. However there are a small number of large, full-service, global CROs offering broad therapeutic and development expertise with substantial scale, capabilities, IT systems infrastructure and data analytics capability. Over the past few years, there has been some consolidation in the CRO industry, leaving only a handful of larger CROs with the global scale and infrastructure, therapeutic and development expertise to support and fulfill the demanding drug development programs of biopharmaceutical and medical device companies. However the service offering among large CROs across the drug development lifecycle is becoming increasingly undifferentiated.
The CRO market can be segmented into two broad categories: pre-clinical research and clinical testing. The pre-clinical market ($5 billion) that includes discovery and pre-clinical research is significantly smaller and less competitive than the clinical market ($21 billion), given the tendency of biotechnology companies to keep more of these functions in-house. In the pre-clinical space, Charles Rivers, Lab Corp, Envigo and PPD are well positioned through specialization in core functional areas that cover the early stages of product development such as research and animal breeding models, pharmacology, toxicology and chemistry services to name a few.
The top players in the clinical testing space are Quintiles, PPD, PAREXEL, PRA Health Sciences, ICON, inVentiv, INC Research and LabCorp. Oncology is the fastest growing therapeutic area for CROs and is expected to comprise 15% of prescription sales in 2020, as per a report from Evaluate Pharma. The top players currently have significant portion of revenue exposure to oncology. The Oncology category is expected to be the fastest growing therapeutic area over the next 5 years, with other complex and emerging therapeutic areas such as rare disorders growing faster than the broader biopharmaceutical market.
CROs are now expanding their addressable market through increased breadth and depth of solutions across the entire drug development life cycle. Increased investments in technology and big data will continue to play an important role. More importantly, wearables, a potential disruptive technology offers large market opportunity and lately, CROs have begun to leverage data from wearables to help improve the quality of data and efficiency of trials. For example, ICON is forging collaborations to develop best practices for wearable technologies to collect health and wellness data for clinical trials.
M&As remain a leading theme in the CRO space. The future M&A activity in the space is expected to be driven by rising interest in IT, informatics, genomics and other differentiated capabilities, In addition, increased investments in technology and big data are expected to play a key role, as seen in a recent merger announcement of IMS Health and Quintiles. With differentiation among CROs becoming increasingly blurred, the deal was driven in part to augment the ability to better leverage data for site selection, enrollment, and commerciality, with an eye to competitive positioning.
Overall, in a difficult drug development environment with rising costs, compressed timelines and regulatory bottlenecks, CROs offer strong value proposition to pharmaceutical companies. As pharmaceutical companies focus on rationalizing the cost structures and improve operational efficiency, CROs should benefit from increased outsourcing of R&D functions. The continued expansion of scope of capabilities and services of CROs will increasingly appeal to pharmaceutical companies that choose to outsource greater portion of R&D function to drive meaningful cost savings.
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