Updated: Oct 16, 2019
From tighter regulatory burdens, to the growth of alternative medicine and dwindling revenues, the pharmaceutical industry certainly has had its fair share of challenges to overcome in recent times. One trend in particular has captured the zeitgeist of the industry's recent developmental trajectory, and that is the ballooning of the contract research sector over the past decade. Also known as clinical research organisations (CROs), these entities once functioned as simple outsourcing bodies for clinical trials and general lab services, but rapidly expanded to encompass virtually every aspect of end-to-end clinical development, including data and analytics for trial insights and design, drug developemt planning, medical affairs, and regulatory consulting.
Indeed, the CRO market is estimated to have expanded by 47% since 2011 alone, and this performance can largely be contextualised by the specific market conditions that produced it; in particular, the patent cliff, and the drop in pharmaceutical investment in the wake of the 2007-2008 financial crisis. During this period, several lucrative patents for 'blockbuster drugs' held by big pharma expired, opening up the market for generic competition. Consequently, there was a substantial reduction in pharmaceutical investment partially due to the financial risks involved in R&D funding, and pharmaceutical companies instead turned to CROs as a way of reducing costs.
Clinical contract research organisation market worldwide from
2011 to 2020
Despite already achieving huge growth, the CRO market has not yet peaked, with BCC Research projecting a further expansion of the market at an estimated compound annual growth rate of 7.6% between 2017 and 2022. However, as the markets continue to evolve, the CRO industry now finds itself at a strategic inflection point, the response to which will determine its ability to sustain growth going forward.
The CRO dilemma: To Merge or Not to Merge?
After years of M&A activity, the trend of pharmaceutical company divestitures of non-core assets and the outsourcing of clinical development quickly took hold post-patent cliff, fuelling the rise of the CRO industry. Interestingly, big pharma's need to outsource a growing number of clinical servies is correlated with CRO M&A activity to meet this rising demand, successfully expanding their value chain propositon by offering a greater diversity of ancillary services. As shown by the chart below, levels of M&A activity have increased significantly from their historical median in the last 10 years. Furthermore, 60% of the market share in clinical trials is controlled by the top 9 CROs, according to a 2017 report by Industry Standard Research.
Historical Sector M&A Multiples (EV/LTM EBITDA)
There are many advantages to CROs expanding in this way, as larger companies with a stronger presence attract more sponsorships. Expansion also allows CROs to gain access to regulatory expertise in countries in which pharmaceutical firms have an interest. However it should be remembered that the CROs' decade-long success was underpinned by delivering specialised, cost-effective services to large pharma companies who were themselves weighed down by a prolonged 'growth-by-acquisition' period. Crucially, the coming wave of digital disruption means that there are now strategic risks for CROs that continue the conventional M&A model.
The healthy data demand
As with other industries, the pace of technological innovation is making strategic recalibration an everyday preoccupation in the CRO space, as the risk of not doing so could result in lagging too far behind in the data race.
Take the insurance industry for example. Specialist IoT data capture providers from outside the industry have built up vast amounts of risk related data analytics on consumers, and are now gradually assuming the role of gatekeepers for prospective insurance buyers by disrupting an age-old operating model (for more see back to the future with IoT technology).
Similarly, it is now possible to harvest huge quantities of data on consumers' health through the use of their smart devices. For instance, smart watches can record step counts of their wearers, track their sleeping patterns, provide information on grocery store loyalty programmes and dietary habits, and all of this data can be fed to researchers pre-study. Given that much of this data has typically been recorded manually by researchers, and how it also reduces the need for in-clinic monitoring and overnight stays, the cost-saving potential is enormous.
Proportion of Companies Projecting Change in
Total Data Sources Used in 3 Years
Furthermore, it is precisely because clinical trial databases and data collection methods have remained largely unchanged for 20 years despite technological advances, with long and unnecessary delays in downstream data entry processes, that the rate of expansion in clinical data management players is expected to rocket in the next three years.
Currently, not only are the Electronic Data Capture systems used by the vast majority of CROs unsuitable to process data, but 26% of sponsors and 52% of CROs reported that they still use paper case report forms to support their clinical studies, according to the Tufts Center for the Study of Drug Development. It is therefore unsurprising that nearly 70% of CROs anticipate a change in the total number of data sources used in three years, including a 47% and 42% increase in the use of smart phones and custom apps respectively, as seen in the chart below. In other words, the CRO data management is rife for disruption.
Data Sources Used Currently and Projected Use in 3 Years
Another consideration is consumer demand. With greater availability of information, consumers are becoming more selective about the kinds of medication they consume, and are paying greater attention to the production and testing processes involved. Consequently, market research is more important than ever, as the most successful CROs will be those able to tap into a widening addressable market by responding adeptly to buyers’ preferences.
Here, the threat from companies from outside the clinical sphere that have already invested in mass data-collection infrastructure and supply data-tracking devices and applications to customers, have real potential to act as gatekeepers of data on consumers. As pointed out by biopharmaceutical clinical operations consultant, Kenneth Wu, a company like Amazon could have a huge disruptive impact on CROs through its ability to apply its existing package tracking systems capabilities to a clinical setting. Such a clinical data stream would be visualised, analysed from a patient-centric perspective, with recommendations all served up in real time; a fundamental overhaul of CROs' record-keeping methods.
The Right CROwth Strategy?
With the digital disruption on the cusp of making a major impact within three years, the time for CROs to act on strategy is now, whether large or small. Smaller firms could prove more adaptable to evolving consumer demands, although larger firms have the resources advantage to invest in new data capture and data management systems, potentially bypassing middle-men tech firms in the process.
Despite this, the huge costs, not to mention risks, involved in setting up data management systems, means it may be wiser to partner with tech firms in order to leverage big data technologies without the CAPEX. Assuming partnership costs aren’t high, CROs can remain competitive by specialising in the areas which sponsors look for most. Additionally, adopting new data management systems can prove strategic in forming partnerships as more sponsors look for CROs with systems that include new technologies like cloud-based technology platforms.