Greater growth potential exists for CROs in early stage work with increased potential for outsourcing, especially in areas such as toxicology studies where outsourcing penetration is lower. Several CROs are adding early stage capabilities to garner a greater share of outsourcing within this market segment. Companies looking to expand and capitalize on these opportunities, however, expect to increase capital expenditure and build new facilities or acquire them.
Frost & Sullivan (pharma.frost.com) finds that the U.S. CRO market earned revenues of $9.77 billion in 2008 and estimates this to reach $23.78 billion in 2015.
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The U.S. CRO market has witnessed strong double digit growth since 2003 and expects strong growth through the forecast period. Before 2003, the market witnessed a sharp drop in growth rates between 1998 and 2002 due to several mergers and acquisitions that led to a decrease in outsourcing relationships of the newly merged entities. There was also a significant slowdown in biotechnology funding from the meltdown of global markets.
The markets, however, have since recovered strongly and consistently added over $1.50 billion in incremental revenues each year. This increase in incremental revenue is primarily driven by growth in R&D spending and the subsequent increase in outsourcing penetration.
There is a strong demand for early stage services from the supply side (R&D spending) that could translate to higher business for CROs if their services are positioned to meet the demand and requirements of sponsors.
As CROs continue to expand their global presence, they must ensure closer coordination with IT vendors to ensure the systems are in-line with the rapidly changing requirements of the market. Also, moving forward we are likely to witness a greater role for CROs in deciding on the IT systems and platforms to invest in as the decision making moves away from sponsors.
“With rising competition and fragmentation of the CRO market, these organizations witness lower margins for contracts,” continues Shankar. “For this reason, translation of a strong backlog into revenues over time is likely to be more challenging than before, especially as CROs have not been able to match the growth of backlog with revenue growth.”
One of the most significant trends within the U.S., as well as global CRO markets, is the move from transactional to strategic outsourcing by sponsors. The fact that the CRO market growth has consistently outpaced R&D spending growth is an indicator that outsourcing penetration is on the rise. It is also interesting to note there have been several preferred partner announcements, the Covance-Eli Lilly partnership being the most recent and interesting one.
More deals expect to be announced, signifying a move from a transactional relationship to a more strategic-based relationship between CROs and sponsors. These types of partnerships are driven by the fact that despite significant increases in R&D spending, the number of new drug approvals is at a historic low.
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U.S. CRO Market