SCALE AND SCOPE
Covance's deals with Sanofi-Aventis and Eli Lilly are remarkable because of their large size and the broad scope of services
they encompass. What does Covance bring to the table that is so convincing to its large pharmaceutical partners?
For one, Covance probably is the only CRO in the industry that has the scope of services and the scale of operations to offer
such a comprehensive R&D package to a top 10 global pharmaceutical company. Other CROs can offer the combination of central
laboratory and other clinical research services, and there are a few nonclinical CROs that can offer a comprehensive discovery
and preclinical development package. However, no other CRO can offer a combined preclinical and clinical offering with such
a large worldwide network of operations.
Further, we can assume that Covance has demonstrated a high level of operational prowess across its service offerings. Clients
wouldn't be signing up for such large fixed commitments unless they were getting good performance from existing dealings with
Covance and were convinced it could deliver. Finally, it has a strong balance sheet and a long record of profitability.
BUT IS IT STRATEGIC?
This Covance-Sanofi deal is impressive, but is it really strategic? It doesn't seem to be a game-changer for Sanofi. After
all, Sanofi spends $6 billion per year on R&D. When Covance is billing Sanofi $200 million or more per year, that level will
only amount to about 3.5% of Sanofi's total R&D and less than 10% of its preclinical and clinical expenditures. Furthermore,
we can assume that much of the work now guaranteed to Covance has been outsourced to other CROs, so by itself, it probably
means only a marginal increase in overall outsourcing activity. Sanofi is benefitting from saving the financial and political
costs of closing two redundant facilities and garners some potential contract-management savings by reducing the number of
CROs it is working with in this area.
As a truly strategic deal, this one falls short of some others we have seen, notably those struck by Lonza (Basel, Switzerland)
to provide biologics development and manufacturing services for Novartis (Basel) and GlaxoSmithKline (London, UK). In both
those cases, Lonza is effectively substituting its own expertise and facilities for its clients' capabilities and taking principal
responsibility for some very strategic elements of its clients' pipelines. The Covance–Sanofi deal doesn't seem to go that
far.
Although the clinical research arena has seen more preferred-provider deals in recent years, it's not clear whether we will
see many more of the size and scope of Covance's deals with Sanofi and Lilly. There have been several proposals floated by
major pharmaceutical companies, but most have come to naught. A big part of the problem has been that the pharmaceutical companies
haven't been willing to guarantee a sufficient volume of work to the CRO to justify the cost and risk of acquiring the facility.
It takes a serious corporate commitment and senior executive leadership to do a deal like this, and few major pharmaceutical
companies seem to be there yet.
Jim Miller is president of PharmSource Information Services, Inc., Springfield, VA, 703.383.4903, jim.miller@pharmsource.com
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