Outsourcing: Early Development Services Lead the Way

2005 is shaping up as a big year for preclinical and clinical CROs, while contract manufacturers hope to see a reversal of a depressing four-year trend.
Feb 01, 2005
Volume 18, Issue 2

The CRO industry ended 2004 on a roll, and it looks like the good times will continue well into 2005.

Jim Miller
2004 was especially strong for companies providing early development services, including preclinical and phase 1 research, bioanalytical and analytical chemistry, and clinical trial materials, manufacturing, and packaging. Most CROs saw revenue gains of 20 % or more in their early development services, with preclinical, phase 1, and analytical chemistry especially strong. The only weak spot was phase 1 studies in Europe, where the new Clinical Trials Directive (CTD) seems to have retarded activity somewhat. However, by year-end, CROs were reporting that European phase 1 activity was picking up as sponsors overcame their CTD uncertainties; the shortage of capacity in North American clinical pharmacology facilities was probably a factor as well.

Demand for early development services is being driven by big pharma's efforts to improve R&D efficiency and accelerate output. Pharmaceutical companies are re-engineering their R&D strategies and decision-making processes so that product candidates move through the pipeline more quickly. The enhanced flow translates into more candidates getting to CROs for testing.

In addition, pharmaceutical companies are conducting more extensive toxicology and pharmacology testing on candidates at early stages of the development process to weed out likely failures more quickly. The increased volume of testing per candidate is also driving up CRO activity.

Downstream services began to show promise in the second half of 2004 after a slow start. Phase 2/3 revenues were weak in the first half, as were contracts for new studies. However, RFP volume and new contract signings rose steadily in the second half of the year, setting the stage for a strong 2005. Phase 3 studies, with their large patient populations, global scope, and high utilization of central laboratory services, are the real money-makers in late development, but actual billable activity in that area is down. Demand for line-extension studies (so-called phase 3-B studies) and post-approval studies (phase 4) has been stronger, but these studies usually have lower contract value than those for new molecular entities.

M&A HEATS UP The strength of the CRO sector has attracted Wall Street's attention. Stock prices for publicly traded CROs like Covance, PPD, Parexel, and Icon were at or near their five-year highs as 2004 ended. In addition, the CRO industry attracted more coverage from stock analysts.

Several companies took advantage of the strong market interest in CROs to launch IPOs in 2004.

  • PRA International (McLean, VA), a provider of phase 1-4 clinical research services with revenues of nearly $300 million, completed its IPO in November 2004; the market valued the company at almost $500 million.
  • Premier Research Group (London, UK), a much smaller CRO with 2004 revenues of£4.3 million, began trading on the London Stock Exchange in November.
  • Phase Forward Incorporated (Waltham, MA), a leading provider of electronic data capture and study management software for clinical trials, completed its IPO in July. The company, with revenues of about $75 million, was valued at $240 million.

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