The CRO Industry in Flux: Navigating Technology, Business Models, and Trends in Pharma R&D Outsourcing

The interplay of the above circumstances appears to be a favorable situation for the contract research market, leading to steady growth in this sub-sector. According to a report by Clearwater International (autumn 2019), the global CRO industry exhibits market growth of around 10% CAGR with projected acceleration up to 12% through to 2022, potentially reaching $45B market value. 

Another natural factor of growth for the CRO industry is the overall increase in the number of biotech companies and the volume of ongoing research projects in the pharma industry -- since 2007 the number of drug candidates under development almost doubled (15267 in 2018 vs 7737 in 2007). 

Pharmaceutical CRO industry at a glance 

The roots of the contract research business can be traced back to the mid-1900s when companies like Huntingdon Life Sciences and Charles River Laboratories emerged to offer basic animal experimentation services. The pharmaceutical CRO industry as we know it only started to shape in 1970-80s -- with the emergence of a regulatory frameworks for the pharmaceutical market, expansion of then-existing contract research companies into clinical trials and other functions, and foundation of new companies -- future CRO industry giants, like Quintiles (1982), Parexel (1982), and PPD (1985). 

Today, the CRO industry is fairly fragmented including more than 1000 organizations, although relatively few of them are global full-service companies. However, it is those few largest CRO industry players, like Covance, IQVIA, Syneos Health, Parexel, PPD, PRA Health Sciences, Charles River Labs, Wuxi Apptec, and Medpace, who control the lion’s share of the market. According to a study by the Tufts University Center for the Study of Drug Development (CSDD), the top 10 largest CROs benefited from around 57% of outsourcing spend in 2018, which is 12% more than in 2011. 

Estimations by Objective Capital Partners suggest that the global contract research market in 2019 is valued at around $30B and growing. According to a 2016 report by Credit Suisse, the CRO industry can be roughly segmented into the four market categories with each having the following shares of the pie: central lab services -- 4%; preclinical services -- 9%; clinical stage services -- 42%; and post-approval activities -- 45%.   

According to David Widley, equity analyst at Jefferies consulting firm, currently, big pharma outsources around 40-45% of their activities to CRO industry players, and he expects this number grows up to 60% in the future. In contrast, small and medium-sized companies outsource substantially more of their activities -- up to 65-70% and the emerging biotech startups typically outsource up to 90%, some of them operating as “virtual” companies. 

Evolving business models of CRO industry players 

When outsourcing R&D services, a straightforward Fee-For-Service task-based model is utilized for separate well-defined services, like screening a library of compounds against a known target or synthesizing a reference compound, which can be performed for a pre-agreed price. 

Another option -- the Full-Time Equivalent (FTE) model, where a sponsor company, basically hires a science project team at CRO premises and pays for all the materials and other project expenses. The FTE model is suitable for multifaceted more complex projects, where flexible continuous discovery work is anticipated, as this model allows to minimize contractual bureaucracy. 

However, business models of to meet the growing pharma companies’ focus on external innovation and strategic alliances. In newer models, initial innovation often comes from the CROs, who establish early chemistry and biology entry points into disease and then approach potentially interested pharma companies to collaborate as strategic drug discovery partners. Such projects can be structured in different ways, including milestone and royalty payments, FTE payments, and event potentially jointly owned intellectual property (IP) rights commercialized as joint ventures or spin-off companies.