Public or private. Contract research organization (CRO) or technology vendor. If a company specialized in supporting clinical trials, we considered it.

It's no surprise: Quintiles is at the head of our inaugural list of the industry's pre-eminent clinically focused outsourcing firms. Most are CROs, but we've also included a handful of leading technology companies because they are larger than all but the very largest CROs.

Quintiles, a pioneer of the CRO industry, has $3 billion in revenues, far exceeding its competitors. The closest rival, Covance, comes in at $1.73 billion. Quintiles employs 22,000 people; the next closest is PPD, with 10,500.

Top Leaders

John Kreger is a financial analyst with William Blair; he has kept an eye on pharmaceutical industry outsourcing for 15 years. (He gave our list a quick inspection but is not responsible for any errors or omissions.) Kreger notes that Quintiles consistently ranks first on his company's survey of sponsor companies' preferred CROs. The message: quality at Quintiles is very high. In addition, Kreger says, the company's revenues are healthy in part because it was early to the table on the global trend.

“Quintiles, along with one or two other companies, made a big bet on going global in the early 1990s, and that has proven to be the right bet,” says Kreger. “Their growth rates are much higher outside of the U.S. than in the U.S., by any metric.” Quintiles was founded in 1982, went public in 1994 and was taken private again in 2003.

Mixed Revenue

But is Quintiles as dominant as it seems? Some wonder. Eric Coldwell, managing director of health care distribution and services equity research with Robert W. Baird, is another long-time close observer of the industry. He notes that Quintiles' impressive revenue number includes more than CRO-related services. The company also has a large contract sales arm, Innovex. Quintiles declined to quantify the revenues for its various units. So the share from its CRO operation is unknown.

Covance, the second firm on our list, is the most diversified of all the CROs. Half of its operations are in preclinical; it has extensive international operations; and many employees are focused on functional outsourcing. “All of this plays right into the hands of the one-stop shop trend,” says Kreger.

Coldwell notes that Covance had tremendous momentum on late-stage work in 2008 and very strong bookings. “They have been winning a large number of semi-exclusive preferred provider deals in Phase II through IV and sole-source central lab contracts,” he says.

Lilly Contract

Covance got a leg up on competitors last year when the company signed a strategic partnership with Lilly, a deal that has Covance providing Lilly with a broad range of services over the next 10 years for $1.6 billion. This could be a turning point not just for Covance but for pharmaceutical outsourcing in general.

“We think this will prove to be a watershed event, another signal that the outsourcing industry is moving to a strategic phase, which is great news for big companies like Covance,” Kreger says.

No. 3 is PPD. For this CRO, which focuses almost exclusively on late-stage projects, Kreger says agile management shines. “PPD stands out as being the most consistent with day-to-day execution. They have a very savvy management team that has done a great job responding to shocks in the market, like what we're seeing now. 1999-2000 [was] the last time the industry experienced a serious slow-down, and they emerged from that stronger.”

Surging PPD

Coldwell adds that PPD is sitting on an all-time high backlog of $3.2 billion in bookings, and had the strongest such record of any company in the industry in the second half of 2008, when the economic downturn started to hit pharmaceutical outsourcing. The company is growing fast outside the U.S., and is seen as one of the strongest CROs financially, with abundant cash and no debt, says Coldwell. The downside? PPD's partnerships to bring drug to market just as a sponsor does, which Wall Street sees as an unprofitable distraction, says Coldwell.

No. 4, Icon Clinical, is a darling of the industry. Coldwell says the company's stunning growth in 2006 and 2007 surprised its peers. Now, the Dublin-based company is still outpacing just about everybody, but at a less accelerated clip. “Where they were growing at two to three times the rate of everybody else, now they may be growing at 50 percent more than the rest,” Coldwell says. It will be interesting to see where they are on our list next year.

International Advantage

Coldwell describes Icon as a solid operation, with a very good service reputation—a focused company that's adept at picking the right projects. “It sticks to its knitting and doesn't chase dragons around the globe,” he says. Adds Kreger: The fact that Icon is based in Dublin gives them clout in the international market; they are not yet another U.S.-based company trying to do trials overseas, but rather one that is already overseas. “They are viewed as one of the international experts in the industry,” he says.

No. 5, Parexel, initially took a hit—or several hits—for going global in the 1990s. “They made a big bet on building a big global infrastructure,” says Kreger, “and for a while that hurt them, caused their profit margins to be smaller than their peers. But now their margins are catching up.” Parexel has the most extensive technology operations of its peer group, with a semi-autonomous group dedicated to software. There is no question of the potential of technology, but it has thus far not helped the Boston-area firm seize market share.

Tech Experts

“They tend to make more acquisitions than the peer group, and go where the peer group doesn't go,” says Coldwell. He's skeptical of the long-term importance of electronic data capture (EDC), noting that outside of the success of Phase Forward, EDC has not been a profitable element of the CRO revenue mix. Coldwell says Parexel's main problem is that it is not consistent in its profitability.

No. 6 on the list is Kendle, headed by the husband-and-wife team of Candace Kendle Bryan, CEO, and Christopher Bergen, president and COO. Kendle expanded energetically from 2003 to 2007, increasing its offerings across all phases of research and going global fairly quickly. But it is still reeling from the loss of work from Pfizer, which had been responsible for 42 percent of revenue. That figure is now 9 percent.

Tough Integration

In addition to those woes, in 2006 Kendle paid $215 million for the troubled clinical operations of Charles River. The integration has had difficulties, says Coldwell. “Kendle's underlying performance is still pretty good,” he says, but the company remains rocked by the ongoing integration. Another downside: Kendle is not very diversified, with, say, a central lab or any other such ancillary services. That's not the best way to operate these days, says Coldwell.

Omnicare Clinical Research and Clinimetrics are the two CROs owned by Omnicare, and combined are No. 7 on our list.

Omnicare is a publicly traded firm that primarily focuses on the nursing home pharmacy space. Its two CROs are among a small handful of CROs that are part of much larger firms with varying degrees of involvement in health care or research (other examples include i3 and MDS Pharma). Says Kreger, “The question has always been: Is that a good idea? Are there synergies? Cross-marketing opportunities? If you look at [Omnicare's CROs'] growth rate, the answer would be no.” So will Omnicare someday sell the CROs, which it has owned for about a decade? It's likely. Kreger adds: “Within these more conglomerate-type structures, these companies usually decide to get big or get out.” So far, Onmnicare's CROs don't look like they're getting big.

EDC Experts

Phase Forward is our highest ranked technology company, at No. 8 on the list. It pioneered large-scale EDC projects and is the most profitable firm in its niche. The growth of EDC has surprised the CRO sector, which generally denigrated the technology before it became an obligatory element of large projects. Coldwell predicts that the EDC market will consolidate quickly, leaving just three to five major players in about five years. Phase Forward will assuredly be one of them, probably at the top, he says.

Also expected to survive—and thrive—are Medidata, No. 12 on our list, and Oracle Clinical, a division of the database giant. Beyond that, it's anyone's guess, he says.

Medidata, which posted losses in 2007 and 2008, has filed the paperwork to go public. For a cautious, careful industry, selecting Phase Forward, Medidata or Oracle is a safe choice. CROs, naturally, are inclined to have the same EDC short list as the sponsor community. The tech firms on our list have all grown to a size where they have to be taken seriously by their CRO cousins as both frequent partners and potential competitors. But it's hardly clear that mergers between the services and technology firms will materialize as EDC is more fully woven into the fabric of all major projects. Another option for CROs could be buy smaller rivals of Phase Forward and Medidata as struggling EDC firms face financial difficulties.

Relationship Oriented

No. 9 is ReSearch Pharmaceutical Services (RPS). It's based in the Philadelphia area but traded on the London stock exchange. RPS executives don't term the company a CRO; they prefer PRO, for pharmaceutical research organization.

What makes the company different? Instead of working on a project-by-project basis, RPS handles functional outsourcing across a client's entire pipeline in a specific region. Got an individual trial? Don't call RPS. Need to outsource all your data management for, say, the west coast? Then they'd like to hear from you.

RPS is in the middle of an international expansion effort. Earlier this year, it bought Chinese CRO Paramax International for $1 million, adding to several European CROs purchased in the last year. Just before that, RPS had expanded rapidly into Latin America. The company says this is the year for its Asian expansion.

Not Global?

The small, quiet, privately held Medpace is No. 10. Coldwell says the Ohio firm is seen as high quality, with very healthy profit margins. Last year, it grew faster than any of its peers on our list. Much of its management came from PPD. Much of the company's business takes place in the U.S.; unlike its peers, Medpace has not gone wildly global. This may present an issue for them. “Is there enough room in the market for U.S.-focused CROs, or will they have to expand internationally for the long term?” wonders Coldwell. Meantime, they are doing well.

Previously known as eResearch Technology, Philadelphia-based ERT is No. 11 on our list. It provides a variety of eclinical technology tools, but is especially strong in the cardiac space. “They have a leadership position in the evaluation of cardiac safety testing, which happens in Phase I for virtually all new drugs,” says Kreger. Pivotal for the company was its 2007 acquisition of the centralized electrocardiograph (ECG) business of Covance.

At the same time, Covance and ERT forged an exclusive 10-year marketing agreement to supply ERT's centralized cardiac safety services to Covance's clients. The company also has a smaller EDC software business; it competes with Phase Forward and Medidata, but is not a dominant supplier of that software. ERT also offers a new technology to evaluate suicidality that, under relatively new FDA guidance, could become an element in a vast array of central nervous system trials.

September Stoppage

The market dynamics were the same for just about everyone in the space last year; Kreger says business was going well until around September, when the pharmaceutical industry began reacting to the economic downturn by drastically cutting costs. This in turn impacted the outsourcing companies. At the same time, biotechnology companies are starting to run out of money, which provided another hit to the outsourcing market.

That will take time to play out. The good news is that analysts think growth will still continue among CROs and their tech cousins, though not as wildly. “We have a hunch the market will grow 8 to 10 percent among leading companies, as opposed to the 15 to 20 percent or better that we'd been seeing,” says Kreger.

Outsourcing Forever

And though growth will likely remain stunted throughout the first half of 2009, things may get better in the second half as pharma's “deer in the headlights reaction” to the economic downturn calms some, says Kreger. Preclinical, though, may see no growth at all, as pharma companies concentrate most of their cuts in the early part of the drug-development cycle, he adds.

Another wild card is the merger mania among the top tier of pharma companies, as Merck buys Schering and Pfizer swallows Wyeth. “The more of this we see, the worse business is going to be for companies that pharma outsources to, as such consolidations create huge disruptions to work flow,” says Kreger.

The big picture, however, remains far brighter than that facing most U.S. industries. As the pharma industry looks for new ways to do business that will cut costs, outsourcing remains the best answer. “And once you start down the path of outsourcing, it's pretty hard to turn back,” says Kreger.

—by Suz Redfearn

This article was an overview of the companies.This article discusses our methodology. Readers with questions or comments about the list are encouraged to contact .(JavaScript must be enabled to view this email address)

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