So far, the contract research organization (CRO) industry has been in an enviable place. The fortunes of most CROs have been healthy despite the ailing dynamics of the economy and the major biotech, drug and device firms that hire CROs.
All that could be on the cusp of a shift, according to last week's Partnerships In Clinical Trials conference, held in Phoenix, Arizona. “Our group expects that the percentage of dollars invested in R&D will continue to slip,” said David Windley, managing director at Jeffries & Co.
Windley is a regular at the Partnerships meeting, which has dropped “CRO” from its title. Among big drug companies, Windley said, the ranks of salespeople have been massively cut, as have general corporate overhead costs. “Now it's R&D's turn,” he explained.
Jeffries recently did a small survey of the industry, asking about the anticipated direction of R&D spending. The answers were moderately hopeful.
Some small firms are continuing to predict higher spending; but middle- and large-sized firms expect flat or lower R&D outlays. Applying some weighted averaging and math to the answers, Jeffries estimates that the industry’s overall R&D spending will grow in the single digit range this year.
As usual, Windley was the personification of diplomacy and thoughtfulness. But after scanning the usual bleak economic territory of the pharmaceutical industry—tumbling scientific productivity, changing reimbursement patterns, an angry political climate—he took a slightly more controversial direction.
Windley acknowledged that the pharmaceutical industry’s reputation for heavy R&D spending has been viewed traditionally as a badge of honor. But what if the Wall Street community, tallying the poor results of all that R&D spending, begins to reassess higher-than-average allocations to R&D? "Is that just lighting a match to capital?" he asked the audience. The badge of honor could become a scarlet letter, and something that life science companies are collectively forced to curb.
Windley also suggested that the U.S. government’s push to evaluate medicines against each other (an academic discipline called comparative effectiveness research [CER]) holds unappreciated dangers for the industry. The industry has resolutely tried not to compare its products to each other in a head to head fashion. Obama’s health reform law is exposed to the political process, but could still give a boost to CER. Said Windley of CER: “If implemented aggressively, FDA would no longer be the highest hurdle to market.” He's also worried about more Americans being covered by lower-reimbursing government insurance plans in the years ahead.
Windley does not see biotechnology as a potential white knight that will save the largest firms. The industry’s clinical success rate with biotechnology products, he says, is no different than its abysmal hit rate with chemically based medicines. So there should be no expectation that biotechnology alone will save the biggest household names from the R&D drought.
Windley spends a fair amount of time analyzing CROs. In that arena, he sounded moderately more positive than about pharma.
He believes that most CROs are at a crossroads of deciding whether to pursue closer alliances with their customers. A small number of the largest CROs will be able to seek and win "preferred" or "strategic" relationships with big pharma companies. Those relationships will guarantee large amounts of work at prenegotiated rates. Many other CROs will be relegated to going after trials in smaller batches.
After 12 years of being an analyst in the space, Windley has been surprised at newly selective, newly choosy sponsor firms. Back in the day, he recalled, most sponsors routinely looked at a few dozen CROs. Now they may only consider several—or just two or even one firm. “That is a change in the risk tolerance for big pharma,” Windley said.
He was polite but skeptical about the ability of small firms to be truly full service. It sounds like he doesn't believe every CRO marketing claim about what full service means. Windley said: “For niche CROs, you must be a master of something. You cannot be a jack of all trades.” Many small CROs, he implied, will not have the necessary financial strength to play in the elite leagues.
For CROs that are winning dramatic, multi-year partnerships with big pharma, there are financial consequences that are not always positive. CROs need time and people to prepare to handle huge amounts of research. That takes money and fixed corporate assets on a global scale that even drug companies in their growth period could not afford. Even in a "preferred" situation, Windley said, there's no telling when revenue arrives at the CRO. “Strategic deals are having a negative impact on revenue recognition,” he warned. d9A2t49mkex
Some of the most prominent strategic relationships between big CROs and sponsors, he said, will soon be approaching their expiration dates. He’ll be watching to see if such pacts are renewed. “Will they stay with the incumbent?" Windley asked. "Or will there be some new blood brought in?”d9A2t49mkex