The Evolution of Contract Research AC4

7/29/2019 The Evolution of Contract Research AC4

1/3

by Jerey Staord

The Evolution o Contract ResearchOrganizations

The Drug Development Process: What Do CROs Do?

Drug development, the task pharmaceutical companies most oten outsource to CROs, is divided into two

phases: preclinical and clinical. During preclinical development, new compounds are analyzed in test

tubes and in laboratory animals or saety and ecacy. Ater the preclinical phase is complete (generally

one to three years), testing moves into human subjects, also known as the clinical development stage.

In the United States, the bulk o in-human clinical work is divided into three phases. Phase I involves testing

or saety in approximately 20 to 100 healthy volunteers. In Phase II, a pool o 100 to 500 volunteers

suering rom the specic disease target is tested over a period o a year or longer. During Phase III,

several thousand people are tested to veriy ecacy and long-term saety on a larger scale. Most CROs

specialize in either early-stage (preclinical and Phase I trails) or late-stage development (Phase II-III

trials). Drugmakers spend billions o dollars per year attempting to discover the next blockbuster drugs,

with the vast majority o potential compounds ailing to reach the consumer. In act, the Pharmaceutical

Research and Manuacturers o America estimates that a pool o 10,000 potential compounds produces

only one FDA approved drug on average. Furthermore, the process is very time consuming with an

average development period o about 15 years. As we will explain in more depth, drug companies out-

source development work or a variety o reasons, such as temporary or permanent lack o capacity

or inrastructure and to ocus on core competencies.

Early History of Contract Research

For decades, biopharmaceutical companies have enlisted outside parties to assist in the drug develop-

ment process. Prior to the contract research organization boom, academic institutions and independent

laboratories handled the bulk o outsourced drug development work. In 1962, regulatory scrutiny on

the development process increased when Congress passed the Keauver-Harris amendments, requiring

drug manuacturers to prove ecacy beore marketing a new product. The new law also took steps

to ensure greater saety. Burdened by a greater workload, drug companies began to outsource additional

studies that couldnt be handled internally. Private rms sprouted up to help pharmaceutical companies

manage these new challenges, which included more complex clinical trial work to gather data or submis-

sion to the Food and Drug Administration. During this period, drug companies only let clinical develop-

ment pass outside their own walls when internal capacity was temporarily constrained. Large rms

operated with a vertically integrated model that kept nearly every step o the process in-house. Develop-

ment outsourcing in this mold continued through the 1980s, with several o todays major players in

outsourced clinical trial management starting operations, including Parexel InternationalPRXL (FV: $21)

in 1983 and Pharmaceutical Product DevelopmentPPDI (FV: $42) in 1985.

Continued on Page 02

Morningstar Opportunistic Investor1


2/3

Continued on Page 03

Beginning in the 1990s, the dynamics between the CRO and pharmaceutical industries began to change.

Pressured by declining research and development productivity and the looming loss o patent exclusivity

or a number o blockbuster drugs, big pharma was aced with higher uture expenses to replace its

current revenue stream. Although the total dollars spent on research and development by drug companies

continued to climb, the number o new drugs submitted or approval by the FDA was not keeping pace.

According to a report by the United States Government Accountability Oce, annual infation-adjustedR&D

expenses increased rom nearly $16 billion to nearly $40 billion rom 1993 to 2004, an increase o 147%.

However, the number o new drug applications or new molecular entities increased only 7% over the same

time period. The CRO industry oered a compelling solution or big pharma. By giving a larger portion

o their noncritical studies to CROs, pharmaceutical rms were able to lower their development costs, as

CROs paid lower salaries than in-house pharma departments. CROs also gave pharma companies

the opportunity to turn a portion o xed development costs into variable costs by shiting studies osite.

With heightened demand rom drug companies, CRO industry revenues began to take o. Global

industry revenue increased to $7.7 billion in 2001 rom $1.6 billion in 1993, a compounded annual growth

rate o nearly 22% over the period.

To accommodate growing demand, CROs added inrastructure, personnel, and service capabilities.

For example, employee headcount at CovanceCVD (FV: $74) ballooned to 7,900 by the end o 2000 rom

5,400 at the end o 1996. Signicant industry consolidation also occurred, as CROs armed with strong

valuations and newound cash needed to expand rapidly to meet demand. Large CROs expanded

into nontraditional areas, such as post-approval services, and used acquisitions to ll therapeutic and

unctional holes. In 1998 and 1999 alone, CROs acquired 39 smaller competitors in total (CenterWatch).

To the chagrin o drugmakers, rapid CRO growth and the integration o newly acquired companies led to

quality issues, straining the industrys already delicate relationship with large pharmaceutical rms.

During the consolidation period, a Covance insider compared integrating newly acquired companies to

changing tires at 80 miles per hour (Bridging the Gap, Lamb). Failed trials and the mishandling o

some projects made pharmaceutical rms weary o handing over important projects to CROs. In one o

the more notable cases o quality deciency, Bloomberg News exposed SFBC International, now

Research & Development Productivity

R&D Expenditures Total NDA Submissions NDA or NME Submissions

93 94 95 96 97 98 99 00 01 02 03 04

200

160

120

80

40

0

Source: Study by the United States Government Accountability Office:

New Drug Development, November 2006.

40($Bil)

32

24

16

8

0



3/3

part o PharmaNetPDGI, or its lack o patient saety in a 2005 article. Bloomberg outlined numerous

inadequate quality controls at SFBC and questioned the strength o regulatory bodies paid to monitortrials. Stories like this are a prime example o the reasons many CROs still lacked the trust o big pharma.

Biotech Surge & Relationship Building

Despite heightened interest, big pharma was still not ready to ully jump into bed with CROs. Intellectual

property, quality, and productivity concerns all remained at the turn o the century. Two trends helped

drive the gradual acceptance o the major CROs: the surge o the biotechnology industry and preerred

provider lists.

Fueled by a bolus o scientic breakthroughs, a rash o venture capital unding, and the maturing o

the industry, biotechnology rms began to take o in the late 1990s. Mapping o the human genome gave

biotech rms a blueprint to create new and exciting treatments. Moreover, newly introduced biologics,

such Genentechs DNA (FV: $91) Herceptin, were gaining steam in the market. While large companies

like Genentech and AmgenAMGN (FV: $71) had been successul or some time, many smaller biotech

rms were just beginning to turn a prot developing new drugs (CNNMoney). This wave o drug develop-

ment meant the prospect o more preclinical and clinical studies. However, these newly successul

companies oten lacked the internal resources, personnel, and expertise necessary to conduct clinical

trials. Without the required inrastructure, biotech rms relied on CROs to conduct much o the preclinical

and clinical development work related to new candidates. As CROs conducted more and more work

or biotech rms, solid relationships developed between each industry. During this period, CROs proved

capable o handling important drug studies. Also, biotech customers diversied the revenue base o

CROs, decreasing the impact o cancellations rom big pharma clients. For example, PPDs composition

o revenue changed rom 72% pharma and 19% biotech in 2002 to 56% pharma and 31% biotech in

the third quarter o 2008.

In addition to building relationships with biotech companies, CROs were also slowly gaining the trust

o large pharmaceutical companies through the use o preerred provider lists. Big pharma realized

that using a large number o CROs was inecient and didnt allow or strong relationships to orm

between sponsor and CRO. As a result, pharmaceutical rms began whittling down the number o CROs

used or outsourcing until the companies were let with a handul o preerred providers. Only the

most reputable and capable CROs made these lists, driving even more business to the top echelon o

the industry, and separating the Covances and PPDs o the world rom their smaller competitors.

As drug company sponsors and CROs worked more closely together on more projects, a level o trust

was ostered. Moreover, making a preerred list gave big CRO players more condence to increase

capacity and invest in additional inrastructure.K

This article originally appeared in Morningstar HealthcareObserver (January 2009).

To learn more, visit http://healthcare.morningstar.com


Documents

The Evolution of Contract Research AC4