Earlier this year ISR Reports released its annual CRO Market Size Projections report. Overall, 2018 was a decent, but not spectacular, year for CROs. All the major/public CROs saw year-over-year revenue growth. Still, the major publicly traded CROs took a pause, along with the rest of the market. ISR Reports notes the S&P 500 fell by approximately 6 percent in 2018, The fact that most of the public CROs managed to gain is a win. The biopharmaceutical fundamentals stayed intact and CROs were able to take advantage.
In this latest report, ISR attempts to provide quantitative insight into the perpetual question: “What is the size of the CRO market?” The data provide a thorough, rational perspective for clinical development services segmented by phase, geography, and service line. ISR utilizes both publicly available information and data obtained through its syndicated primary market research efforts.
I spoke to Andrew Schafer, president of ISR, about the report and some of the insights it contains.
Ed Miseta: In producing your analysis you use a top-down approach to market size. Can you explain what that means?
Andrew Schafer: There are basically two ways to construct a market size estimate. First, you could look at the majority of companies in an industry and add their revenue figures together. This works well when there is a lot of transparency in the marketplace, for example, you can easily find the majority of competitors AND you have a way to know or estimate their revenue figures – this is the bottom-up approach because you are adding up to get your market size estimate. The alternative approach (top-down) is to look at the components/drivers of a market and work down. Think of this as looking at an industry (the CRO industry) through the lens of their customers (e.g. sponsors, government, academic, non-profit). This approach works well when there is limited information about the companies in the industry. In our opinion, because there are so may CROs that are not publicly traded, the top-down approach seems to work well.
Miseta: You are projecting the CAGR for the CRO market to average 7.5 percent growth from 2018 through 2023. What fundamentals are in place that you think will drive this growth?
Schafer: We get asked this all the time. There are really two main drivers of growth for the CRO industry: changes in life science R&D spending and changes in outsourcing percentages. For the near future we see both components increasing.
Miseta: You believe more mergers and acquisitions will continue to occur in the CRO market. Your research also found that 75 percent of respondents agreed that some CROs are just too large. Will CRO size continue to be an issue for many sponsor companies?
Schafer: I’m not sure CRO size is an “issue.” The issue is more about how CROs service their customers. Today, if a sponsor organization needs to outsource a large, global Phase III study, they have many more choices than they had five to seven years ago. But, for the most part, those large studies are reserved for the large industry sponsor organizations. Those organizations are very familiar with working with the larger CROs. You’ve noticed in the past 12 to 18 months that several large CROs have established “biotech”-focused service offerings to reassure the smaller/emerging companies that they have the ability and desire to service their companies. Time will tell if they are able to do so.
Miseta: The top seven CROs control almost 58 percent of the CRO market. What do sponsor companies see as the advantages and disadvantages of going with a large CRO over a small- or mid-sized company?
Schafer: Let’s start with the first point. The 58 percent is a combination of large sponsors (who hold a lot of R&D budget) traditionally working with large CROs. Some advantages of working with a large CRO could include scale (resources and geographic), depth/breadth of therapeutic knowledge, governance and relationship management, volume discounts/ preferred provider agreements, and technology platforms. Some disadvantages could include lack of personal involvement, high cost, and inflexible contracting/financial arrangement.
Miseta: If virtual trials gain in popularity over the next five years, which areas that are serviced by CROs can we expect to grow or shrink?
Schafer: That’s a good question and it all comes down to what resourcing models the CROs (or others) employ. Let’s take clinical monitoring as an example. Whether you’re running a traditional trial or a virtual trial, you still need to monitor the protocol, safety, reg documents, and data quality, even if there is not a “site” to visit on a regular basis. So, most “services” will still be needed, but what will change is the mode in which they are delivered. When talking about virtual trials, it’s very important to clearly define them because it seems that everyone has a slightly different definition and those differences can really impact how a trial is delivered.
Miseta: You expect outsourced Phase I to IV development expenditures to increase by almost $17 billion from 2018 to 2023. In what areas do you expect to see the greatest growth?
Schafer: Most of this growth has and will continue to come from three areas, an increase in the number of biologic products in development, the overall healthy appetite for venture capital investment into the life science industry, and an increasing outsourcing rate.
Miseta: More than a year ago we heard about regulatory changes in China that were designed to attract more clinical research. Do we expect their two to three percent of the CRO market size to increase in coming years?
Schafer: Yes, we would expect this to increase based mostly on increased investment from local Chinese biopharma companies. It’s still very difficult for non-Chinese CROs to do business in China, so look for more growth from local CROs benefiting from increased R&D spending from local Chinese biopharma companies.
Click here for more information on the 2019 edition of the CRO Market Size Projections report.