Resizing the Global Contract R&D Services Market

By Kenneth Getz, Mary Jo Lamberti, Adam Mathias, Stella Stergiopoulos, Tufts CSDD | May 30, 2012

A new study revises estimates of the market

Pharmaceutical, biotechnology and medical device company managers serving every R&D function — from discovery and manufacturing through post-approval clinical trials — are keenly aware today of the integral role that outsourcing plays in supplementing capacity and expertise. Demand for outsourced services has increased sharply as drug and device development sponsors have downsized and consolidated infrastructure in response to a sharp global economic downturn, poor short-term revenue growth prospects and costly and inefficient operating conditions. In addition, startups and small companies actively leverage contract service providers to gain access to expertise and skills not available internally.

Contract service organizations have proliferated across a wide spectrum of R&D services areas. A 2011 analysis by Tufts Center for the Study of Drug Development (Tufts CSDD) found a nearly four-fold increase in the number of contract research organizations (CROs) in the U.S. alone during the past decade: Whereas an estimated 800 contract service providers operated in the U.S. in 2000, more than 3,100 did so at the end of 2011. (Data on the proliferation of contract R&D service providers in Europe and in other regions around the world are not available.) In another study, Tufts CSDD found that in 2010, CRO-employed professionals were more than doubling the capacity of the global drug development enterprise — the first time in history when CROs were providing more head count in support of R&D activity than were pharma and biopharma companies.

Despite this dramatic proliferation during the last 10 years, however, little information exists that characterizes the size and characteristics of the overall global outsourcing landscape. Coverage of CRO markets and usage practices by peer-review and trade journals has largely focused on individual service areas aligned with either each publisher’s readership or the author’s primary area of expertise. Contract lead identification and optimization services markets and practices, for example, tend to be covered in publications reaching discovery scientists. Similarly, the contract formulation services area is typically discussed in publications catering to professionals in chemistry, manufacturing and controls. Some directories (e.g., Contract Pharma (www.contractpharma.com/csd), PharmaCircle (www.pharmacircle.com)) profile companies across contract R&D service areas. These directories do not publish macro-analyses of the global aggregate R&D outsourcing market.

Capital market analysts and industry observers have also largely focused on characterizing only the most mature R&D outsourcing markets: contract clinical and preclinical research services. These markets have historically had the highest prevalence of large, publicly-traded companies making it relatively easy to monitor performance, assess transactions and evaluate corporate strategies. Goldman Sachs, UBS, Fairmount Partners, Jefferies and William Blair are among the many financial services firms that support transactions and cover developments in the global outsourcing marketplace. Published reports from these organizations typically only cover and estimate the size of the clinical and preclinical markets — a fraction of the total contract services marketplace. Industry professionals and analysts tend to use these estimates as proxy measures for total market size when they grossly underestimate the size of the overall outsourcing market.

Two recent reports stand out as noteworthy attempts to size the overall CRO market and affirm the growing interest in this aggregate market metric: the Harris Williams & Company 2008 Market Monitor report and the 2011 BCC Research Report. The former report focused on the larger healthcare and life sciences arena but estimated — using a top-down approach — the size of the contract clinical, preclinical, manufacturing, clinical laboratory and sales markets. Harris Williams, a private investment banking firm, estimated that the total market for these specific service areas in 2008 reached approximately $75 billion. The later BCC Research report sized the overall 2011 global outsourcing market at $217.9 billion. This top-down analysis included not only contract service providers supporting prescription drugs, but also over-the-counter and nutraceuticals products.

As demand for — and the adoption of — contract research services has grown there is a greater need for more accurate and comprehensive measures of the size and structure of the overall landscape. Better metrics assist companies and analysts in assessing the financial health, trends, structure, operating conditions and maturity of the overall market for contract research services. Sponsor companies can also use these metrics for strategic planning purposes and to forecast the impact of new management practices on the landscape. More accurate metrics enable analysts to monitor consolidation, diversification and divestiture activities. And more accurate descriptive statistics on the landscape assist CRO companies in developing, implementing and evaluating strategic initiatives.

In late 2010, Tufts CSDD began a new study using a rigorous, bottom-up approach to independently size the U.S. market for all contract R&D services. The goal of the study was to perform a carefully designed, methodical and systematic market-sizing study using actual data wherever possible. It is our hope that this initial but definitive quantitative assessment will serve as a basis for sizing contract service providers in Europe and in the rest of the world, and that it will better inform discussion, analysis and understanding of the global outsourcing landscape.

Tufts CSDD focused on the U.S. market for this initial study due to the labor-intensive nature of analyzing a large, fragmented market predominantly made up of small, privately held organizations and independent consultants. Tufts CSDD developed detailed definitions of primary contract service markets, and compiled a list — to the best of its ability — of all known contract service providers in each respective market within high concentration metropolitan and industrial areas. A total of 15 major geographic clusters, defined by Metropolitan Statistical Area (MSA), were identified and analyzed. These clusters capture approximately 75% of the list of contract service companies operating in the US. Contract service companies operating within these 15 geographic regions likely capture an even larger proportion of total U.S. outsourced services revenue as these companies include all the major, widely-recognized players. Data on more than 4,500 companies — some of them divisions or branches of diversified players — were analyzed.

Market Segment Definitions: The five primary market segments evaluated correspond with primary R&D and manufacturing processes: Applied Research, Non-Clinical Research, Clinical Research, Chemistry Manufacturing and Controls (CMC) and Staffing-Consulting-Management (Other) services. This ‘Other’ segment includes a wide variety of small, independent companies as well as large providers offering contract professional staffing, supply chain management, import/ export and distribution services as well as business development support. Specific main service category and common sub-category service areas within each of the primary market segments are characterized in Figure 1. (Main Categories and Sub-Categories are not mutually exclusive.)

Figure 1: Service Area Map

Service Provider Identification: Tufts CSDD used seven published, commercially available print and online directories of contract service providers to identify individual contract R&D services companies:
  • Applied Clinical Trials 2010 Directory & Buyers Guide
  • Contract Pharma 2010/2011 Contract Services Directory
  • Fierce Marketplace 2010/2011 Directory for Contract Manufacturing
  • Hoovers.com Biotechnology Services Directory
  • The Pharmaceutical OutsourcingTM 2011 Company Focus and Industry Reference Guide (Volume 11, Issue 6, October 2010)
  • The PharmaCircle Database 2010/2011
  • ReferenceUSA.com (SIC Code 591207; “Pharmaceutical Consultants”) as of December 2010
Top Areas of Geographic Concentration: From these directories, company names and addresses were captured. Each company’s main address zip code was organized according to the U.S. Office of Management and Budget (OMB)’s definition of Metropolitan Statistical Areas (MSA). This approach was used in order to systematically identify and analyze areas of highest geographic concentration. The OMB’s definition of the MSA is “one or more adjacent counties or county equivalents that have at least one urban core area of at least 50,000 population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties.” The largest 15 geographic areas, defined by MSAs, containing contract service providers are:
  • New York/Northern New Jersey (i.e., New York-Northern New Jersey-Long Island)
  • Greater Boston (i.e., Boston-Worcester-Lawrence)
  • Delaware Valley (i.e., Philadelphia-Wilmington-Atlantic City)
  • Los Angeles (i.e., Los Angeles-Riverside-Orange County)
  • The Washington DC Area
  • San Francisco Bay (i.e., San Francisco-Oakland-Freemont)
  • San Diego (i.e., San Diego-Carlsbad-San Marcos)
  • Durham NC (i.e., Durham-Chapel Hill)
  • Greater Chicago (i.e., Chicago-Joliet-Naperville)
  • Greater Baltimore (i.e., Baltimore-Towson)
  • Raleigh NC (i.e., Raleigh-Cary)
  • Minneapolis (i.e., Minneapolis-St. Paul-Bloomington)
  • Kansas City Area
  • San Jose (i.e., San Jose-Sunnyvale-Santa Clara)
  • Houston (i.e., Houston-Sugar Land-Baytown)
Figure 2 provides a visual representation of the 15 highest concentration areas of contract R&D services providers in the United States. These concentrated areas of contract service providers are in close proximity to geographic areas where pharmaceutical, biotechnology and manufacturing sectors in the US originated.

Figure 2: High Concentration Geographic Areas

Contract Service Company Types: Tufts CSDD organized companies along the following lines to assist with its evaluation of overall market and service segment characteristics:
  • Pure-play companies: companies offering only one service area main-category. Examples of pure-play companies include: Abpro Corporation, cGMP Validation LLC. and Profacgen.
  • Mid-sized companies: companies with two to five service area main-categories. Examples include: Accugenix Inc., Beckloff Associates Inc., QS Pharma and the Zitter Group.
  • Conglomerate companies: companies with six or more service areas main-categories. Examples include: Aptuit (multiple sites); Covance (multiple Sites); PPD (multiple sites) and Quest Diagnostics (multiple sites)

(Service areas are defined in Figure 1.)

Tufts CSDD used company websites to determine branch and satellite office locations. If a company did not have a website, it was removed from the analysis. If the website did not specify which site performed which service, it was assumed that all locations offered the same number of services.

For publicly traded companies, Tufts CSDD used published company reports — annual reports, 10Ks, trade journal and newspaper articles — for operating information, revenue figures, locations and employee size. For privately held companies, Tufts CSDD used Hoovers.com.

Actual revenues and employee data were used whenever possible. In those cases where actual data were not available, financial and employee data were imputed using benchmark metrics derived from actual data:
  • Pure-play companies: assigned average revenue and employee values based on actual data from other pure-play companies.
  • Mid-sized companies: derived revenue and employee values based on actual data from companies of equal size and diversity.
  • Conglomerate companies: derived revenue and employee values based on actual data from companies of equal size and diversity.
  • Public companies: If service area-specific revenue and employee data was not reported, values were distributed equally across service areas.

In total, 3,244 unique contract R&D service companies actively operating in the U.S. were identified and analyzed. These companies generated an estimated $32.9 to $39.5 billion in contract R&D services revenue with the largest share coming from the CMC and Non-Clinical market segments — 29%, and 21% respectively. The U.S. Clinical Research Services segment — which includes regulatory services — generated approximately $6.5 billion. Chart 1 shows the relative U.S. market share of each contract R&D service segment.

In the aggregate, companies operating in the overall U.S. contract R&D services market employ approximately 154,000 people and were founded more than 17 years ago. The typical company is privately-held, generates $10 million ($US) in revenue annually and is operating in 1.4 service areas.

The CMC and Non-Clinical Research segments have the largest number of companies providing services as shown in Chart 2. An estimated 1,274 companies in the U.S. offered CMC services in 2011, and 1,205 companies in the U.S. offered Non-Clinical Research Services. The Clinical Research segment had 643 active companies in the U.S. providing services in 2011.

The majority — 69% — of contract R&D service providers overall are privately held companies. CMC and Non-Clinical Research services segments have the highest concentration of publicly traded companies at 47% and 52% respectively. Approximately 17% of all companies providing Clinical Research Services are public. Chart 3 depicts the proportion of public to private companies in each major U.S. contract R&D services market segment.

Applied Research Services and Other Services U.S. market segments are the least mature and most productive segments, as reflected in Table 1 and Table 2. Companies in the Applied Research Services segment are the youngest, the most likely to be privately held, and the smallest. As a more nascent segment, revenue per employee in the Applied Research Services segment is one of the highest, at $267,000. The Other Services segment is also relatively young, with a high concentration of privately held companies. Revenue per employee in this segment is higher than any other U.S. market segment, at $284,000.

Individual companies in the Clinical Research Services and Other Services segments generate more revenue per company and have relatively higher levels of employee productivity. The CMC and Non-Clinical Research Services segments are the most mature, with the highest proportion of publicly-traded companies, the highest average number of employees and the lowest relative employee productivity.

This initial Tufts CSDD study sizes the overall U.S. contract R&D services using a systematic bottom-up approach based on actual company data whenever possible and imputed data based on benchmarked actuals. The overall U.S. market for the 15 highest concentration geographic areas — as defined by MSA — is estimated at between $32.5 and $39.5 billion. Assuming that these geographic areas represent 75% of the total U.S. market, and that the U.S. market contributes 50% of contract services worldwide, Tufts CSDD estimates that the total global market for all contract services supporting prescription drug R&D is $90 billion to $105 billion. The total global market for contract R&D services therefore is more than five times larger than commonly cited figures.

Adjusting the service areas to adhere to traditional market definitions established by the investment banking community, the Tufts CSDD figures for the Clinical Research and Preclinical Research markets are consistent with those published by financial analysts (see Table 3).

It is highly likely that the overall market and individual segment sizes are larger than the conservative estimates presented in this paper. Tufts CSDD acknowledges the limitations of using Hoovers.com to characterize the high proportion of privately held companies, as Hoovers tends to present ultra-conservative figures. In addition, there are some limitations to using imputed data within service area revenues, as there is a tendency to inflate the smallest company revenue. However, using our estimates combined with actual data from public and some private companies helps to mitigate this limitation to some degree.

The major market segment definitions and service areas that comprise them are a useful approach to organizing contract services companies and it may provide a valuable framework for future analyses. The Tufts CSDD study finds that all of the market segments are accommodating very large and highly diversified publicly traded companies and many small, specialty companies. CMC and Non-Clinical Research segments are the most mature with the oldest relative companies, the highest proportion publicly traded, and the lowest levels of employee productivity (e.g., revenue per employee). Segment maturity is a function of historical receptivity by pharmaceutical, biotechnology and medical device companies to outsource high fixed cost, manufacturing and labor-intensive activities that are deemed non-core. Relative to the other segments, the Clinical Research Services segment is one of the most productive with the highest proportion of privately held companies.

The Other Services segment remains too diverse, making it difficult to characterize this segment adequately. In the future, Tufts CSDD will look to refine the definition of this segment to ensure that it is a more homogeneous group of companies.

At the present time, Tufts CSDD is analyzing contract services company data by geographic cluster to better understand the economic impact of each market segment locally. In addition, Tufts CSDD plans to apply this more robust methodology to sizing the overall contract services market in Europe and in other major global regions.

Drug and device innovation is evolving and re-inventing itself continually. As R&D costs rise, operating and regulatory complexity increases, and mergers, acquisitions and consolidation continue, the use of contract service providers as integral and integrated sourcing providers will similarly continue to grow. It is our hope that the analysis and results contained in this article will play a role in improving future assessments of the size and structure of the outsourcing landscape.

Kenneth Getz, MBA, is Senior Research Fellow and Assistant Professor at Tufts Center for the Study of Drug Development. He can be reached at kenneth.getz@tufts.edu. Mary Jo Lamberti, Ph.D., is Senior Project Manager at Tufts CSDD. Stella Stergiopoulos is project manager, Tufts CSDD.  Adam Mathias is Research Analyst, Tufts CSDD. This project was funded by an unrestricted grant from the Kansas Bioscience Authority (KBA).