In the July/August issue, I speculated about the potential for some participants to leave the CRO industry and others to enter it. In the June issue, I profiled three recent acquisitions that exemplified those ideas. (Since then, Charles River has terminated its plan to acquire WuXi PharmaTech.) In this issue, I want to address the structure of the industry over the long term by asking, “Which type of corporation is the most appropriate one to house a unit offering outsourcing services to the drug development industry?”

I realize the answer will depend on exactly what types of outsourcing services are involved. So let me first divide the industry’s activities into three broad categories of services: those involving the treatment of patients, those involving the functions included in the CMC section of an NDA, and those involving the software used to generate, transmit, or store relevant information from preclinical, clinical, or post-approval trials.

Let’s first consider clinical trials services.

ICON, Kendle, PAREXEL and PPD are large, independent, publicly held providers of such services.Other reasonably large providers are units of publicly held firms focused primarily on managed care (UnitedHealth Group), pharmacy services (Omnicare), or staffing services (Cross Country Healthcare). Still others (PRA International, PharmaNet, Quintiles and INC Research) are controlled by private equity firms, and must be considered candidates for either an Initial Public Offering (IPO) or a sale to a larger strategic buyer.

In the long run, is there a stronger rationale for maintaining the independent status of a clinical research services company than for housing such an operating entity inside a large, diversified, healthcare services company? The answer is not intuitively obvious. Moreover, changing conditions in the overall worlds of drug development and health care could make tomorrow’s answer different from today’s.

Consider now all the laboratory-based, capital equipment-dependent activities I’ve put into the large bucket of CMC functions.

There are dozens of independent, publicly held providers of products or services, including AMRI, Cambrex Corp., Charles River Labs, Covance, Lonza Group, Patheon, Thermo Fisher Scientific and WuXi PharmaTech. There are dozens of firms that are part of larger organizations, including AB SCIEX, Ben Venue Laboratories, Hospira One 2 One and HollisterStier. And there are dozens of privately owned firms with and without private equity ownership, including Almac Group, Aptuit, DPT Labs, and MPI Research.

In the long run, is there a stronger rationale for maintaining the independent status of a provider of products and/or services used in the drug development industry’s laboratories and manufacturing suites than for housing such an operating entity inside a large, diversified provider of multiple products and services to a broad range of customers? Again, the “right” answer to this question does not seem obvious.

Finally, let’s examine the range of “e” services used in the drug development world.

Soon, Phase Forward will no longer be an independent, publicly held company, but Medidata Solutions, BioClinica, eResearch Technology and Omnicomm Systems still fit that bill. Other prominent providers of “e” services include the software firm Oracle Corporation, the CRO PAREXEL, and the data management and IT services companies Eliassen Group and Merge Healthcare.

The question, of course, is the same. In the long run, is there a stronger rationale for maintaining the independent status of a company providing “e” services to the drug development industry than for housing such an entity inside a larger provider of software, IT services, or health care services? And as the reader must suspect, the answer is as clear as those to the two other questions posed above, i.e., there is no perfect answer.

So what’s my conclusion?

In some respects, the outsourcing industry seems mature. Many companies have been around for more than 20 years; firms of all sizes, capabilities, and corporate configurations seem to have established themselves as permanent parts of the drug development landscape. Yet, the outsourcing industry we know today is really younger than my first-born child – he turns 30 in December. Other components of the modern health care services industry are configured quite differently today than in their infancy in the 1960s and 1970s. Keep an open mind on the ultimate look of the outsourcing services industry come 2025.

Michael A. Martorelli is a Director at the investment banking firm Fairmount Partners. For additional commentary on the topics covered in this column, please contact him at michael.martorelli@fairmountpartners.com, or at Tel: (610) 260-6232; Fax (610) 260-6285.