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A new study revises estimates of the market
May 30, 2012
By: kenneth getz
By: Mary jo lamberti
By: adam mathias
By: stella stergiopoulos
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. Methods 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
Figure 2: High Concentration Geographic Areas
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