Dark days over for CROs--but don’t expect major growth: KPMG

CROs can look forward to “steady but tentative growth” in the coming years, but the biggest gainers will be the largest companies in the business, with the others set to squabble over lesser gains.

This is according to a new report from consultants at KPMG, who also believe that those CROs that are diversifying--notably into areas like analytics--will help shore up growth in the future.

“The good news for CRO organizations is that the dark days seem to be over,” the report’s authors write. “Compared to the lackluster growth from 2010 to 2014, the next five years appear ready to deliver steady, albeit modest, growth.”

This is down to a number of factors, including the fact that life sciences product pipelines have regained their strength while approvals by the FDA have come back, with a host of strong new products set to launch in key therapeutic areas.

Given this, topline growth for the CRO sector is expected to hover between 6% and 7% over the next 5 years.

KPMG warns, however. that this growth is not uniform across the sector. “The reality is that the top 10 CROs currently represent more than half of the market, with the remainder divided among an estimated 700 to 1,000 small and mid-sized companies operating around the world.

“We anticipate that the top 10 will enjoy above-average growth, as will a handful of the more innovative niche players, particularly in emerging areas such as pharmaceutical analytics and market access. The vast majority of the others, however, will likely suffer lower-than-average growth rates and possibly risk becoming acquisition targets.”

KPMG says that diversifying the sector’s service offering is the defining strategy among CROs as they look to offer the latest technological improvements to their clients. “Analytics and predictive modeling have proven to be the most desirable new services, whether developed internally or by acquisition,” the authors note--borne out in the starkest of terms with the recent megamerger deal between healthcare analytics and data firm IMS Health and Quintiles, the world’s biggest CRO.

The report notes that Quintiles is also strong given its sizable investments in the development of commercial offerings.

It points out that the firm’s Integrated Healthcare Services group, which primarily addresses the commercial needs of their clients, is growing at a rate of 7.8%, which is not far off the 8.3% seen from its clinical services group over the past few years. The Services group makes up a quarter of Quintiles’s $4 billion in annual revenues.

The authors conclude: “As the forces of convergence continue to shift the life sciences business model, many companies are reassessing what activities they should focus on internally versus what they can outsource. Aside from improved economies of scale, collaborating with CROs can foster ‘improved’ outsourcing of non-core commercial costs and eliminate burdensome operating costs. In making these decisions, life sciences executives will need to answer some tough questions about scale, services, costs, and value. And they will need to look beyond the traditional areas and perceptions of outsourcing to find opportunities to refocus, streamline and enhance their operations.

“Ultimately, we expect to see the life sciences sector embark on a phase of value chain deconstruction like the airline industry before it. Organizations will strive to identify the natural owners of the functions and operations they choose to outsource so they can truly focus on their core businesses.”