Global R&D spending is unlikely to grow by much more than single digits over the next 5 years, but that won't do much harm to the world's biggest CROs, according to a Morningstar analyst, as the industry's heavyweights are only digging deeper into the operations of their sponsors.
As David Krempa writes, Morningstar expects a 10% annual growth rate for the likes of Quintiles ($Q), Covance ($CVD), Parexel International ($PRXL), Icon ($ICLR), Charles River Laboratories ($CRL) and WuXi PharmaTech ($WX). Morningstar's optimism is based in part on CROs' ability to drive efficiencies, but where the big names stand out is in lucrative late-stage studies.
"The biggest factor driving CROs' moats is their global infrastructure, which creates a cost advantage over smaller competitors," Krempa writes. "Phase III trials usually require thousands of patients and frequently take place across many geographic locations. Sponsors need a CRO with the expertise in all local country cultures, government relations, and with physician/investigator relationships. We believe the competition for these global contracts is limited to just the 6 largest CROs."
Morningstar figures the world's R&D spending will increase by just 1.1% over the next 5 years, but, thanks to increased market penetration and the promise of faster development, the largest CROs can more than outpace the market. About 32.5% of the $80 billion spent on drug development last year was outsourced, Morningstar figures, and that rate is likely to double in the long term, setting the table for expansive growth in the CRO world.
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