CROs shift as early-phase demand dries up

While pharma's cost-cutting has long been a boon to CROs that can do R&D on the cheap, a lack of early-stage compounds coming down the pike has put the squeeze on labs that focus on preclinical and Phase I services.

As BioPharm Insight reports, more and more early-stage-focused CROs are winding up with excess capacity and shutting their doors as the demand for first-in-man studies dwindles. Even giants like Covance ($CVD), Parexel ($PRXL) and Icon ($ICON) are scaling back their Phase I services and focusing on more profitable late-stage work, a trend likely to continue, an investment banker told BioPharm Insight.

"Since the financial crisis, there has been no real growth in this sector since 2009," he said. "Everyone has been waiting to see the number of first-in-man compounds increasing, but it never happens."

Early-stage work is a capital-intensive business, and Celerion Vice President Fred Pritchard told the website that many of the faltering Phase I CROs are paying the price of overexpanding under the assumption that greater capacity will lead to more deals. Compounding that, many drug developers are waiting until later stages to outsource in order to better protect their intellectual property, he said.

And the trend is borne out in CROs' financials. Despite 9.3% revenue growth in the first quarter, Covance's early-stage business slipped 2.1% to $207.3 million. Charles River Labs ($CRL), which specializes in preclinical work, saw its net profits decline about 2.3% last quarter, as rising costs negated 1.8% revenue growth.

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