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This article in the Indy Star reports that the
Lilly is not getting out of early-stage drug trials altogether, but it has created a partnership with Covance in which they will conduct majority of the trials elsewhere. Covance already does preclinical toxicology testing for Lilly, but now it will conduct several more clinical trials. Working more closely with Covance will allow Lilly to get drugs out to the market faster and cheaper than before.
We have posted some articles recently on the growth of the CRO industry. This article from The Motley Fool confirms what others have been saying and provides some more insight into this development. As can be seen by the chart featured, over the past year, CRO’s have seen their revenues increase. The article makes a point of stating that much of this growth is a result of the drug companies looking for ways to cut costs, with the current state of the economy, by outsourcing their research. Also, considering that their revenue is not tied to the success of a particular drug, their risk is minimal.
| | 1- Year Return | TTM Diluted EPS Growth |
| Covance (NYSE: CVD) | 25.5% | 24.1% |
| Paraxel International (Nasdaq: PRXL | 39.2% | 38.3% |
| ICON (Nasdaq: ICLR | 73.8% | 37.8% |
| | 29.2% | 22.1% |
| | 24.4% | N/A |
Some important points the article makes are:
“It doesn't look like the growth that CROs have experienced over the last few years is likely to go away any time soon, either. A recent report by Turner Investment Partners estimates that in the next few years CROs will be involved in half of all drugs at some point during development.”
“What's interesting though is that the CROs may be shifting who their source of revenue . Many smaller biotech companies are now using CROs' expertise to get early drug development done. That same report estimates that biotech now accounts for 30% of CROs revenue globally, up from 21% five years ago.”
Covance, a contract research organization, is one company that is proving the prediction that pharmaceutical companies are starting to rely on them more heavily. This article mentions that profits have risen for the Covance by 22.7%. The contract research organization industry is one of the few that is experiencing growth in an otherwise dismal economy. As mentioned in our previous blog post, much of this is because the cost of in house procedures is much more expensive than that of outsourcing to companies such as Covance. The company is also very optimistic in its outlook, which is inline with the trend, and predicts that they will be able to post a 20% growth in profit by the end of 2008.
It has been estimated that the CRO industry will expand from being $7 billion in 2006 to $19 billion by 2013. While some reports may vary, they all agree that the industry will see a huge boom in the next couple of years. This article from FierceBioResearcher delves into the reason why the boom will take place. As they explain, biotech companies are starting to become more reliant on CRO’s. Instead of doing all of the R&D work in-house, more and more companies are looking to outsource those functions. In fact for every $5 spent on R & D, $1 of that, is being outsourced. The article also cautions though, that without “significant government oversight”, there may be reason for concern when turning to CRO’s for drug trial management. As Norbert Bischofberger, Chief Scientific Officer from Gillead’s, remarks, however,
“If you want to do that all by yourself, you need an unbelievable infrastructure that we’ve never had. It’s just too expensive.”
So despite rising concern over safety, there may be no other options for the makers of drugs, except to turn to CRO’s.
