CROs and the Changing Paradigm of Research and Development

Barath Shankar Subramanian

Industry Analyst – Pharmaceuticals and Biotechnology

19th August, 2008

2

Focus Points

• Global CRO Markets

• Overview of CRO Markets

• Market Overview

• Issues and Challenges

• Drivers of Outsourcing

• Emerging Trends

• Competitive Analysis

• Revenue Forecasts

• Clinical Development Pipeline

• Regional Share

• Factors Expected to Impact CRO Market Growth (2008-2013)

• Conclusions

3

Overview of CRO Market

4

Market Overview

• U.S. CRO market grew from $4.8 billion in 2003 to 8.5 billion in 2008.

•During the same period, the global CRO market grew from $8.7 billion to $17.4 billion.

•North America dominated the CRO market with over 60.6 percent of the share of global clinical trials in 2006.

•The top-tier CROs are continuing to consolidate their market share and spur revenue growth.

•There is a global trend towards increased outsourcing, not only in R&D but also in areas such as manufacturing, sales force and customized chemistry and development services

2006

4.1%2.5%3.4%

4.0%

5.9%

7.6%

11.9%60.6%

North America Western Europe Eastern Europe

Latin America Japan India

Rest of Asia Pacific Others

Source: Frost & Sullivan

5

Issues and Challenges

• CRO market growth was driven predominantly by the growth in R&D budget.

•As the market has grown rapidly, it could witness a slowdown in overall growth due to a shift in the overall change in R&D budget spends from the “Over $500 million/year” tier to the lower tiers.

•Increasingly complex and global trials require CROs to constantly upgrade and add capacity and capabilities to handle these trials, which requires higher capital expenditures.

•There is also an increasing shift towards strategic partnership-based relationship between CROs and sponsors from transactional relationships.

Over USD

500 Million /

Year

26% Less than

USD200

Million /

Year

43%

USD 200 -

500 Million /

Year

31%

Source: Frost & Sullivan

2006 – 2007 R&D Allocations

6

Drivers of Outsourcing

7%

8%

8%

9%

11%

13%

13%

14%

16%

23%

23%

25%

24%

33%

33%

33%

38%

39%

32%

48%

48%

49%

44%

46%

47%

36%

34%

41%

43%

40%

34%

32%

26%

21%

26%

22%

17%

18%

22%

13%

8%

6%

17%

5%

8%

7%

6%

5%

5%

5%

3%

4%

1%

2%

4%

2%

2%

1%

2%

2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100

%

Outsourcing to CROs enhances quality

CROs have greater regulatory understanding

Outsourcing to CROs reduces R&D risks

Outsourcing to CROs has resulted in shorter R&D cycles

CROs have better scalability of data

Outsourcing improves overall productivity signif icantly

Cost savings from CRO outsourcing is signif icant

Outsourcing to CROs enables us to pursue R&D in non-core

therapeutic areas

CROs have better access to patients for clinical trials

Lack of manpow er is one of the reasons w hy w e outsourced

to CROs

CROs have a w ider geographic coverage

Outsourcing to CROs has helped us reduce our manpow er

Strongly Agree Agree Neutral Disagree Strongly Disagree

Source: Frost & Sullivan

7

Drivers of Outsourcing (contd..)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

$ (

Bil

lio

n)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Gro

wth

Rate

(%

)

CRO Markets: R&D Spending (World), 2003-2013

Source: Frost & Sullivan

8

Emerging Trends

• There is an increasing demand for adoption of information technology to improve the efficiency of clinical development as well as manage global trials more effectively.

•There are also several new models of drug development being proposed to lower the risk of clinical development and counter any potential late-stage failure of drugs that could prove disastrous to niche/emerging companies with limited resources.

•CROs are also looking to provide more services such as central labs, imaging, contract staffing, data-management etc., to garner a greater share of the outsourcing pie.

Demand for IT Capabilities

Value-AddedServices

New BusinessModels

Emerging Trends

9

Emerging Trends (contd..)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

R&

D S

hare

(%

)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

YearPharmaceuticals Biotechnology

CRO Markets: R&D Share by Market (World), 2003-2013

Source: Frost & Sullivan

10

Competitive Analysis

11

Revenue Forecasts

• The Global CRO market is forecast to grow from $15.0 billion in 2007 to $34.3 billion by 2013 at a CAGR of 14.3 percent.

•The growth is expected to be fairly consistent during the forecast period, but might slow down towards the latter part due to a high-base effect.

•Cost pressure on pharmaceutical companies is a significant driver for this growth rate and CROs enable sponsors to convert their fixed costs of building and maintaining facilities into variable costs.

•Future outlook for CROs remains healthy driven by robust demand for services across tiers and strong RFPs from pharmaceutical and biotechnology companies.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

$ (

Bil

lio

n)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Gro

wth

Ra

te (

%)

Source: Frost & Sullivan

12

Clinical Development Pipeline

• Phase I and Phase II products accounted for 25.0 and 29.3 percent of total pipeline drugs.

•Strong early stage pipeline is driving the demand for outsourcing services, as they contribute more volume or work outsourced.

•As “Big Pharma” continues to work on building a strong pipeline, the volume of early stage (preclinical & phase I) share of the pipeline will continue to expand.

•Several top-tier CROs are continuing to aggressively add capabilities and capacity to cater to this slow shift toward early stage development work.

•The downside of this shift is the higher risk of failure associated in this stage.

Phase III,

18.4%

NDA, 11.4%Preclincal,

16.0%

Phase I, 25.0%

Phase II, 29.3%

Source: Frost & Sullivan

13

Regional Share

• North America is expected to continue to dominate the global share of clinical trials, although the percentage is expected to come down despite an increase in actual number of clinical trials.

•Lower cost advantage and less stringent regulatory guidelines in comparison to U.S. are key drivers for outsourcing of clinical trials to emerging markets.

•Emerging markets are also driving the demand for functional services, which are increasingly being provided by CROs, thus seeking to project themselves as a “one-stop-shop”.

•Consolidation in the pharmaceutical and biotechnology industry might have a negative impact on growth as witnessed in the late 90’s and early 2000s.

2011

53.3%

11.8%

8.8%

5.9%

3.7%

5.3%3.0% 8.2%

North America Western Europe Eastern Europe

Latin America Japan India

Rest of Asia Pacific Others

14

Factors Expected to Impact CRO Market Growth

CLINICAL RESEARCH OUTSOURCING MARKET (2008-2013)

Shift Toward Strategic Outsourcing

Pressure to Lower Fixed Costs

Improving R&D Efficiency and Quality

Demand for Global Trials

Stringent Regulatory EnvironmentRising R&D Cost

Pressure to Improve Clinical Pipeline

Demand for Increased IT Capabilities Demand for Better Scalable Data

15

Conclusions

16

Conclusions

• Strong revenue and volume growth projected across CRO

markets globally

• CRO market is experiencing two-tiered growth from “Big

Pharma”, which is outsourcing work to CROs to lower fixed costs,

while biotechnology and specialty pharmaceutical companies

outsource work to CROs due to the lack of infrastructure.

• The shift in volume from the “Big Pharma” tier to “biotechnology

and specialty pharmaceutical companies” is expected to have an

impact on overall growth rate.

• Demand for functional services such as data management,

logistics, translation, regulatory and consulting services is also

experiencing strong growth.

17

Major Industry Participants

18

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