The Impact of R&D and Medical Device Trends on Small to Mid-Size CROs

September 23, 2016

Last month I wrote a blog suggesting that small and mid-size Clinical Research Organizations (CROs) overachieved the past five years.  That blog seemed to touch a nerve within the CRO community as I received a lot of great feedback and numerous questions.  Due to the high level of interest, I decided to dig a little deeper and focus on two data points contributing to the recent success of small to mid-size CROs:

 

  1. Increased research and development spend by small pharma and biotech

  2. Increased outsourcing by the medical device industry

 

Small Pharma & Biotech Research &Development (R&D)

 

Scrip100.com has a great interactive chart that contains R&D expenses for over 500 pharmaceutical and biotech companies from 2012-201.  I compiled and sliced the data a few different ways.  Below are my analyses along with observations:

 

 

2014 vs 2013 R&D Spend by Top 50 and All Other Sponsors

 

  • A 12.8% increase for the All Other pharma category jumps out – it’s almost 3x more than the R&D growth for the top 50.

 

  • Additionally, All Other has almost a $3B increase in R&D spend – significant considering almost all CROs outside the top 10 have less than $300M of revenue. 

 

2014 vs 2013 R&D Spend by Top 100 and All Other Sponsors

 

  • 20.8% growth after taking out the Top 100 – that is more than 2x the expected growth of the entire CRO market.

 

2014 vs 2013 R&D Spend by Top 50, Next 50 and All Other Sponsors

 

 

  • Similar to the previous chart – I found it interesting that companies 50-100 had the least amount of R&D growth.  Probably coincidence but worth noting.

 

2014 vs 2013 R&D Spend by Pre-Revenue and All Other Sponsors

 

 

  • Pre-revenue pharma and biotech companies increased their R&D spend by a staggering 36.6%.

 

  • Many pre-revenue companies spend less than $50M annually on R&D, but as you can see it really adds up.

 

Medpace’s recent S-1 filing provides additional color on the subject.  Medpace states that, “small and mid-sized biopharmaceutical companies outsourced approximately 69% of their development expenditures” in 2014.  Medpace estimates that by 2019, small and mid-size biopharma companies will outsource close to 76% of their development expenditures.  Compelling since the penetration rate for the industry as a whole is currently around 49% (per ICON’s presentation at the 2016 J.P. Morgan Healthcare Conference).  Small to mid-size CROs have been smart to focus on a segment that outsources at a higher rate than the broader market AND is increasing R&D spend 3-8x faster (Medpace also expects this segment to grow 10% a year until 2019). 

 

 

Medical Device Outsourcing

 

Understanding medical device clinical outsourcing demand has been a bit of an enigma.  When I was CFO at Theorem Clinical Research, our sales performance indicated there was a clear demand for medical device outsourcing.  However, finding market data was difficult.  Fortunately, I came across a great article by Medical Design and Outsourcing utilizing data compiled by a variety of sources.

 

Why is the medical device sector relevant?  Medical device is still considered a niche segment of the industry being serviced by lots of small to mid-size CROs.  The article states that niche and mid-size CROs make up 37% and 32% of the device CRO market (meaning almost 70% of device trials are performed by niche or mid-size CROs).  I was curious and did a google search of medical device CROs – here are the first 20 that appeared:

 

 

Outside of Novella (now owned by Quintiles) and Medpace (which is more mid-size than large CRO), no other traditional large CROs appeared (Clinipace is private so I couldn’t obtain revenue figures).  I was surprised that Aptiv (acquired by Icon) and Theorem Clinical Research (acquired by Chiltern) didn’t appear.  It’s possible that medical device has been deemphasized since their respective acquisitions.  Let’s take a look at the outsourcing opportunity presented by Medical Device.

 

 

Medical Device Market Size

 

 

  • INC Research states (via their presentation at the William Blair 2016 Growth Stock Conference) that outsourced biopharma CRO revenue was $25.7B in 2015.  The $5.2B medical device CRO market is roughly 20% of the pharma market.  Hence the lack of focus from the larger CROs – clearly pharma is the bigger opportunity

 

  • However, a $5.2B market with a 12.5% CAGR is a great opportunity for niche to mid-size CROs

 

Future Looks Great

 

 

  • Medical device outsourcing is still in its infancy.  Per the chart above, only Data Management had a 40% penetration rate in 2015.  No other function had a penetration rate greater than 29%

 

  • The medical device outsourcing opportunity could double as penetration rates approach 50%

 

Wrapping Up

 

I’m not so sure that small to mid-size CROs overachieved, more like they adapted to a changing market.  Over the last 5-7 years, we’ve seen:

 

  • Increased strategic relationships between large CROs and pharmaceutical companies (making it difficult for smaller CROs to gain much business from the largest pharmaceutical sponsors).

 

  • Strong investor demand for small pharma/biotech companies.

 

  • Increase in Medical Device clinical outsourcing.

 

The impact has been:

 

  • Large CROs have continued to grow organically albeit at a slower rate than their smaller CRO counterparts.

 

  • Large CROs have bolstered both their growth and capabilities via acquisitions.

 

  • Small pharma/biotech sponsors increasingly found small and mid-size CROs to be complementary partners to execute their development plans.

 

  • Medical device sponsors chose niche and mid-size CROs to satisfy their specialized and growing outsourcing needs.

 

  • Small/mid-size CROs realized that they wouldn’t have the scale to compete for large pharma strategic deals, causing a strategic shift towards a greater focus on small pharma/biotech & medical device sponsors.

 

In essence, small and mid-size CROs didn’t overachieve, they simply took advantage of changing industry dynamics.  Proving there is room for CROs of all sizes and specialties when you have sponsors of all sizes and specialties as well.

 

 

Jason Monteleone is President of Pivotal Financial Consulting, LLC, a Strategic Financial Consulting firm focused on serving the clinical research industry.  He can be reached at jmpivotalfinancial@gmail.com.

 

 

 

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