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ICON PLC, one of the industry’s largest clinical research organizations (CRO) and the preferred provider of clinical research services for Pfizer Inc., has felt the effects from ripples of biopharma consolidation, and the emergence of biotech, throughout its years as a services provider to the industry.

Its CEO, Steve Cutler, has seen much of this kind of activity play out first hand. Formerly working for Kendle as COO and latterly as CEO, he also spent 14 years working atQuintiles Transnational Holdings Inc. (now IQVIA) in project management. He also held several positions at Sandoz International GMBH. A native Australian, he represented his country 40 times on the rugby field between 1982 and 1991.

Despite his many years of experience in the clinical research sector, this straight-talking antipodean still loses sleep over potential disruption to the industry, specifically the threat posed by non-traditional players such as Apple, Google and Microsoft. “Those companies can apply significant technology and resources to the drug development conundrums and problems that we all face,” he says.

“It’s all very well to worry about it but you’ve got to say, ‘Okay, how are they going to do it?’ They can certainly bring a lot of resources, they could bring some innovative technologies. Whether that technology could fundamentally change the game and do it better, I don’t know. Maybe they could,” he wonders. “I think you’ve got to be aware of those potential threats. You’ve got to be open to those potential opportunities. Collaborate with those sorts of organizations because they’ve certainly been extremely successful in their space and, who knows, maybe they can bring a different way of looking at things to our business.”

Certainly, if large tech providers do come knocking on the door of biopharma, Cutler will be ready to open the door. ICON inked a deal with Intel in April that enabled it to offer the Intel Pharma Analytics Platform for use in clinical trials. The platform is an artificial intelligence (AI) solution that enables remote monitoring and continuous capture of clinical data from study subjects using sensors and wearable devices, allowing it to quantify the impact of therapies. ICON has a number of existing technology and data partnerships with potentially disruptive entrants to the industry. Cutler says that ICON is “open to partnerships with all such organizations that can bring value and help solve some of our industry's key problems.”

Beware The Biotech Bubble

Where there is disruption there is also benefit, and vice versa. The funding of biotech projects within the last three to four years, for example, has been a boon to the clinical services industry with mid-size and large CROs feeling the benefits most of all.

The contract services industry is reaping the rewards of a resilient biotech funding environment, re-accelerating growth in the sector.

However, when planning the long-term strategy of a services business, a customer operating within a funding bubble is not always the blessing it could appear to be. While the unprecedented amount of funding in the biotech space is a good thing for innovation, sustainability is also a huge factor to consider.  “This industry is on a big wave at the moment but quite conceivably in a year or two, that could change,” says Cutler. “And ultimately, in our industry, it’s the large pharma companies who have the majority of the outsourcing and development dollar to spend.” Pharma’s largest 50 companies have approximately 75% of development dollars to spend, explains Cutler. “They are the ones who have a really sustainable pipeline, a portfolio of drugs, that are making money for them, so that they can reinvest in R&D.”

The company reiterated this point at a recent investor day, and this is not a sentiment exclusive to ICON. “We have consistently heard this phrase from CROs - large and small, clinical and preclinical - and thought it worth emphasizing,” said David Windley, managing director of Jefferies’ Healthcare Equity Research team, in a recent investor note. “Our investor conversations suggest that observers view large partner discounts as driving lower margin. Because of the complexity of service delivered and idiosyncrasies of each client, repeat business drives process optimization and higher margin in the long-term.” ICON’s partnering strategy looks to customers with substantial budgets and opportunities for repeat business. “This strategy has borne mid-teens growth in its non-Pfizer business over the last year or so,” says Windley.

“Biotechs are great when they’ve got their funding but many of them don’t make a profit, and some don’t even have revenue,” Cutler says, “so, when they run out of money there’s a problem. So, I think we all ride that wave and enjoy that wave while it’s running. It’s been running for a couple of years and long may it continue, but I think you’ve got to make sure you build your business on a long-term basis, and really, for us, that’s the top 30 to 50 pharma companies in the world.”

Traditionally, a biotech has one or two drugs, so a partnership with a CRO is not an focus for them. But increasingly these types of companies do want to stay with one service provider and execute the whole clinical program, rather than jumping from CRO to CRO. “It may not necessarily be over many compounds or a large portfolio, but it’s more of a one to one; you’re the only provider, help us get to market” explains Cutler. “Biotechs want to be efficient with their spend and with their relationships, and not cast the net broadly over a large number of CROs. [They want to] go to one CRO for their program and the development work that they need to do. We’ve certainly seen a number of opportunities in that area.”

Mid-size pharma companies are also starting to become more strategic in their partnering, says Cutler, explaining that this peer group has been much slower to partner up than large pharma. “They realize that they have to spend with fewer partners to make it really worthwhile for the partners to engage and to invest in that partnership. There is a maturation, if you like, in the mid-sized pharma sector around partnerships.”

Impact Of Consolidation

With more companies looking to partner with services providers for the long-haul, they may not find as much choice as they would have done a few years ago. Consolidation has been the ongoing story of the CRO space for the past few years, with the largest seven CROs in the industry (IQVIA, Parexel International Corp.,Pharmaceutical Product Development Inc.,Covance Inc., PRA Health Sciences Inc., Syneos and ICON) engaged in some kind of M&A activity within the past 18 months.

Last year, 187 deals took place in the pharma services realm, each one molding the acquisitive company into a slightly different shape to reflect the current needs of the pharmaceutical industry. One imperative continued to drive more large deals than all others: data.

 The choices, and standards, are better for pharma, says Cutler, even though diversity in service providers is not what it once was. “It’s still a highly fragmented industry and there are still 1,200 CROs around the world, but there are probably seven to 10 large ones who have the majority of the market share,” he explains. “Typically, our industry doesn’t pay dividends, we are still reinvesting the profits we make into our business in creative ways to improve what we do for customers. So, I think on the service side, it’s about improving what we do and executing well.”

There is a bifurcation in the CRO business, says Cutler. While there will always be a place for large and small CROs, it is the mid-size players, those that are making $100-400m in annual revenues, that are most at risk of being overlooked by potential customers. “They need to find their niche, they need to find their focus,” he says. “There are pros and cons with any of the companies you work with and I don’t think it will ever totally bifurcate but it is the companies in the middle that have to sort themselves out in the longer term. They are probably more at risk than the others.”

Constant Pressure

ICON made net revenues of $1.7bn in 2017. Its year-to-date revenues currently stand at $1.2bn according to its Q2 results, with full-year revenues expected to be in the range of $2.56bn to $2.64bn. The analyst John Kreger from William Blair estimates 2019 revenues to be around $2.8bn.

Despite the buoyant market for outsourcing that patently exists, the pressure to remain one step ahead of the competition is constant. “There’s always pressure to be more efficient and effective, to be more innovative, creative, to deliver on time and budget. I don’t know if that’s necessarily increasing,” explains Cutler. “In fact, you could argue with the amount of funding that’s out there, there’s a lot of opportunity. We are not all scrambling for the same dollars at the moment.

“I don’t see any increasing pressure; I see constant pressure. As an organization, we must be constantly on our game to get better. You’ve got to get better every year; you’ve got to improve every year and you’ve got to drive your organization. If you don’t get better, you’re going backwards.”


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