Post-integration costs are becoming realised across operating structure

Total combined peer group operating margin increased by 100 basis points to 12.4% of total sales in 2016, which represented three consecutive years of margin improvement in the outsourcing market. GlobalData attributes this to a number of companies posting record sales in 2016, including LabCorp / Covance, Piramal, INC Research, AMRI, and Eurofins Scientific, which allowed these companies to adequately cover their operating expenses.

GlobalData believes as these companies expand their service capabilities through acquisitions, the ability to effectively cope with post-integration costs will be critical to allow cash to flow through company balance sheets. Higher fixed costs, headcount restructuring, service redundancies, and plant capacity will all increase in the future, making it vitally important that companies’ have the management structure, and the operations strategies in place to continue to generate long-term profit.

Figure 1 displays the combined peer group revenue and average operating margin from 2010–2016.

Source: GlobalData, Pharma Intelligence Center, Financial Analytics [Accessed March 7, 2017] and Company SEC filings. Note: Peer group includes 27 publicly-traded CRO/CMOs.

Figure 2 displays the revenue for each company in the peer group in 2016 and 2015.

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Source: GlobalData, Pharma Intelligence Center, Financial Analytics [Accessed March 7, 2017] and Company SEC filings.

Key growth drivers

Table 1 summarizes the key growth drivers in outsourcing market during 2016.

Source: GlobalData, Pharma Intelligence Center, Financial Analytics [Accessed March 7, 2017] and Company SEC filings.

Pillars of sustainable growth

The pharmaceutical outsourcing market stands to benefit from several factors impacting biopharmaceutical companies as they continue to face many challenges around weakening product pipelines, increased cost structures, and more complex disease targets that have been the key motivation for pharma companies to outsource their R&D activities to contracted partners across all stages of the drug development continuum. In addition, clinical activity has trended towards biologics from small molecules over the past few years, a trend that should prove beneficial to outsourcing vendors with expertise and experience in discovery pharmacology.

GlobalData remains bullish on the outsourcing market, with opportunities for the public vendors to augment revenue growth with profitability improvements and new capital deployments. However, as outsourcing penetration moves closer to peak levels and profitability targets are reached, we believe that CROs might need to look elsewhere to maintain the current growth trajectory. Acquisitions could help the top players support the current pace of growth, while in some instances offering additional service capabilities to increase share in new markets.