Taking a drug through the regulatory pathway can be difficult, time-consuming and expensive. That’s why more and more leading biotech and pharmaceutical companies are choosing to outsource the work to contract research organizations, or CROs, instead.
In this episode of The Motley Fool’s Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi discuss the benefits of investing in CROs and why Iqvia Holdings ( IQV -6.42 %), PRA Health Sciences ( PRAH ), Syneos Health ( SYNH -4.72%) and ICON PLC (ICLR -7.04%) are top picks to consider.
Let’s talk about another safer way to invest in biotech and biopharma. This approach is interesting because, in an effort to reduce costs and accelerate R&D, many biotechs are now beginning to outsource many of their clinical functions. This is a class of providers better known as contract research organizations, or CROs, as they are called.
Why are CROs such an attractive investment opportunity right now?
I’m sure many biotech investors know that getting a drug through the regulatory approval process and doing those clinical trials not only takes a long time, but it’s extremely expensive. This means they will spend a lot on clinical trials. The benefit of buying a CRO is that they are the ones who directly benefit from this spend. They also directly benefit from this long delivery time.
CROs work with biotech companies, pharmaceutical companies and handle all aspects of the clinical trial process. They can literally design the study, get in touch with the clinics to actually do the study, they can run the trials, they can analyze the data, they can help with the regulatory submission. If a company wants to outsource this work, or even just partner to get consulting advice, CROs are a natural partner for them.
Also read:- Gastroenterology Clinical Trials And Gastroenterologist
The great thing for investors is that the CRO makes money on the drug basically no matter what the outcome is. If the drug doesn’t meet his expectations, the CRO still gets paid to conduct the trial. Another nice benefit is that when a drug enters phase 1, by the time it passes phase 3, the process can take many years.
Working with CROs
If you work with a CRO in Phase 1 and you have to make it through to Phase 3, those trials have to be done over years. You typically sign contractual agreements with CROs that span several years and multiple phases. If a CRO acquires a compound early in its lifecycle, it gets a lot of revenue visibility as the drug progresses. This is very attractive.
Yes. Interestingly, right now only about 40% of clinical development is currently outsourced. Some analysts say it could rise above 50% in the next few years. A few reasons, a few drivers, one is just the cost of running these expensive, massive trials. These will continue to grow, especially as many biopharmaceutical companies continue to expand and test globally. You also have very complex regulations.
In some cases, the FDA is starting to step back in some ways and make it less complicated, but in other ways, in other areas like gene therapies, it’s going to be more complicated paths that a lot of these biopharmas are going to have to take. solve. They will need a partner like a CRO to help them through.
In addition, another huge drag is insurance reimbursement. We have seen and will continue to see, especially as we get through the next election cycle, continued pressure on drug prices. You see payers moving away, you see politicians getting more into the mix. Maybe, maybe not, we will actually see something happen when it comes to drug prices. In any case, all of this means continued downward pressure on margins for many of these big biopharma companies.
Biotech, especially the smaller ones, need expertise, they need cost-effectiveness, and they really need the global reach that many CROs offer. Brian, are there any particular names that stand out to you in the CRO space?
There are several that are publicly traded. My personal favorite is the biggest one in the sector called Iqvia Holdings. It is a company with 55,000 employees. It literally serves 8,000 different customers.
They handle soup to nuts, from essentially discovery to commercialization. If the biotech needs help with something, it can basically get it from Iqvia. So not only do they have resources, a huge army of researchers and regulatory experts in many countries that they can tap into, but Iqvia actually owns a database that has 530 million patient records in it, and they can use that to analyze prescribing habits that can help sales reps targeting physicians after the drug receives approval to make the commercialization process as easy as possible.
To put some scale, this company currently has $60.4 billion worth of future projects pending. These guys are absolutely huge.
I love their focus and their push on the data end. You can see this play out in many different ways. Once a drug is on the market, you have access to clinical trial data. They also have a database that tracks prescribing trends. I really think it will equip the sales force with better data to go after the markets to drive the top line of this company. In addition, they are expanding worldwide. I know they recently expanded into Asia Pacific markets. Really interesting there.
Also read:- Farber Cancer Institute To Gastroenterology CRO Board
There are some other companies in this space as well. Can I think of any others?
There are a few smaller ones. Iqvia is definitely the big dog in this space, but there are several other CROs that focus more on niche positions. Because they are smaller, they tend to grow faster. A couple for investors to put on their radar, one is called PRA Health Sciences. Their symbol is PRAH. Then there’s Syneos Health, which is a sponsor of the show. Their ticker is SYNH. Then there is another called ICON PLC. Their ticker is ICLR. All these companies have their own niches in the industry. Since they are smaller if you want to ride the wave, maybe they could be more interesting to look at because they could show faster growth on a percentage basis.
Yes. This is a great point for smaller companies. What we have seen in the CRO space in recent years is a lot of M&A action. I think it will continue. If you think about it strategically, it makes a lot of sense. Clearly, together they can not only combine and utilize a much wider network of clinical trials, but they can also now expand their clinical trial participant pools and begin to use the big data and AI tools that many of them are pursuing. So I wouldn’t be surprised to see more M&A in this space in the next few years.
How CROs Work?
- For the entry phase, the mainstream should enter after the clinical phase. Only Calvert and Viva specifically focus on preclinical investments. Because competition in preclinical investment is relatively low, investors will have more bargaining power. However, they will also run the dual risk of low success rates and long payback periods.
- Also, for the entry-level model, financial investment is complemented by value-added services such as R&D support, strategic consulting and market research. In terms of investment strategy, proprietary third-party preclinical and clinical R&D services are additional strengths that are urgently needed for fast-paced startups.
- And, for an investment objective, an investment based on a clinical research project or drug product is a unique entry point. Compared to investment companies, investment projects/drugs will have advantages in risk control.
Also read:- How to Start Ophthalmology Clinical Trial With Your Practice
Collaboration and open innovation are gaining importance in the pharmaceutical and biotech sectors, and CROs and their clients will become more involved, leading to a risk-sharing business model.6,7 As a result, the future of CROs would be to serve as growth investors along with clients with three typical features:
- Only seed-stage investments;
- Not corporate investments, but drug-based investments; and
- Financial investment along with cooperation in research and development.
Visit our website at Vial to know more about contract research organizations.
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