Increase in R&D Costs Compared to Revenue Growth a Reason for Outsourcing Clinical Trials to Contract Research Organizations

The R&D productivity of top pharmaceutical companies has been declining in recent years as Food and Drug Administration (FDA) regulations surrounding the approval of new drugs become more stringent. This will significantly affect pharmaceutical companies’ revenue generation. Many patents are set to expire in 2012 – 2018, which will further reduce revenue and erode profits. As a result, companies are making huge efforts to reduce R&D expenditure and increase profitability. Outsourcing clinical trial activities to Contract Research Organizations (CROs), particularly in the developing nations, is rapidly gaining acceptance in the industry.

R&D expenditure for the 10 largest pharmaceutical companies increased at a Compound Annual Growth Rate (CAGR) of 8.3% for the period 2004 – 2010 compared to a revenue turnover of 6.5%. The collective R&D expenditure for the top 10 companies stood at $42.1 billion in 2004, which increased to more than $67 billion in 2010. Revenue turnover increased from $293 billion in 2004 to $428 billion in 2010.

Contract Research Organization Market to Grow at a Good Pace due to Increase in Clinical Outsourcing Activity

CRO industry market revenue was estimated at $21.4 billion in 2010. According to clinicaltrials.gov, by November 2011, 43.9% of the clinical trials had been carried out in the US, while 22.9% had been carried out in Europe, and 11.6% had been carried out in Asia. The rest had been carried out in Canada, Mexico, Australia, Middle East and Africa, accounting for a total of 21.4%. In 2009, the CRO industry recorded revenue of $19.1 billion; an estimated increase of only 6% from 2008.

This was due to the global economic crisis causing many pharmaceutical companies to reduce their R&D expenditure. As the financial condition in the US became more stable, funds began to flow back into R&D. A number of patents are expected to expire in the forecast period, meaning that large pharmaceutical companies’ revenue is predicted to dry up, leading them to outsource clinical trials to CROs. It is estimated that the CRO industry will grow at a CAGR of 12.8% to $56 billion by 2018.