The whole is greater than the sum of its parts - unless you’re talking about the pharma industry.  Evidence of the industry’s deconstruction are everywhere, as pharma companies struggle to increase efficiencies and cut costs.  Gone are the days when R&D, manufacturing, clinical trials, and sales/marketing were all done under one roof.  Instead, companies are realizing the economies of scale that come with specialized services that do one thing.  Outsourcing to these companies is on the rise.  Will this outsourcing wave eventually cycle back to a wave of consolidation?  Possibly.  But one thing at a time…

We are in the golden age of the Contract Research Organization (CRO), as the role of companies like Covance, Charles River Laboratories, and WuXi in China becomes more concrete.  The breadth of work being sent to CRO’s is expanding, as primary chemistry, synthesis, and purification are being outsourced, among other assays.  In addition, as pharma companies are forced to reduce headcount, the talent pool is ripe for the picking from qualified scientists who know what pharma companies need.  CRO’s are also benefiting from the divestiture of pharma’s research labs, as exemplified by Covance’s acquisition of research labs from Merck and Lilly in the past year and the ensuing research contracts that were signed.  The future of the industry is becoming clearer.

Where does biotech fit into all of this?  They are still a source of compounds for in-licensing by big pharma - particularly when large resources are needed for their development.  In other words, pharma is still the sugar daddy of the industry.   Everyone is more cost conscious, though, and many biotech companies have figured out the benefits of outsourcing the majority of their R&D and preclinical work.  The trend is likely to continue, again to the benefit of CRO’s.

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