By the time you read this, it will be the middle of the summer of 2010 and the following observation may be a little dated. Still, I believe it is worth mentioning because I believe that it provides a glimpse at the status of the preclinical CRO industry.

As I have mentioned numerous times in these pages, the preclinical CRO business started to decline in the end of 2008 just as providers were bringing additional capacity on-line. While past declines in customer demand lasted only for a few quarters, this particular decline carried into 2010. Fast forwarding to June of 2010, it is now clearly evident that business is booming at some preclinical CROs while others report steady to slow workloads. While it is good news that customer demand seems to be rebounding, it is still puzzling that it seems to be doing so in an such unbalanced fashion. In other words, why is business booming at some CROs and not at others? This is a real observation; I have seen and heard enough examples across the industry to judge its veracity. What I don’t know is why preclinical work seemingly is being awarded unevenly across the industry. If demand continues to grow, industry capacity utilization will even out but until then, the inequity is worth examining. Consider the following observations:

Capacity

Those CROs reporting good business tend to be mid-sized and not the larger CROs that offer comprehensive services. Obviously, it is easier for a smaller facility to fill capacity faster than the larger multi-site CROs. That being said, there are other mid-sized CROs where the business is very slow. As I have noted in the past, it may be possible that the industry has actually returned to a normal level of customer demand but the additional open capacity at larger CROs may erroneously contribute to the appearance that customer demand is slower. It seems that many of the CROs that are busy today either resisted adding additional capacity or added capacity more modestly than their larger competitors. Just as the airline industry has cut capacity following years of lower customer demand, you have to wonder if there is an optimal amount of capacity in the preclinical CRO industry.

People

While facility capacity is often measured by study room occupancy and turnover, there is an obvious “people” element when you encounter a busy preclinical CRO. I have often found that when you ask CRO employees if they are busy, a “yes” answer is often accompanied by an emotional response. This is consistent with what I have observed at those CROs that are reportedly busy. The staff is busy and thankful to be so after the industry experienced so many layoffs. You can sense the urgency among the staff and in some cases, I have marveled at the innovative utilization of resources that allows these CROs to effectively compete with the larger players in the industry. Some CROs have begun to recall laid off workers, albeit slowly, while others continue to trim their payrolls.

Bid Volume

It seems like the entire preclinical CRO industry has noted that there has been an increase in the volume of bid requests by potential customers. Some CROs noted this change as early as January 2010 and it seems to be continuing. You would think that this would be a leading indicator of increased customer demand but some CROs have been unable to convert their bids into actual work. Curiously, when you ask CROs if they are busy, those that are busy talk about work in progress while those that aren’t talk about bid volume. For whatever reasons, some CROs have been more successful converting bids to actual work than others.

So what’s going on here? Why are some preclinical CROs busier than others? Are some preclinical CROs more aligned with the client’s needs than others? Here are some possible explanations that are impacting CRO selections:

“The Shrewsbury Effect”

When Charles River announced that they were closing the preclinical facility in Shrewsbury, MA, other CROs reportedly benefitted by gaining clients that had previously been using the site. While this may be true, it is unlikely that this the sole reason for the workload disparity between busy and slow CROs.

Pricing

As I write this article in early June, many in the industry have acknowledged that the competitive pricing environment that was seen in 2009 has ended. While the preclinical CROs may have ended competitive pricing, I am not so sure that low prices of 2009 have not created a more price sensitive client base. Again, looking at an airline industry that lowered prices in the past to attract travelers, it has been difficult for that industry to return to premium pricing because consumers are more inclined to shop around for lower prices. I believe the same may be true to some degree in the preclinical CRO industry. Those CROs that sacrificed profit margins in 2009 may be finding it difficult to compete in 2010 as the slowdown in customer demand continues. While it seems that most CROs tried to be competitive on pricing in 2009, it seems like those that avoided long periods of significant price reductions seem to have the better business volume in 2010. I caution to point out that this is pure speculation on my part but it is consistent with my observations of the industry.

Relationships

I have always said the preclinical CRO industry is a relationship-based business. Those CROs that are currently busy seem to have a history of well-established relationships with their clients. It is important to understand that the quality of the client-CRO business relationship will not offset pricing or quality issues but if these parameters are equal across the industry, the quality of the relationship can be the determining factor in the selection of a CRO. That being said, some CROs still struggle with what I call “institutional arrogance.” In my opinion, some CROs either let their own marketing hype or long-held opinions by key individuals get in the way of building solid business relationships. Clients will be drawn to CROs that acknowledge and meet their needs. Other CROs suffer the “silo syndrome,” where clients may be overwhelmed by the multiple individuals whom they must work with to get their work done. In this latter example, no one in the CRO operations actually “owns” the business relationship, which depersonalizes the experience for the client. It is difficult for clients to develop trust in a CRO if they can’t identify with a counterpart in the CRO who can exert overarching operational influence.

Perceptions

The problem with perceptions is that they aren’t always based in fact, but seem real to those that believe them. For example, there are some small pharma or biopharma companies that will not even approach a large CRO for their preclinical outsourcing needs because they believe that these CROs are only interested in working with larger clients. You would think that a CRO would seek business wherever it can find it in this economy. Just as some pharmaceutical companies now seek new blockbuster drugs to replace their legacy products, is it possible that the CROs that attribute their growth to mega-deals have developed tunnel vision in pursuit of the next big deal? The problem is that even if this isn’t true, some small companies believe it enough to take their work elsewhere.

Clients seek stability in their CRO partners. If a preclinical CRO has encountered layoffs, a client may worry that morale issues among the remaining employees could lead to quality issues. The fact is that many CROs have endured layoffs and, of these, many are continuing with business as usual. Unfortunately, there is at least one example in the industry where the layoffs at the CRO were so significant that much of the institutional expertise was dismantled. Examples like this fuel clients’ concerns.

In other cases, if a client has encountered quality issues at a CRO, other clients that learn of this experience may avoid that CRO so as to avoid similar issues.

As always, clients need to do their homework before selecting their CRO partner. It wouldn’t be good business to make outsourcing decisions based solely on perceptions.

In this column, we explored possible reasons why clients would select one preclinical CRO over another and why some CROs are busier than others. Some of the reasons above are real while others are more speculative. In general, clients want quality work and an on-time final report at a good value. Beyond that, the quality of customer service and the business relationship can play a role a role in the CRO selection process. So why are some CROs busier than others?

When customer demand is slow and there is excess open capacity in the industry, clients have more choices in their CRO selections. I believe these market conditions actually expose operational issues at CROs that otherwise may not be evident during times of high customer demand. Those with experience in research operations understand that the ideal time to enact operational improvements is when the workload slows. Accordingly, is it possible that some CROs used the slow customer demand in 2009 as an opportunity for operational learning while others didn’t?

Steve Snyder is a consultant with more than 25 years of experience in preclinical toxicology as an outsourcing customer and provider. He can be contacted at [email protected].