This report outlines the revenue and operating margin drivers of the outsourcing market in 2016 across a peer group of 27 publicly-traded CRO/CMOs. The report summarizes the different drivers of corporate revenue growth including business segments, and geographic markets, acquisition synergies, and supply agreements with pharmaceutical companies. Finally, the report looks at cost-containment and operating expenses, including acquisition expenses, S,G&A, and other fixed/variable costs.
Cost Containment Remains Strategic Driver
Post-integration costs are becoming realized across operating structure
Total combined peer group operating margin increased by 100 basis points to 12.4 percent 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 3 displays the combined peer group revenue and average operating margin from 2010–2016
Figure 4 displays the operating income for each company in the peer group in 2016 and 2015.
Table 2 displays the key growth drivers in 2016.
|Company||Operating Income||Operating Margin||Key Growth Drivers|
|LabCorp/Covance||$1,312||13.6%||Higher laboratory and distribution costs as a result of the Covance acquisition. Additional restructuring costs as a result of cost-improvement initiatives and integration synergies.|
|Quintiles/IMS||$642||9.1%||Increase of $215M in S,G&A expenses and $87M in merger-related costs, such as investment banking, legal, and accounting fees, as well as severance, facility closure and other termination costs.|
|Lonza||$545||12.0%||Higher costs due to Capsugel acquisition and purchase of Triangle Research Labs, along with the disposal of its peptides business and operations in Belgium.|
|EuroFins Scientific||$477||14.1%||In 2016, EuroFins completed 27 acquisitions representing total annualized revenue of around $230M. The acquisitions either strengthened EuroFins leadership in existing markets, or further developed the Company’s expanding footprint in clinical diagnostics testing, or in emerging markets in Asia.|
|Icon||$312||18.7%||Higher costs due to increased headcount and laboratory costs which were off-set by lower facility and IT costs.|
|ChRiver||$237||14.1%||S,G&A costs increased by $30M in the Company’s Discovery and Safety Assessment (DSA) segment due to $13M in compensation; and $6M in facility expenses, $5M in acquisition-related expenses. The Company also paid an increase of $30M in unallocated corporate SG&A expenses, including $8M in consulting fees.|
|Parexel||$224||9.2%||Direct costs grew due to higher fixed, and variable compensation costs, as well as $16M change for the fair value adjustment of contingent consideration related to acquisitions.|
|Catalent||$218||11.8%||The Company was more effective at absorbing its fixed costs structure through higher capacity utilization within its Softgel Technologies Segment. This was partially offset by $5M increase in acquisition-related transaction costs during the prior year.|
|Capsugel||$215||19.9%||Higher warehousing and distribution costs, additional investment in R&D, and transaction charges related to prior acquisitions.|
|Patheon||$197||9.4%||Higher S,G&A costs primarily due to FDA remediation activities at the Company’s Ferentino, Italy site; and $8M in compensation costs related to stock expenses due to the Company’s IPO.|
|Piramal||$160||14.7%||Sale of formulations business provided company with increased cash flow to reinvest into firm and improve margins. Company’s Financial Services Segment was the primary driver of 2016 operating income.|
Higher fees and expenses for transaction-related costs, including stock repurchase debt refinancing and legal fees. The company posted an increase of $96M in reimbursable expenses, which was due to an increase in the number of studies in which the firm procured principal investigator services.
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. Weakening product pipelines, increased cost structures, and more complex disease targets have all been key motivations for pharma companies looking 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.
Senior Industry Analyst
About the Author
Adam Dion is Senior Industry Analyst at GlobalData. Mr. Dion is the author of GlobalData’s PharmaLeaders Benchmark reports, which rank the competitive positions of the top companies in the pharmaceutical, biotech, and CRO/CMO and generic drug manufacturing sectors. Adam is the lead author of the Pharmaceutical Benchmark Report and the Innovative Mid-Cap Biotech Benchmark Report. He also provides coverage of trends in the healthcare IT space, including ‘Big Data’ and cloud computing.
Prior to joining GlobalData, Mr. Dion was an Analyst with Technology Business Research, a leading market research and consulting firm. In this role, he was responsible for coverage of blue-chip hardware, software, and BPO companies, such as Dell, Apple, SAP, Acer, Wipro, and Tata Consultancy, analyzing these companies’ go-to-market and vertical integration strategies, financial forecasting and competitive benchmarking. Adam has also been involved in a number of primary market studies in the consumer space, analyzing the market penetration of tablets, Netbooks, E-readers and mobile devices. His analytical commentary has been quoted by leading sources, such as The Wall Street Journal, Bloomberg, Forbes, Financial Times, The Guardian, PharmaLive, Drug Discovery News, ComputerWorld and eWeek. Adam received his BS in Neuroscience from Merrimack College, and MSc in Marketing from the University of New Haven. For commentary, Adam can be reached by email at: [email protected]
PharmaSphere (2013): Global Deal-Making and Operations Strategies in the CRO Market
PharmaLeaders (2013): CRO Benchmark Report – Financial Performance Benchmarking & Competitive Landscape Assessment of Leading CROs