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.
Inorganic Growth Continues to Fuel Outsourcing Market
Quintiles/IMS merger pushed sector higher
The total combined peer group revenue from leading vendors in the outsourcing market grew by 13.6 percent year-to-year; from $40.3 billion in 2015 to $45.7 billion in 2016. Largely fueling the growth in the sector was Quintiles/IMS, which independently contributed approximately $1.1 billion to the nearly $5 billion increase.
Quintiles’ revenue grew by nearly 20 percent in 2016 to over $6.8 billion. GlobalData attributes this growth to the Company’s Commercial Solutions business which came about from its $9 billion mega-merger deal with IMS Health back in May 2016. The Company’s Commercial Solutions offerings include performance metrics related to sales of pharmaceutical products, prescribing trends, medical treatment and promotional activity across multiple channels in more than 80 countries across the globe, and even drills-down to the prescribing activity to the regional, and zip code levels.
One particular strength of this business is the Company’s real-world evidence and pharmacovigilance services which looks at the likely impact of new therapies on costs and treatment outcomes and how new therapies are performing against existing standards of care. These solutions allow life sciences organizations to apply a high degree of sophistication to their commercial operations including developing pre- and post-launch strategies.
With almost one year of sales accrued post-merger, it looks the Company’s financial results have begun to prove investors and the analyst community wrong who were weary of the deal, stating “integration risks” which led to each company’s stock price to drop after the deal was announced. Quintiles is now trading at over $80 per share, an increase of 27.3 percent from the $63 per share price level it was trading after the merger was publicized.
Figure 1 displays the combined peer group revenue and growth rate from 2011–2016.
Figure 2 displays the revenue for each company in the peer group in 2016 and 2015.
Table 1 displays the key growth drivers in 2016.
Table 1: Outsourcing Market, Revenue ($M) by Company, Key Growth Drivers, 2016
|Company||Revenue Growth||YoY Growth||Key Growth Drivers|
|LabCorp/Covance||$9,642||11.1%||Covance acquisition, organic volume growth in the Company’s managed care business and toxicology testing business, and increase in revenue per requisition in core testing business.|
|Quintiles||$6,878||19.9%||IMS merger, $773M growth in Commercial Solutions business from greater demand for real-world and late-phase research services.|
|Lonza||$4,550||8.9%||Capsugel acquisition, significant sales growth in the Company’s Pharma & Biotech Segment with strong performance from its Mammalian Manufacturing business. Signed a number of manufacturing agreements with industry players, including Clovis Oncology to supply rucaparib, and bluebird bio to supply gene therapy vectors.|
|EuroFins Scientific||$3,382||30.1%||Sales growth in North America and France markets, the Company’s two largest revenue generators. Food, air and water testing services posted strong performances, primarily in France and Germany. EuroFins has further expanded its footprint with the launch of medical device testing services to add to its already comprehensive pharma testing capabilities.|
|Paraxel||$2,428||4.2%||Modest increases across all three of the Company’s business units, led by $38M spike in the Parexel Consulting Services (PCS) services segment, which included new business wins and the addition of $12M in revenue related to the acquisition of Health Advances, a pharmaceutical consulting firm.|
|Icon||$2,428||9.4%||Sales increased due to additional revenues from the acquisition of ClinicalRM in September 2016, and the full year impact of the acquisition of MediMedi Pharma Solutions in February 2015. Growth was also higher across markets in the US and in BRIC regions.|
|Patheon||$1,867||5.2%||Double-digit sales growth in the Company’s Pharmaceutical Development Services (PDS), and Drug Substance Services (DSS) business segments. PDS revenues increased by $21M from the acquisition of Agere Pharmaceuticals, a provider of solubilisation technologies, and $99M in the DSS segment as a result from the purchase of Irix Pharmaceuticals, a specialty API maker for high-potency drugs and schedule I–IV controlled substances.|
|Catalent||$1,848||1.0%||Net revenue increased by $113M led primarily by its Softgel Technologies Segment. The Softgel Segment witnessed higher volume demand for consumer health products using the company’s proprietary offerings.|
|PRAH||$1,812||12.3%||Service revenues benefited from an increase in billable hours as well as better than expected backlog, and growth in new business wins. During FY16, PRA derived nearly 52 percent of its total service revenue from large pharma clients, and over 19 percent of its Service revenue was from large biotechnology companies.|
|ChRiver||$1,681||23.3%||Better than expected pricing environment helped to drive sales along with increased capacity utilization in safety assessment services by acquiring WIL Research; and strong demand for microbial testing solutions. In June 2016, Charles River acquired Blue Stream Laboratories to enhance the Company’s biologics business. In total, both acquisitions added over $180M in top-line revenue.|
|INC||$1,681||23.3%||Net services revenue increased $116M in 2016, as the Company witnessed strong growth across CNS and oncology therapeutic areas. INC also reported a stronger backlog of business, driven by growth in new awards, and a lower cancellation rate at the beginning of the year.|
|Piramal||$1,086||29.0%||Acquisition of Coldstream, a developer of sterile injectable products, and completed capacity expansion at Grangemouth plant to handle larger batch sizes of ADC manufacturing. Entered into a co-promotion agreement with Cumberland to sell branded hospital products in the US. Piramal acquired five brands in gastro-intestinal segment, and four consumer brands from Pfizer.|
Sales growth from Xcelience and Powdersize acquisitions, and spray-dried dispersion products, and liquid-filled capsule sales.
Source: GlobalData, Pharma Intelligence Center, Financial Analytics [Accessed March 7, 2017] and Company SEC filings.
Having explored some of the key factors in the outsourcing market, in Part II, Adam Dion will examine the trends that drive growth in the pharmaceutical industry.
Click here to read the second part of this exclusive report investigating revenue and margin drivers.