Q&A on the challenges facing the contract research organization industry

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July 12, 2019

Which issues are keeping contract research organizations (CROs) busy or awake at night? HRI recently sat down with Laura Robinette, who leads PwC’s Pharmaceutical and Life Sciences Assurance practice, to talk about the industry and some of its most pressing challenges.

PwC Health Research Institute (HRI): 

What are some of the biggest challenges facing CROs today?

Laura Robinette, PwC US Pharmaceutical and Life Sciences Assurance Leader:

From an operational perspective, cybersecurity is becoming more and more important. Clinical trial sponsors in particular are very concerned about keeping their data private, especially after a recent breach involving clinical data. Companies are concerned about what happens if their data is stolen, and whether that could impair their R&D activities. There’s a new operational emphasis for pharmaceutical and life sciences companies using CROs to protect their own trial data.

Separately, the new accounting rules for revenue recognition have created a big operational issue with CROs, because they have to more accurately predict and estimate their third-party costs associated with a clinical trial. That’s very difficult. Historically, they could estimate those costs upfront, but the estimates weren’t always accurate. As in all clinical trials, there are constant change orders, which also results in changes to third-party costs.

Under the new accounting rules, there is significantly more emphasis on accurately estimating total costs, including third-party costs, because it forms a basis for CRO revenue recognition. It’s very hard to accurately estimate these costs, and CROs are talking about this issue. It’s creating volatility in their financials, and they’re worried that the investment community will reduce their share values.

HRI: What are some of the challenges from a business perspective?

Laura Robinette: All of the emphasis on drug pricing has gotten some of the biopharmaceutical companies rethinking their R&D spend, so there’s risk of trial cancellations. There’s a heightened focus on R&D spending in light of all the pricing pressure. Companies are asking if they should really be spending at current levels on R&D, considering significant pressures on the top line.

HRI: How do CROs need to change to increase the value that they provide to biopharma trial sponsors?

Laura Robinette: They have to become more data-driven. I think CROs are in a very powerful position to use the data that they have to help sponsors provide better transparency on how much it costs to develop a drug and bring it to market, which can help sponsors to justify the prices they charge—with all the regulatory scrutiny on drug pricing and the notion that all pharmaceutical companies are getting rich. And while some of them are highly profitable, they have to spend huge sums of money to get that drug to market. I think CROs have power in the data they have to help companies provide support for that narrative.

Under the new accounting rules, there is significantly more emphasis on accurately estimating total costs, including third-party costs, because it forms a basis for CRO revenue recognition. It’s very hard to accurately estimate these costs, and CROs are talking about this issue. It’s creating volatility in their financials, and they’re worried that the investment community will reduce their share values.

HRI: What kinds of new technologies or capabilities should CROs explore or adopt?

Laura Robinette: The fundamental problem remains: CROs have to reduce costs. The way to reduce cost could be through any number of technologies. Conducting virtual trials, to the extent that you can get better patient participation and adherence to trials, will reduce cost, for example. Many CROs are looking at technology companies offering virtual capabilities to increase trial compliance. The question they’re asking is whether the existing technology is good enough, or whether they need to try and build it themselves.

HRI: Do you expect to see additional consolidation or M&A activity in the CRO market?

Laura Robinette: With regard to big combinations, I think we’re now down to the big eight, or maybe the big 10. I think future deal-making will be more about adding on to existing capabilities through technology. Everyone is trying to create a full spectrum of services, beyond just clinical trials and moving into commercialization and other services. CROs might do acquisitions to expand their footprint across all of those services, but primarily it will be buying technology, data companies or partnering with big data if they don’t have it today. It will be more about expanding the types of services and offerings that they can give to their customer base.

For more of HRI’s insights and content, visit our Regulatory Center and report library

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Margaret Stover

National Higher Education Advisory leader, PwC US

Benjamin Isgur

Health Research Institute Leader, PwC US

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