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Parexel Says It Is Ideally Positioned As Big Pharma Shakes Up R&D Efforts

This article was originally published in The Pink Sheet Daily

Executive Summary

Noting its recent five-year contract with Pfizer, the CRO predicts 13% revenue growth for fiscal 2012.

With some big pharma companies reworking their R&D programs to rely more on contract research organizations, Parexel International Corp. believes it is favorably positioned to help such companies, as well as small and mid-sized firms, realize cost savings in their clinical development budgets.

Ahead of a June 2 investor presentation at which the company cited its recent five-year R&D collaboration agreement with Pfizer as a harbinger of things to come, Boston-based Parexel provided financial guidance, projecting year-over-year revenue growth of 13% for fiscal 2012, which begins July 1, 2011. For calendar year 2010, the CRO brought in $1.2 billion in service revenue, 12% year-over-year growth, noted Chairman and CEO Josef von Rickenback.

Pfizer announced a consolidation of its clinical trial implementation services from 17 providers to two last month, choosing to move ahead in tandem with Parexel and Icon Plc (Also see "In R&D Shakeup, Pfizer Tries New Outsourcing Model" - Pink Sheet, 26 May, 2011.). Last fall, Sanofi announced a similar plan, signing a 10-year pact with Covance as its primary contract research partner (Also see "Sanofi Makes Good On Outsourcing Promise In Deal With Covance" - Pink Sheet, 4 Oct, 2010.).

Addressing the investor meeting June 2, von Rickenback said Parexel is leading the CRO industry trend toward strategic partnerings, in part because of the global reach it can offer. "The ability to shift our internal business activities to optimal cost locations around the world will also allow us to improve our operating leverage and ultimately our margins," he said.

Clinical Research Services is one of three, and by far the biggest in terms of revenue generation, divisions within Parexel, with a core focus on conducting Phase III clinical trials. Its geographic reach spans 71 locations in 52 countries, with an ability to recruit patients and run studies in roughly 100 nations, von Rickenback said.

A key factor in Parexel's favor is the access it can offer to emerging, non-traditional markets, he added, noting that outsourced drug development is undergoing a geographic shift. "The developed health care markets of the U.S. and western Europe are fairly saturated in terms of clinical research and there is intense competition for patients in many therapeutic areas in those geographies," said von Rickenback. "Emerging markets, by contrast, often provide easier, faster and more efficient patient accrual at lower costs."

More Strategic Partnerships In The Works

Parexel works with all of the 50 top pharma companies, along with the top 10 biotechs, and has strategic partnerships with several, including Bristol-Myers Squibb, GlaxoSmithKline, Eli Lilly and Merck. The Pfizer pact goes into effect this month, will be implemented over the next 18 to 24 months, and the estimated impact of the deal factored into the company's 2012 guidance, he said.

"We have also several other strategic deals with large and mid-sized pharmas that have not been publicly disclosed and several others - potential relationships - that are still in the works," von Rickenback added. "Strategic deals have some traits in common: working collaboratively with the client on project design and utilizing study startup and patient recruitment tools result in fast cycle times. Often, ultimately ... this helps the client get to market faster, which is a goal we all have."

He noted that the CRO industry's growth is being driven by unprecedented scientific, competitive and financial pressures facing the biopharmaceutical industry at present. In particular, among the large caps, patent losses and deep cuts in R&D infrastructure and staff are pushing companies to externalize many R&D activities and to rethink what is core and what can be outsourced. For instance, earlier this year Pfizer shuttered its Sandwich, U.K., operations. These factors are causing companies to alter the way they approach nearly every aspect of their business, especially R&D.

Parexel estimates about $77 billion was spent industry-wide on drug development activities in 2008, the most recent year for which it has full data. Of that total, $20 billion was outsourced. Of that, $11.5 billion was spent on clinical studies in phases I through IV. Von Rickenback says he perceives three key reasons why those outsourcing figures will only continue to grow.

The first is that many companies are focusing less on developing new blockbusters and more on specific disease areas, looking to move larger numbers of compounds through discovery and development. "Larger numbers of compounds demand an R&D strategy that focuses on core competencies ... identifying the compounds with the best potential and then turning over the large-scale, late-stage clinical trials to process specialists," he asserted.

The second reason is that outsourcing to a global CRO gives sponsors access to new countries without needing to invest in their own global infrastructure. A final factor in favor of CROs, von Rickenback said, is the proportion of biopharmaceutical intellectual property held by small and mid-sized firms, which he estimated at about 60%.

"Often, [these companies] lack the in-house experience and resources to develop and commercialize a product inside and, so again, outsourcing for them to a global CRO like Parexel in particular is a good decision," he said. "We believe that the combination of these trends will result in continued growth in outsourced R&D spend and a corresponding increase in CRO market penetration. The shift among large pharmas to keep outsourcing is another important trend."

-Joseph Haas ([email protected])

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