Full service deals between top CROs (contract research organisations) and big pharmaceutical firms raised questions about the health of the FSP (functional service provider) model. However, in recent weeks evidence of continued sponsor and CRO interest in the FSP model has emerged.
“The FSP model is alive and well”, Tim Evans, senior analyst at Wells Fargo, wrote. Evans was writing after inVentiv made its $50m (€38m) offer for Kforce Clinical Research (KCR). The takeover added weight to reports of the resilience of FSP emerging from discussions at Partnerships in Clinical Trials.
Andrew Townsend, vice president of alliances at INC Research, told Outsourcing-Pharma it was on the brink of a big FSP deal with an unnamed company and analysts also noted continued interest.
John Kreger, equity analyst at William Blair, wrote: “There is still plenty of momentum for functional deals, particularly among the top 20 pharma segment, with Eli Lilly, Merck & Co, and Sanofi as three notable examples.”
Townsend said INC views FSP as an opportunity, in part, because low margins discourage some CROs from pursuing these deals. Kreger corroborated this by writing that the emerging FSP contracts “are being priced at a lower gross margin threshold”.
Offsetting the low margins is the expectation that CROs will face less cancellation-driven volatility than in traditional deals. Stability is further enhanced by longer contracts, upwards of four to five years, Kreger writes.
Replacing Pfizer
INC and inVentiv, both of which are trying to buy a seat at the top table, are keen on the model. Both have strengthened in the area through acquisitions, namely Kendle and KCR, and seem to view their capabilities as a differentiator from other leading CROs.
Kendle and KCR both did a significant amount of FSP business with Pfizer but seem to have lost out in its vendor consolidation process. Pfizer accounted for half of 2011 sales at KCR but is now moving work to other vendors. KCR said Pfizer may complete the transition by the end of the calendar year.
Loss of the Pfizer account is expected to result in sales at the unit falling by one-third year-on-year to $70m (€53m). This figure includes expected contract expansion efforts by inVentiv, which already has some FSP capabilities.