CRO pricing power remains ‘elusive,’ analyst says
Top pre-clinical and early phase CROs, including Charles River Laboratories (CRL), have remained cautiously optimistic in recent earnings calls and investor conferences of their ability to raise prices as demand strengthens.
“Charles River’s capacity has continued to fill, and we believe our current utilization rate surpasses the preclinical industry average,” CRL spokeswoman Susan Hardy told Outsourcing-Pharma.com. “We have opened a small number of study rooms in the last year to accommodate the increasing demand for our safety assessment services... Pricing has been relatively stable for the last two years, with some slight signs of improvement as industry capacity utilization has improved.”
Similarly, Brian Cass, CEO of pre-clinical CRO Huntingdon Life Sciences, told us earlier this month that higher capacity utilization is driving prices upward, though he was cautious in his assessment of the landscape, noting that the company sees “some directional movement, but it is difficult to make any specific claims.”
Citi Research Garen Sarafian, writing in a note to investors, questioned why CROs’ “pricing power remains elusive with lukewarm commentary by most CROs in their ability to raise price,” given that capacity utilization has been cited to be in the 70-75% range.
“We increasingly question industry capacity metrics in the 70% range when the stubbornly persistent lack of pricing power among most participants remains,” Sarafian told investors.
Still, he said he’s “encouraged that the tone hasn’t deteriorated yet puzzled why pricing remains stagnant.” He added that there’s “more value in clinically focused CROs,” such as Quintiles and Parexel.
Other mid-size, later-phase CROs that don’t rely on fixed amounts of space for running trials also don’t seem to be seeing any upturn in pricing power.
Jeff Williams, CEO of Clinipace, told Outsourcing-Pharma.com: “We have not changed our prices for 2015,” though he also noted that Clinipace doesn’t have capacity to fill as the bulk of its costs are for hiring experts.
“What we’ve been experiencing in our segment is higher demand – all CROs are doing well on new bookings,” Williams added, noting that there could be an increase in labor costs as a result of the increased demand, which ultimately would have an impact on pricing but that has yet to occur.
And as for strategic partnering, Williams said he’s encouraged by it because it usually drives small and mid-sized clients to mid-sized CROs like Clinipace. “Fifty percent of outsourcing still goes to the non-big boys, so there’s plenty of work for mid-tier CROs,” he added, noting there’s still likely to be consolidation.
