ANALYSIS-Slowing growth push CROs to specialization, new markets

* Specialized service offerings to help CROs differentiate

* CROs push harder into emerging markets for future growth

By Esha Dey

BANGALORE, March 24 (Reuters) - Their days of blistering growth behind them and facing a slide in bookings and revenue, U.S. outsourced drug-research service providers are striving to stand out in a crowded space through increased specialization and a push into emerging markets.

The contract research organizations (CRO) have to look to these strategies as clients seek low-cost options to revive their pipelines, which had shrunk through trial halts and cancellations during the economic slowdown.

"(CRO) clients are asking for unique services, unique capabilities, differentiated capabilities; they want CROs that are not only able to manage the brawn of the drug development process but also (have) the brains to design and control the process," Robert W. Baird & Co analyst Eric Coldwell said.

The broad trend in specialization is for the bigger, mostly public, CROs to deepen their skill and expertise in particular stages of drug development, while smaller firms try to offer specialized, niche-market services based on therapeutic areas.

Preclinical and early-stage research providers like Covance Inc (CVD.N) and Charles River Laboratories (CRL.N) are investing heavily in drug discovery services, while Pharmaceutical Product Development Inc PPDI.O is deepening its expertise in infectious diseases and vaccines.

"Prior to the regulatory studies, companies do smaller tests in specialized models to see if the drug in a live system shows some tendency towards what they hope it to do, Jefferies & Co analyst David Windley said.

Windley said Charles River and Covance have begun migrating backwards for these studies.

John Ratliff, chief operating officer at privately held Quintiles -- one of the largest players in the space -- agreed that increased specialization can help the company win more clients as "biopharma companies want to work with an ally that brings intellectual capital to the table."

"Therapeutic specialization is an extremely important point of differentiation for Quintiles," Ratliff said.

Another model being tested by a few research firms is "risk-sharing," where CROs put up their own capital or commit to trial outcomes.

Wells Fargo Securities analyst Greg Bolan, who expects the U.S. CRO market to reach around $20 billion to $22 billion by 2015, said the risk-sharing model has been handled successfully by CROs like Icon Plc (ICON.I) (ICLR.O) and Quintiles.

Still, specialization will not come at the cost of abandoning traditional coverage areas for the CROs.

"The long term winners are going to be the ones that are not only global and capable of providing all the traditional services, but also have specialized facilities, techniques and services that are more unique and have higher barriers to entry," Baird's Coldwell added. MERGERS IN EMERGING MARKETS As the big, global drugmakers eye emerging markets as the future growth engine, CROs are looking to grab a share of that.

"Pharma is desperate for growth, and where are pharma markets growing right now? It's Eastern Europe, the southern hemisphere and the Asia Pacific region," William Blair analyst John Kreger said.

Large, concentrated populations, access to patients where certain diseases, like malaria, are widespread and an opportunity to run trials in markets where there is a rising demand for medicines, are the main reasons behind the growth of these markets, Quintiles' Ratliff said.

And acquiring smaller peers in these markets or setting up infrastucture is the best way to tap into the growth space, analysts argue.

"Joint-ventures and alliances just don't work. When drug companies are looking to outsource globally they are not interested in a U.S. CRO that partners with a Finnish CRO. That doesn't get you anywhere," Baird's Coldwell said. In 2009, Covance expanded into markets like Ukraine, Slovakia, Brazil, China and India, among others, while PPD acquired two China-based CROs and opened offices in India and the Philippines.

Quintiles, which already has a big presence in emerging markets, said it expects its Asia business to double by 2015 or 2020, and acccount for about 30 percent of its total business.

Charles River's CEO James Foster said while emerging markets are not expected to have a big impact operationally in the near term, they are of tremendous strategic importance to the company as the future growth area.

"I wouldn't want to be a pure-play, non-differentiated, U.S.-based CRO. That is not the place to be today. You definitely need to see growth in emerging markets," Baird's Coldwell said. (Reporting by Esha Dey in Bangalore; Editing by Jarshad Kakkrakandy)