Drugmaker ills to drive growth, deals in lab sector

By Deepa Seetharaman

NEW YORK (Reuters) - A strong five-year run by companies that specialize in pharmaceutical testing shows no sign of slowing as struggling drug makers farm out even more business to them in a trend that should drive consolidation.

Drug companies stand to save millions of dollars by outsourcing clinical trials to little known contract research organizations, or CROs, because that lets them avoid hiring researchers and building laboratory space of their own.

Some 25 percent of all pre-clinical drug testing is already outsourced to CROs. Faced with stringent regulations, mounting patent expirations and sinking sales and profits, drug makers are expected to rely on CROs more heavily in years to come.

"We will get to 50 percent in three years," said Isaac Ro, analyst at Leerink Swann. "We're in the first two, three innings of significant outsourcing."

Outsourcing of clinical trials is also expected to double within five years, Ro said. In 2007, late-stage development accounted for about $9 billion in CRO revenue and early-stage trials represented about $4.5 billion.

The strong outlook has helped lift shares of CROs like Covance Inc and Parexel International Corp despite the turmoil in the stock market this year.

In the next three years, analysts expect to see a wave of consolidation as larger CROs absorb more specialized companies to boost their capacity to run trials and test drugs. Larger and more diversified CROs will likely see drug companies divest portions of their business to them.

"Drug companies' budgets are under quite a bit of pressure," Jefferies analyst David Windley said. "That pressure contributes to strong outsourcing."