Trends and challenges facing middle market life sciences services companies

ARTICLE | April 18, 2023

Authored by RSM US LLP

Middle market life sciences services companies such as contract research organizations and contract manufacturers experienced unprecedented growth during the pandemic and are well positioned for opportunity, despite recent market disruptions. Biopharma and biotechnology companies are developing increasingly complex therapeutics with limited resources, so companies focused on contract manufacturing and contract research and development are in high demand. Hybrid clinical trial solutions are also becoming more of a focus for drug sponsors and contract research organizations as they struggle to meet development timelines and increase diversity in trials. 

Challenges that continue to weigh on middle market life sciences services companies include:

• Funding – Limited public funding for clinical research, technology and innovations that could help speed up product development and launch. Private equity and venture capital investment, as well as mergers and acquisition, remain robust.
• Labor – Ability to recruit and retain highly qualified talent, especially given the need to keep compensation aligned with inflation.
• Delays – Significant delays in completing clinical trials, meeting enrollment requirements and recruiting diverse participants.

High interest rates continue to result in uncertainty in the marketplace

Rising inflation, high labor demands and costs, and an overall uncertain economy are resulting in public biotechnology companies maximizing their cash runways and focusing only on essential clinical research, drug development and product manufacturing. CROs are being asked to scale and face pressure to keep their fees down while labor costs rise.

“High interest rates lead to uncertainty in the market, resulting in investors and drug sponsors lowering investment in new technologies. Currently, the market is favoring cost and quality over the speed of drug development, clinical trials and manufacturing,” said Justin Culbertson, RSM senior analyst for the life sciences industry. “The industry is coming out of a period of some of the highest funding in its history and continues to see significant demand, so growth in therapeutics and clinical research is still projected despite current headwinds.”

Recruiting and retaining top talent is more complex than ever before

“Labor and talent retention continues to be a challenge. A lot of middle market life sciences services companies are using strategies like providing one-time retention bonuses to key talent,” said Culbertson. “While turnover in the life sciences industry is lower than in most, it is important for companies to focus on retaining their top talent and keep quality and business continuity top of mind. In the current economy, it is particularly important to ensure that compensation changes are also keeping up with inflation.”

Only five in 5,000 drugs that enter preclinical testing progress to human clinical trials and ultimately make it to market. While small biotechnology companies often fold or have significant layoffs when an investigational product fails, talent is generally able to find new employment relatively quickly.

Demand for clinical research remains strong despite evolving challenges

There are more than 16,000 clinical trials active today in the United States. Over the past 10 years, the average length of a phase 3 clinical trial has increased from two to three and a half years. Clinical trials are taking longer and longer to be completed based on several factors. As the industry focuses more on biologics, cell and gene therapies and rare disease treatments, drug development and manufacturing processes are becoming increasingly complex. Additionally, as clinical trials become more complex and unemployment rates continue to be low, CROs are in high demand and raising their fees.

Drug sponsors are still mainly conducting clinical trials in outdated models designed for small cell molecules based on well-established experts and timelines, dependency on brick-and-mortar sites, and stringent regulatory requirements. Decentralized clinical trial companies and services are transforming how clinical research is conducted by replacing archaic manual processes with automated systems and consolidating services into single management platforms.

The pandemic and other factors resulted in both the U.S. Food and Drug Administration and the industry overall putting the importance of diversity in clinical trials front and center. Traditional clinical trials rely on major academic centers, requiring trial participants to live in or travel to metropolitan areas for treatment and monitoring at brick-and-mortar sites. Both this and labor shortages in the industry limit participation from diverse and underserved communities.

“Biotechnology companies are increasingly taking a hybrid approach to clinical research that introduces technologies and solutions to solve for geographic and demographic barriers, speed up enrollment, and keep participants engaged throughout clinical trials,” said Culbertson. “Most drug sponsors are enlisting the help of CROs and contract manufacturers to meet more complex trial requirements, putting increased pressure on contract organizations to show how they can scale their work to meet new and increased demands.”

Gain additional insights by reading our life sciences services outlook.

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This article was written by RSM US LLP and originally appeared on 2023-04-18.
2022 RSM US LLP. All rights reserved.
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