As an Oscar-winning 2022 movie noted about another kind of ubiquity, artificial intelligence is now “everything, everywhere all at once,” and that includes North Carolina’s multi-billion dollar clinical research outsourcing industry.
Early applications are basic, such as identifying potential drug therapy candidates and patient populations, accelerating clinical trials and general paper shuffling. But that is likely to change.
“Our industry is in the same place as most people with AI,” says Paul Evans, CEO of Durham-based Velocity Clinical Research, which has grown to become one of the state’s largest private companies in recent years. “We’ve seen a step change. Everybody started with efficiency gains, back office functions. Then you move on to how you use AI to transform the industry.” As to the latter, Evans says, “We’re not there yet.”
Given rapid advances in technology, a more radical transformation may be coming. Joachim Bleys, a senior partner at the consulting firm McKinsey, says AI will help drug companies lower administrative costs and accelerate their trials through enrolling patients more quickly and making better use of data. “For earlier stage research, we see AI truly transforming the quality of assets that make it into the clinic, drastically changing time to market and also probability of success.”
Because AI is moving so quickly, the challenge for industry is determining potential
benefits and “how do you harvest that potential,” Evans says. “That’s not easy to discern
at this point.”
COVID SPIKE
The story of the clinical trial research outsourcing isn’t a page-turner; it’s an industry that operates largely behind the scenes. Its roots trace back at least to 1753, when Scottish physician James Lind’s controlled trial examined whether citrus fruit could combat scurvy on a British naval vessel. Spoiler alert: lemons, oranges and grapefruit protect against
the disease.
North Carolina’s CRO industry is of a more recent vintage. Its founding is generally attributed to British ex-pat Dennis Gillings and Gary Koch, who were biostatistics professors at UNC Chapel Hill when they launched Quintiles in 1982. It went public in 1994, reverted to private ownership in 2003, then did a second IPO in 2013. It merged with IMS Health in 2016 to form Durham-based Iqvia, which employs 87,000 people and has a market value of $45 billion.
Another early entrant was Wilmington-based PPD, founded by Fred Eshelman in Maryland in 1985 as a one man consulting firm. He moved to North Carolina the following year and, after a series of ownership shifts, PPD was acquired by Thermo Fisher Scientific for
$17.4 billion in 2021. Eshelman has spun out other companies, while donating more than
$140 million to UNC Chapel Hill.
Iqvia and PPD benefited from an ecosystem that provided both talent through the area’s multiple research universities and potential clients in the form of major pharmaceutical companies located in the Triangle.
Thanks to Iqvia, PPD and others, North Carolina is now at the center of the CRO world with 167 companies and 24,613 employees as of late 2023, according to the North Carolina Biotech Center. The average salary for a clinical research associate in NC is about
$85,000, according to the online recruiting firm, Indeed.
Yet, beyond the reams of data generated by these trials lies the impact on real lives, and on the fortunes of entrepreneurs, venture capitalists, and pharma executives. More recently, the industry has seen some consolidation, along with a steady flow of new therapies and drug trials. And there has been the pandemic.
“If you look at recent trends, the market started to heat up a little before Covid,” says Matt Jenkins, a partner at Raleigh-based private-equity group QHP Capital, which has invested in clinical research groups and affiliated vendors. “There’s a lot of new platforms for drugs, lots of therapeutics being developed, lots of cell and gene therapies. It’s been a sea change, a shift toward precision medicine.”
While the pandemic led to a spike in trial activity, long-term growth is dependent on R&D spending and the willingness of pharma and biotech companies to outsource some of their work, says Truist analyst Jailendra Singh. Both have been moving in the right direction of late. “Overall, research spending is growing around 5-6%,” he says, “with large pharma spending slightly less and emerging biopharma companies at a much higher rate, the low to mid-teens.”
Emerging biopharma companies benefited from robust funding during the peak of the 2020-21 pandemic, but things cooled off in 2022-23, Singh says. “Now, the environment is improving, supporting further investment in R&D and, ultimately, in outsourced drug trials.”
Velocity Clinical’s Evans says, “There’s plenty of capital around. What you need is good ideas to use that capital.”
The numbers suggest the ideas are out there. Biopharma funding gained 56% in the first half of this year, versus a year earlier, according to Truist. Clinical trial starts rose as well, climbing 32% through mid-year, versus 2023. There were 1,077 clinical trial starts in June, compared with 867 starts in May. About 40 or 50 “novel drugs,” which have never been approved, get OK’d annually in the U.S.
CONSOLIDATION AND OPPORTUNITY
The use of outsourcing for drug research ebbs and flows constantly, with McKinsey’s Bleys comparing it to a pendulum swing. “The benefit of working with a CRO is that you don’t have to build a big organization, so you’re not stuck with the cost,” he says. “The disadvantage is that you lose some proximity to your trial site.”
Within the industry, CROs seek to differentiate themselves by scale and by specialization. Big ones argue for the benefits of deep resources and global reach. Smaller- to mid-sized CROs tend to position themselves as having deeper, narrower expertise in specific therapies and patient populations, while offering a better customer experience.
In structuring a trial, big pharma companies have the luxury of using their own resources or outsourcing. “Biotech (companies) are not interested in building their own in-house capabilities,” Bleys says. “They’re always going to work with a CRO.” That creates the opportunity for smaller companies to step into the role of “adviser to the CEO, and a true partner. The drug succeeding or failing is the most important thing that’s going to happen. If the drug fails, your biotech company is gone.”
The combinations involving Iqvia and Thermo-Fisher Scientific have consolidated the industry, but also opened doors for smaller, nimble companies. “Because the top seven or eight CROs have so much market share, about 70%, it’s a huge opportunity to take market share from the incumbents,” says Evans. “Smaller biotechs and smaller and mid-sized pharma are always going to look at (the trial process) and say we don’t get enough attention. That’s been the story in the industry for 30 years.”
A February industry survey from Worldwide Clinical Trials found that “pharma and biotechs favor midsize contract research organizations due to personalized service” and concerns about high development costs, among other reasons. That Worldwide is itself a midsize CRO makes the finding unsurprising, but it flags what some see as a trend.
“What we have clearly heard from some of the larger sponsors is that they are feeling disenfranchised,” says Sara Davis, executive vice president and chief commercial officer at Durham-based Worldwide. “They’re not feeling they’re getting that customer service when issues arise.”
As a result, she says, “The criteria by which some of the larger sponsors are selecting CROs has changed. It has been quantifiable, numbers-based. (Now) our larger sponsors are asking ‘How do you innovate? What differentiates you? How are you going to grow with the partnership?’”
Bigger pharma companies are definitely outsourcing more, says Jenkins. “It just makes economic sense. You’re going to see a lot more specialization as the complexity of therapies rises,” he adds.
But the big CROs aren’t standing still. “Iqvia, Icon, the big guys, they have historically been focused on large pharma, but now they’re expanding to emerging biopharma and mid-size pharma companies,” says Truist’s Singh.
Adds Evans, “All of the big CROs have tried to adapt by creating business units that focus on those smaller companies. Whether that’s effective is an open question, but they recognize the challenge they face and are trying to address it.”
PRIVATE EQUITY SHOWS UP
The CRO industry has historically seen the kind of steady growth that tends to attract financial buyers. “When you look at funding trends, it’s important to look at the last five or 10 years, and not just the post-pandemic period,” says Jenkins. ‘The nature of clinical research is that it is increasing in both quantity and sophistication and that’s driving the need for specialized outsourcing.”
Broadly speaking, there are two kinds of acquirers in any market – strategics, generally competitors looking to add to a portfolio of products or services, and financials, with capital to deploy and a goal of maximizing returns for investors.
QHP’s Jenkins says that, over the past five or six years, there has been a “significant appetite for CROs in private equity. There are a lot of these bigger players rolling up the smaller and mid-sized companies.” As to the financial buyers, “(They) are all over the map in terms of small, medium, and large (CROs),” he says. “There’s definitely a lot of consolidation, especially in the middle tier. I don’t expect that to stop any time soon.”
Because of the M&A activity, there are only about five or six “pure play” publicly traded CRO companies, Jenkins adds. “I think the public markets have an appetite to see more of
these companies.”
The industry continues to create new companies, including various suppliers. “There are a lot of people who have made their careers here (in North Carolina) in CROs and that creates a lot of spin-out services,” he says. “The nature of clinical research is (that it is) increasing in both quantity and sophistication and that’s driving the need for outsourced services, more CROs and deeper levels of expertise.”
IMPACT OF AI
One issue for further expanding the reach of AI into the industry is data quality. “Having good data sets, first to train AI and then to learn, is not so easy, especially when you’re talking about patients (and electronic medical records),” Evans says. The records are “only as good as what the physician put in there. There’s a lot of data around, but it’s not clear what the quality of that data is.”
“Theoretically, AI can do a really nice job to find patients who fit (a trial),” says QHP’s Jenkins. “If you have good data and lots of it, AI can find very interesting things that a human won’t necessarily find at first glance. It’s not there quite yet, but you
will see more and more adoption of AI earlier in the drug discovery process.”
AI may favor the larger companies, who can call on global datasets to train their algorithms. Evans isn’t so sure. “None of us know yet how the AI industry is going to evolve. Are there going to be AI vendors who are industry agnostic or is it expertise that you have to bring in-house? The answer is probably both.”
So the pendulum will continue to swing with one thing seeming certain: Drug development is unlikely to become less complex. That should be good for North Carolina’s CRO industry, large, small or in-between.
In North Carolina’s clinical research industry, Velocity Clinical Research is among the compelling rapid-growth stories.
Incorporated in late 2017, the company initially grew by buying regional U.S. sites, but has expanded globally more recently. It was the only company that conducted trials for all of the pharma companies included in the Operation Warp Speed program to help accelerate research of drugs to fight the coronavirus. By 2021, it operated 14 sites in 11 states.
Velocity was initially backed by an investor group led by Washington, D.C.-based NaviMed Capital, which sold the business in 2021 to London-based Global Healthcare Opportunities for about $500 million, according to PE Hub, an industry publication. GHO has invested more than $5 billion in about 24 companies over the past decade.
Three years later, Velocity has 90 sites in the U.S., United Kingdom, Germany and Poland, and a database of more than 1 million patients. It also established a tech hub in Hyderabad, India to develop proprietary patient recruitment and engagement technology. Inc. magazine ranked Velocity as No. 543 on
its list of the 5,000 fastest growing U.S. private companies in 2023.
Leading that growth since 2018 is Paul Evans, who had spent the previous 26 years at various clinical research groups including Parexel, Iqvia and Synexus. He has a Ph.D. in biomedical engineering from the University of London.
In July, Velocity hired Mike Zaranek as chief financial officer, a post he previously held at Morrisville-based Science 37, which went public in 2021. Velocity is considering a potential IPO, Axios reported in May. The company has declined to comment on that report. ■
