Why are CROs not fully benefiting from the biotech recovery?

Biotech is back. The XBI has surged 89% in the past year, reaching levels just below its early 2021 highs. The reasons are complex and multifaceted, but at its core the run has been driven by stabilizing interest rates and a resurgence in pharma M&A activity. So far, Biotech deals amounted to USD106bn in H1’26 as the industry faces a USD300bn patent cliff this decade.

In theory, a recovery in biotech would translate into stronger clinical trial activity and thus increased demand for Contract Research Organization (CRO) services tasked with managing these studies. However, it’s not so simple. 

• Most Biotech companies don’t generate revenue, let alone a profit, and burn significant amounts of cash to fund R&D. To raise funds they can look for external funding, but as interest rate declines stabilise, access to capital remains restricted. Biotechs can use equity raises, but this dilutes ownership and alters spending behaviour. Thus the pace of Biotech pipeline expansion is not keeping up with Biotech valuation growth. 
• Large pharma sponsors are acquiring biotechs with existing pipeline programmes, not necessarily adding de-novo programmes to the industry’s overall pipeline - there is simply a change in ownership. To the CRO, a pharma company acquiring a biotech does not change the number of studies they necessarily have to run (at least initially)
• Large pharma are also managing tighter budgets due to the aforementioned patent expiries on blockbuster drugs and shifting regulatory pricing pressures in the US. To protect margins they’re delaying non-essential projects by 4-6 months, demanding lower prices from vendors, and even changing their outsourcing model. 

This creates an industry paradox. Capital is flowing into the sector via M&A and high-profile asset acquisitions, but this liquidity is not translating into a high volume of individual trial starts. Instead, the actual number of active mid-market clinical trials is shrinking, creating an immediate volume bottleneck for mid-sized CROs.

Soft backlog illusions & margin compression

On paper, the CRO sector outlook appears relatively robust, with investors traditionally viewing CRO backlogs, the total value of signed contracts for future trials, as a key measure of future revenue visibility. 

However, Third Bridge experts say that sector revenue visibility for 2026 is being obscured by "soft" wins that may overstate the quality and conversion of reported backlogs. Sponsors are increasingly downsizing their commitments shortly after signing letters of intent. As one Third Bridge expert noted, a 20 million dollar booked award can ultimately translate into closer to 12 million dollars in realized billings by the time the project concludes.

At the same time, intense competition for a smaller pool of projects is forcing CROs to cut prices and offer more flexible terms to secure new business. These significantly discounted front-end bids can require 6-12 months of execution before CROs begin to realize acceptable margins, which is straining cash flow across the whole industry.

The case of Syneos Health: Operational vulnerabilities

Broader industry pressures are creating operational challenges across the CRO sector, with scaled, highly leveraged providers such as Syneos Health showcasing these vulnerabilities. 

As an earlier attempt to insulate itself from cyclical market pressures, Syneos Health launched Syneos One, an integrated model designed to span both clinical development and commercialisation. The strategy aimed to generate pull-through revenue across the product lifecycle while creating cross-selling opportunities between its clinical and commercial businesses. However, experts we spoke with questioned the effectiveness of the model. 

Clinical and commercial budgets within pharmaceutical companies remain largely siloed, with limited coordination between the teams responsible for each function. As a result, winning clinical work does not necessarily translate into commercial contracts. Some experts cited instances where multiple RFP wins failed to convert into funded contracts over a 12-month period.

Furthermore, Syneos may face challenges competing for certain biotech customers due to its limited ability to offer the risk-sharing pricing arrangements that some emerging biotech companies increasingly favour. This pressure, combined with outdated technology platforms, has contributed to a reactive operating culture focused on short-term revenue preservation. According to experts, this environment has intensified employee turnover among senior clinical research professionals - a critical metric in the CRO space, as high staff attrition directly triggers project execution delays and strains client relationships.  

Operational instability has become a growing concern, with some experts pointing to the potential need for a divestiture of the commercial division or broader structural changes as the company seeks to address its financial challenges. 

The case of Fortrea: Mid-tier CROs feel the margin squeeze

According to Third Bridge experts, the demand environment for CRO services has weakened incumbent pricing power. Experts indicate that mid-tier CROs are discounting their baseline full-service billable labor rates by 10% to 15% simply to remain competitive in request-for-proposal (RFP) processes against larger incumbents.

The challenges facing mid-sized CROs are reflected in their performance, with Fortrea serving as a good example. Third Bridge Experts say that the company’s headline revenue growth may be masking underlying margin pressure. Fortrea’s top line has benefited from higher inflation-driven pass-through costs - essentially reimbursement for clinical trial sites, investigators and patient expenses - which are billed directly to sponsors but offer limited margin contribution. 

Effectively, Fortrea’s earnings are tied to their higher-margin billable services such as clinical monitoring, biostatistics and data analysis. However, pricing increases for these services remain constrained by legacy contracts that limit annual adjustments, often linked to Consumer Price Index(CPI), leaving Fortrea with less flexibility to offset rising labour and operating costs.

At the same time, the traditional CRO model of expanding margins through trial modifications and change orders in the later stages of a trial has become more challenging. As pharmaceutical companies face tighter budgets, sponsors are pushing back against additional charges, limiting Fortrea’s ability to expand pricing and leaving legacy contracts locked into compressed, lower-margin profiles. 

The company is further burdened by higher costs associated with replacing its legacy lab-based systems. The simultaneous transition away from its former parent company's IT infrastructure, known as Transition Services Agreements, and implementation of a complex new standalone ERP database system have created significant operational friction. 

Conclusion

In conclusion - despite a buoyant Biopharma sector the reality for CROs is that the operating environment remains challenged. Uncertain backlog conversion, persistent pricing pressure, and tighter sponsor spending continues to limit the pace of recovery.

In the near-term, as mid-tier players navigate margin compression, we hear giants like IQVIA are benefiting from a market flight to quality. Large pharma sponsors are increasingly consolidating their business with market leaders that have advanced data and software capabilities. 

Whilst AI harbours the potential to combat sector-wide margin traps by optimizing trial design, automate biostatistics, and significantly accelerate patient recruitment timelines, as with all things AI, one must cut through the noise. Third Bridge experts emphasize that meaningful deployment remains a near-term challenge and not the panacea that some hope for.

Relevant transcripts:

1. 2026/02/11 Biotech Spending, Soft Backlogs & CRO Commercial Trends – Are Project Wins Truly Generating Cash?
2. 2026/02/05 Fortrea – Decoding the Biotech Rebound & the Future of Flexible Outsourcing
3. 2026/02/02 Syneos Health – Commercial Strategy, Restructuring Impact & Competitive Positioning

All insights in this article are based on information provided by Third Bridge experts. 

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