Disruptive forces made Clinical Research Organisations(CROs) looking at all options to boost growth and competitiveness. In one hand CRO industry under tremendous pressure to constantly increase efficiency and drive innovation in their operations on the other hand many Pharma companies are also looking forward to CROs for risk sharing in clinical development of the product.
While organic growth remains an important driver there is an increasing shift toward inorganic growth drivers. Compared to 10-15% in October 2016, 25% of executives now expect growth to come from M&A activity with an additional 21% growth coming from joint ventures and alliances in the next 12 months.
In the last few weeks, several mergers and acquisitions were announced that continue the trend of consolidation in the contract research and development space, as demand for these services has continued to heat up.
- Pamplona Capital Management acquired Parexel International in a $5 billion deal to take the CRO private in June.
- In June, Albany Molecular Research Inc. was acquired and taken private by Carlyle Group and GTCR for $922 billion.
- Chiltern picked up a Japanese CRO Integrated Development Associates in May.
- In May, two of the largest CROs – INC Research Holdings and InVentiv Health – merged in a $4.6 billion deal.
- In 2016, Charles River Laboratories went on an acquisition spree, snapping up other CROs.
- In 2016, Quintiles Transitional merged with IMS Health in a $8.75 billion deal. Together, the company provides clinical research and health information technologies, which goes beyond what’s traditionally considered a CRO.
- Back in 2015, LabCorp acquired Covance in a $6.2 billion deal.
- Recently Labcorp acquired Chiltern in a $1.2 billion deal.
Moving on to the impact, there are several ways to look at how biopharma is (and will be) affected by this wave of CRO consolidation. Lets start with the positive, which is related to the impetus mentioned previously. Simply put, CROs that are in growth mode are typically growing by way of expanding their global reach, which allows for scale and creates cost efficiencies. While some of the small-mid size biopharma companies may not have enough leverage to benefit from such efficiencies, global CROs are sometimes able to pass cost savings down to potential anchor clients (i.e. big pharma). Whether or not they are actually willing to do so hinges on several factors and is a topic for another day.
For most pharmaceutical companies, CRO pricing is not a driving factor in choosing which companies to choose for outsourcing research and services. So, changes in costs for CRO services produced by consolidation won’t have as large an impact as might be expected.
Therapeutic expertise and quality in trial design, enrollment and being able to navigate IRBs are more paramount factors. Most drugs get just one shot at approval, and if the quality of the clinical trial is sacrificed, there’s a long-lasting, if not permanent, impact.
Since pharmaceutical companies are still striving for improved quality and efficiencies in conducting research and running clinical trials, however, it’s likely that growth and consolidation among CROs will continue.
Consolidation will in turn have a beneficial impact on the bottom line for many CROs. In the past, CROs have been formed by clinical entrepreneurs, but as CROs continue to grow and merge, it’s likely that more private equity investors will buy these companies.
As a result, CROs will have more financial resources as well as more business discipline that will appeal to their pharmaceutical clients.
Looking through a more realistic lens, more times than not, consolidation causes disruption. Because of how the CRO industry operates, there is really never an ideal time to integrate. For example, lets say that two large CRO players, each with a fully functioning lab, merge. This consolidation will likely result in a lab (or multiple labs) being shut down in the middle of a running a critical trial. This means that all of the samples, data, knowledge etc. must be transferred to a new site that likely does not have the same level of global standardization as the previous lab. Additionally, what if the new designated site for the trial does not have any available capacity? In short, the new site will need some time to get up to speed and integrate effectively, which almost guarantees an impact on ongoing trials. To no one’s surprise, biopharma clients are never keen to hearing that there has been any sort of hiccup with their multi-million dollar investment.
In terms of drivers for deal activity, strategic growth remains a top priority for boards as CROs look to grow market share and expand into new geographies. CROs will also likely continue to pursue deals that drive scale to maximize reimbursement, ease pricing pressures and improve R&D capabilities in core therapeutic areas. CROs also see M&A as the fastest route to future-proofing their businesses in an environment of technological innovation, digitization and increased competition from outside the sector. This helps explain why joint ventures and alliances are seen as a key component of any inorganic growth strategy.
