The milestone was passed at the end of 2010 following years of rapid overseas growth at the top five public contract research organisations (CRO). From 2002 to 2010 sales outside the US grew 302 per cent as the big CROs added scale in emerging markets to handle larger outsourcing deals.
“We believe an extensive global footprint is a differentiating characteristic in a market moving to more strategic relationships with fewer partners”, Eric Coldwell, equity analyst at RW Baird, said in a report. Coldwell covered PPD, Covance, Parexel, Icon and Charles River Laboratories in the research.
US growth at all five CROs trailed overseas operations but the details vary between companies. For example, Icon grew non-US sales by close to 1000 per cent over the eight year period, whereas at Covance the increase was under 200 per cent.
Parexel generates the largest proportion, 65 per cent, of revenue outside the US. Covance, tied with PPD, is most reliant on US revenue but it still made more sales, $845m (€580m), overseas than its peers.
Growth through M&A
Acquisitions drove growth outside the US. “Much of the [overseas] growth exhibited by covered CROs is the result of [acquisitions] and is not indicative of total market growth, but the clear signal is that leading CROs see international expansion as a key initiative for long-term success”, Coldwell said.
Larger, global CROs with strong capabilities have “a key competitive advantage”, Coldwell said, and this will drive a shift in market share. In April, David Windley, equity analyst at Jefferies & Company, predicted the leading CROs will have captured close to half the market by 2015.
Last year acquisition activity at public CROs stalled after a busy 2009 in which CROs “invested in [information technology] infrastructure, new service offerings, quality improvement initiatives, and geographic expansion to support future growth”, Coldwell said.
In 2011 private CROs, notably INC Research and inVentiv Health, have expanded through acquisitions but Icon’s takeover of late phase specialist Oxford Outcomes is the only deal by a public player. This could change before the end of the year.
“We expect CROs to redeploy excess capital to make acquisitions”, Coldwell said. Public CROs had $1.24bn in cash and equivalents at the end of the second quarter and Coldwell “would be unsurprised by additional strategic and/or bolt-on acquisitions throughout the course of the year”.