So far Icon, Parexel and other leading CROs have scaled quickly but organically to meet the increased demand from strategic deals, leaving consolidation to mid-tier players seeking turbocharged growth. However, reports of a skills shortage, particularly in the US, could drive big CROs to seek mergers.
“We suspect that this shortage of personnel may drive continued consolidation as large CROs strive to find enough personnel to honour their commitments to strategic clients,” John Kreger, equity analyst at William Blair, wrote after attending DIA 2012 this week.
The skills shortage stems from hiring at CROs like Parexel and Icon, which have both added 1000 staff in the past year to serve Pfizer, and could, if it threatens the strategic partnership model, drive M&A.
A lack of skilled staff is a possible threat to the health of existing deals and the likelihood of entering into more alliances. Icon, Parexel and others continue to show an appetite for more deals and there are signs there is still plenty of business to win.
“We suspect that as many as half of the world’s midsize and large biopharma companies have yet to announce strategic partners, and of those that have, we believe many have only done so for a portion of their R&D structure,” Kreger wrote.
The ability of a CRO to win and effectively execute this business is dependent on having skilled staff in place. If CROs are unable to find enough staff through normal hiring processes they may look to takeovers to add scale.
Last year there was a steady stream of reports saying mid-tier CROs, such as PRA and Chiltern, were up for sale but the buzz around deals has slowed in 2012. However, many of the CROs reportedly on the market last year are still at the same owners so there is a ready pool of possible takeover targets.
Mid-tier movers
Much of the consolidation in 2011 was initiated by two private equity-backed CROs – INC Research and inVentiv Health. Observers, from credit rating agencies to rival CROs, have doubted the model, particularly the ability to integrate, but there are encouraging signs emerging from the new CROs.
“These private companies are winning strategic clients – including some of those that are the result of recent combinations – and so far, appear to have integrated more quickly than we would have expected,” Kreger wrote.
Kreger is “surprised” by the speed at which the CROs have won business and, while concerns about maintaining quality remain, the integrations appear to have been executed better than expected.
Speaking to Outsourcing-Pharma.com in March, Andrew Townsend, vice president of alliances at INC, said the company lacked “the luxury of time” when integrating Kendle so moved “very, very quickly.” This involved making some hard decisions but the process has gone “very well”, Townsend said.