With between eight or nine CROs in the top tier – including Quintiles, Parexel and Covance – and another ten to 12 CROs in the middle tier, many of the companies are doing whatever they can to differentiate themselves, David Blume, co‐founder and managing director of the New York investment bank Edgemont Capital Partners, told us.
“Consolidation will eventually happen,” Blume said. He said Covance has a strong brand name, but has a late-stage program that is “decidedly smaller” than its top competitors. Scale and global reach are two assets that could differentiate some of the top companies, he said.
Neil McCarthy, managing partner at the investment bank Fairmount Partners, told us that consolidation is nothing new in the industry, noting all of the top CROs are looking for acquisitions, though Covance and Parexel seem less interested or willing to make larger deals.
Consolidation “has been the nature of the CRO business” for nearly 20 years, McCarthy said.
Private Equity’s Influence
One of the more recent trends in CRO consolidation is the influence of private equity (PE) companies, McCarthy said.
PE companies want “to invest in CROs, hold for between three and five years and then sell,” he said.
He gave the example of PRA International, which indicated its plan to go public recently with a confidential SEC filing. McCarthy said the confidential filing may be further indication that PRA is looking for other private equity ownership rather than actually wanting to go public.
If Genstar Capital, the PE company that owns PRA, decides to actually take PRA public, they would “then have the biggest ownership of a fragile, newly minted company,” whereas if they can sell to another private equity company, such as Hellman & Friedman, “they can get all of their money out and don’t have to worry,” McCarthy said.
Another classic example of private equity’s interest in acquisitions in the CRO industry is with inVentiv, McCarthy said, noting that Thomas H. Lee took the company private after purchasing them for about $300M, and then proceeded to combine them with i3 research, the management consulting firm Campbell Alliance and Pharmanet. THL could sell inVentiv now and make a significant profit, McCarthy said.
CROs are attractive to PE companies because their pharma partners “are consistent and pay their bills” and CROs can generate “excess cash, and can pay down a lot of debt,” he noted
Mid-sized CROs and Strategic Partnerships
But private equity may not be the sole or even the main reason for the consolidation in the CRO industry.
“Private equity interest is a symptom not a cause,” David Windley, an analyst at Jefferies, told Outsourcing-Pharma.com. “The consolidation is first and foremost a function of the biggest customers saying they only want to work with a few of the largest, most global CROs.”
These longer and more costly strategic partnerships between CROs and sponsors are “more efficient and cost-effective for” sponsors looking to manage three vendors rather than 15, Windley said. He noted that in some cases it’s turning into “beauty contests to narrow down to a few vendors,” whereas previously some of the medium-sized CROs “could get a few bread crumbs from bigger sponsors. So the push is to get bigger to be more legitimate for these customers.”
Recent examples of mid-tier CRO consolidation that could be an indicator of the future includes PRA’s takeover of Clinstar, Charles River’s stake in China-based Vital River and Accelovance’s purchase of Radiant Development.
But Windley stopped short of calling this consolidation among medium-sized CROs a trend. “My hesitation is to say that it’s a big trend – I think the trend is accelerating and these trends have happened for at least a decade,” he said. With as many as 1500 CROs worldwide, “we’re a long way from being truly consolidated,” he added.
Adaptation
Mid-sized CROs may also adapt and not simply be forced into consolidation. “The mid-sized companies will react to changes in the marketplace like everyone else does,” Edgmont’s Blume said. They could target mid-sized pharma and biotech companies and find their own niche in the market, he added.
In terms of other acquisition targets for CROs, Blume said regulatory consulting firms, medical device and specialty CROs focusing on oncology may all be top acquisition targets because expertise is a hot commodity. A prime example of such an acquisition is Parexel’s purchase of the consulting company Heron for $24M in cash last month.
Fairmount’s McCarthy added that CROs with a more global presence, especially in the MENA (Middle East and North Africa) region and other parts of Asia outside of India and China, such as Indonesia, or South Africa are becoming more attractive for pharma companies to run trials.