PE's unclear role in CRO industry leaves sponsors 'uncomfortable,' says expert

The acquisitions of firms including PPD​, inVentiv​, INC​, and MedPace​ are evidence of recent investment in the CRO industry by PE firms, yet over the last few years pharma pipelines and budgets have been getting tighter.

Therefore, the necessity to ensure quality and efficiency from its CROs is leaving many sponsors hesitant of PE’s involvement in the industry, said Richard Scaife, Chairman of the Pharmaceutical Contract Management Group (PCMG) - an industry group focused on outsourcing that consisting of over 100 pharma and biotech members – mirroring the recent views of Italian CRO Cromsource​.

The role of PE in the CRO industry is “a big unknown amongst our members,”​ Scaife told Outsourcing-Pharma.com, with many feeling “uncomfortable”​ with their presence due to the already risk averse nature of the industry.

“Though the jury is still out,”​ he continued, one thing that has been made clear by sponsors at PCMG’s conferences is the “relationship between the strategic intent of PE management and that of the CRO’s management is pivotal.”​

Exit Wounds​

Sponsors are also worried about PE’s lack of defined role within a CRO, Scaife told us, and the lack of commitment to the industry in the long-term.

However, according to Michael Martorelli - Director of Fairmount Partners, an independent investment banking firm who has been involved in the closure of a number of acquisitions amongst CROs - this fear is due to a lack of understanding about the business of the PE industry itself.

“PE firms are supplying lots of growth capital to the CRO industry,”​ he told us. “Where would firms such as Theorem, Clinipace, Worldwide Clinical Trials, and dozens of others be without that capital?”​

Whether in the short or long term, “PE firms are definitely seeking an eventual exit,”​ and most need to return their limited partners’ funds within seven years. However, Martorelli continued, this does not imply they would stifle the growth and success of a CRO.

“[Some pharma firms] suggest that a PE investor might take actions that would hurt the reputation or quality of their CRO. Taking such actions makes no sense to me, and I don’t see any PE firms doing anything to hurt the business of their CROs.”​

Growing services, in Theorem​

His words were echoed by Jason Monteleone, Senior Vice President & CFO of Theorem Clinical Research, a CRO owned by PE firm Nautic Partners​, who told this publication PE had benefitted both his own CRO and the industry as a whole.

“Clinical research requires innovation and significant investments in our most important assets,” ​he said. “Pharmaceutical and Medical Device companies are some of the most innovative companies on the planet and a short-term focus in servicing these clients would be a fatal strategic misstep no matter your ownership structure.”​

For Theorem, Nautic Partners has invested in strengthening operations, infrastructure, technologies and management team, he added. “Clients have not expressed concern that Theorem is focused on short-term results as we haven’t given them a reason to do so.”​

“Nautic’s strategy to management is quite clear:  Run the business for the long-term, provide superb customer service and build the best CRO you can.”​

Only in it for the money?​

As to affecting contracts with sponsors, one Director at a pharma firm who wished to remain anonymous told us that while he was unable to point to any palpable examples of what PE brings, any uncertainty surrounding PE was not affecting business.

“Wary or not, I don’t see pharma folks disengaging from their agreements because of these events,”​ he said. “No one seems to be voting with their feet.”​

Furthermore, he was certain PE would continue its interest in the industry. “One PE firm told me candidly that they simply see CROs as cash cows,”​ he said, and if the cash-cow sentiment is universal then PE will continue to invest.

Strictly Commercial​

This view may explain why PE has infiltrated the clinical stage CROs but have not ventured into the riskier, more volatile and lower growth area of preclinical research.

“Preclinical is such a different business with investment in infrastructure being such a heavy burden​,” Scaife explained to us, when asked about the lack of interest in this sector. “Are margins high enough and will PE want to invest in more volatile markets? Probably not.”​

Theorem’s Monteleone agreed the investment economics between clinical and preclinical CROs differ greatly. “I don’t spend much time focused in the preclinical space, but I think its reasonable to assume that a larger market size and recent growth would suggest that there are more investment opportunities within the clinical CRO sector.”​

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