Mid-size CRO market update: battle for customers is heating up

The landscape of the mid-size CRO sector changed again with LabCorp’s acquisition​ of Chiltern International. The revenue gap between mega/large and mid-size CROs continues to widen.

Chiltern was the largest mid-sized CRO with a revenue base of approximately $550m. Medpace​ is the new leader, with a reported $188m of revenue through June year-to-date (YTD) 2017, which would be approximately $400m for all of 2017.

Below is a schedule showing how consolidation has changed the listing of top 10 CROs in the last couple of years. Medpace by virtue of not getting acquired moved up from #10 to #8. The revenue gap between #7 PRA and #8 Medpace is vast as PRA’s full year 2017 forecast guidance was for between $1.825bn and $1.855bn of revenue (or over 4.5 times more than Medpace).

What does this mean for the mid-size sector? I suspect the following:

1. Increased competition from the larger CROs for small and mid-size biopharma customers
2. Less mid-size CRO consolidation
3. Fewer acquisitions of mid-size CROs by larger CROs

Let’s take a deeper look.​

Increased competition from larger CROs​

The mid-size sector has thrived in recent years by becoming a strong partner to small- and mid-size biopharma customers. Using Medpace as an example, you can see that almost 90% of their total revenue has come from the small- to mid-size biopharma sector. Medpace’s overall revenue between the periods was relatively flat ($188m vs. $180m)

The larger CROs have definitely taken notice of the opportunity, below is INC Research’s reported revenue by customer segment.

You can see that small/mid-size biopharma now make up 47% (up from 41%) of INC Research’s total revenue base. That increase equates to almost $60m increase when annualized for a full year.

INC’s annualized revenue (excluding the upcoming InVentiv transaction), is roughly $1bn. So INC’s annual small/mid-size revenue biopharma revenue is roughly $470m – or $70m more than Medpace as a whole.

There are other data points that suggest this trend as well. Parexel reported in their Q3 2017 earning presentation that they have seen a 25% increase in new business from small- and mid-sized biopharma customers.

One last data point is this line from PRA’s SEC filings: “We believe our long-term track record serving biotechnology and small- to mid-sized pharmaceutical companies has resulted in our earning a reputation as a strategic partner of choice for these companies​.”  

The battle for small to mid-size customers is heating up.​

Less mid-size CRO consolidation​

Let’s take a look at a list of current mid-size CROs (in no particular order).

• Medpace, as discussed, is publically traded and hasn’t shown a history of doing large acquisitions. Organic growth and small niche acquisitions have served them well.
• Bioclinica has been acquisitive but has focused on technologies (Clinverse) or capabilities (Compass) or both (Synowledge), rather than scale.
• Premier, SynteractHCR, and TFS were acquired by their current owners within the last couple of years.
• Clinipace, CromSource, Worldwide, and PSI have not reported large acquisitions ($50m+) in recent years.

Obviously, things could change, but timing and valuation matter when it comes to consolidation in the mid-size sector.

Chiltern was large enough to acquire Theorem Clinical Research outright and Theorem’s ownership group had decided the time was right for an exit.

I suspect smaller strategic deals will be more likely in this space for the following reasons:

• Integration risk: It’s much easier to integrate a small CRO rather than a large CRO
• Financial risk: CRO multiples has increased to north of 12x EBITDA. Smaller transactions can often be had for 8-10x EBITDA
• Strategy: Mid-size CROs may simply need to acquire a particular therapeutic expertise or capability to satisfy customer demand – not add all of the extra overhead that comes with acquiring another mid-size.

Chiltern’s lucrative sale to LabCorp demonstrated that the strategy of consolidating mid-size CROs is still an effective strategy, but the strategic Ockham deal and investment in Endpoint gave them the size to pull off the Theorem transaction.

Fewer mid-size acquisitions by larger CROs​

Chiltern may be the last mid-size CRO transaction we see for a while.

• QuintilesIMS and PPD would seem to have all the clinical capabilities and geographic reach needed. I suspect they will focus on strategies to gain new technologies and niche capabilities.
• INC and inVentiv will soon be focused on integrating and operationalizing their soon to be completed merger.
• Parexel appears to be focused on adding value via internal improvements.
• PRA’s recent acquisition of Symphony Health communicates their desire to integrate healthcare analytics with the clinical research services.

I would say that Icon and LabCorp are the two wild cards. Icon recently acquired MAPI and reportedly was in the running for Chiltern. LapCorp’s acquisition of Chiltern may not be their last as they round out their Phase II-IV capabilities. However, one would think that LabCorp will take some time to effectively integrate Chiltern into their Covance franchise.

The CRO industry continues to surprise the experts with rich valuations and what seems like a never ending list of transactions. The industry is also maturing and it feels like we are in the early stages of reinvention by many of the CROs. Future acquisitions will likely bring more clarity to the sector’s future.

Jason Monteleone is a guest contributor to Outsourcing-Pharma.com’s Pharma Finance column.​

Jason is the president of Pivotal Financial Consulting, LLC, which provides divestiture assistance, acquisition advisory services and strategic planning to the pharmaceutical outsourcing industry. He was previously CFO at Theorem Clinical Research and Omnicare Clinical Research and held executive finance positions at MDS Pharma Services.​

Jason can be reached at wzbagryrbar@cigsvanapr.pbz​ and followed on Twitter @JMPivotal​. ​