Sizing up: Does CRO consolidation leave space for smaller firms?

In February, Ratan Ratesh, director and head, clinical outsourcing at Otsuka, said that the global contract research organization (CRO) industry could become a monopoly. As David Windley, managing director, healthcare equity research at Jefferies LLC, noted, Ratesh’s comments reflect sponsor’s continued experience of uneven vendor performance and the desire to have more options.

Responding to the comments, Jason Montelone, CEO of Clinipace Worldwide agreed that sponsors now have to choose between a very large CRO or a sub $500m CRO – “that is very clear,”​ he said.

“However, I believe larger sponsors have been impacted more by recent CRO consolidation than small to mid-size sponsors,”​ Montelone told us.

Data suggests that the biotech/small pharma portion of CRO outsourcing now makes up more than 20% of overall outsourcing, he said. And Montelone believes sponsors in that segment tend to work with small- to mid-sized CROs, “as they are the optimal partners for those organizations.”​

However, he said there are still a sufficient amount of CROs in the $100m to $500m segment to service sponsors of all sizes. “I think its key that sponsors strategically match up study size and therapeutic area with each CRO selection,”​ Montelone explained.

For example, a small/mid-size CRO may be the right partner for a $5m study, but a larger/mega CRO may be an apt partner for a $25m program. “The one-size-fits-all outsourcing strategy may not make sense today due to recent CRO consolidation,”​ he said.

Settling into a 'new normal'​

According to Jason P. Layton, vice president of Jacobs Capital, an M&A advisory firm, “Market prognosticators have long been calling for the death of small- to mid-sized CROs as the largest CROs either squeeze them out via an increasingly competitive range of services – or block them out via strategic partnerships with large biopharma.”​

While there has been ubiquitous consolidation, as evidenced by the percent of market share now held by the top 7-10 CROs, Layton told us there is still a market for small- to mid-sized CROs.

“So long as biopharma continues to pay large sums for smaller, single-product or single platform development companies, there will be a market for similar-sized CROs,​” he explained.

In Layton’s opinion, the industry is “settling into a new normal,”​ in which the top 7-10 CROs control nearly 50-60% of the market share. However, he does not think this percentage will increase in the current environment, leaving “plenty of room for a healthy small-to-mid sized CRO market that is targeted at their small- to mid-sized biopharma counterparts.”​

Echoing Montelone’s sentiment, Layton said that because smaller development companies tend to focus on a single therapeutic area or a single indication, small- to mid-sized CRO “are best served by presenting themselves as specialist within a narrow range of areas or indications.”​

“As those CROs are successful in making a name for themselves within an attractive therapeutic area niche, larger CROs and/or private equity buyers will find them to be interesting acquisition candidates,”​ Layton added.

A sponsor problem?​

Sharing his perspective from a small CRO in Saint-Petersburg, Russia, Nigel Goodman, Director of Gaea Clinical Trial Services LLC said “sponsors are creating their own problem,”​ adding that sponsors take even the small trials to the “global big five.”​

“Small nut, huge hammer. Small can barely get a look in,”​ he told us.

Why? For Goodman it comes down to easy choice and blame: “Large CROs are known to be slow, but that is accepted, and it’s also the easy choice to give all the trials to one or two largest providers and just accept they aren’t optimal for all,”​ he said.

Goodman added, “If niche CROs are used, and there are any issues, the blame within the company may be put on the clinical ops person for making that choice.”​