A new report by Wells Fargo says that pharmaceutical mega-mergers generally cause short-term problems for contract research organizations (CROs) but benefit them in the long run.
The report, written by Senior Analyst Tim Evans, was completed after the Nov. 23 announcement that Pfizer is buying Allergan for a record $160 billion, the world’s largest-ever healthcare deal. It states that such mergers are “a long-term positive” for CROs because they generally result in more outsourcing.
“It’s been shown pretty well that CROs have contributed to the efficiency gains of the pharma industry,” Evans said in an interview with CWWeekly.
His report provides more details.
“Outsourcing at the combined company tends to be more thoughtful—driven less by procurement and approached more from a total value standpoint, which tends to create less pricing pressure for the CRO and gives the CRO a chance to demonstrate value,” it states.
The flip side, Evans noted, is that there can be problems that arise immediately after such a deal is completed. Among them are “simple uncertainties” caused by every merger—including the questions of who will be in charge or which employees will be retained—as well as overlap in the drug pipeline.
As his writes in his report, the “near-term risk to CROs is material. The combined entity inevitably ends up rationalizing pipeline while looking for R&D synergies, and uncertainties about leadership can also cause delays in decision-making. In the past, CRO books have been weak for a few quarters in the midst of large pharma mergers. We think this risk is relevant to Pfizer/Allergan, but several caveats are worth noting.
“The Pfizer/Allergan deal seems less motivated by R&D synergies than past mergers, and pipeline overlap is minimal. Pfizer also noted on the [Nov. 23] call that this deal can be executed with minimal disruption to R&D, which we view as positive for CROs. Finally, CROs have matured since the last wave of pharma mergers, which dilutes the impact of any individual cancellation (in other words, while CROs continue to have high client concentration, we think individual program concentration in CRO backlogs is likely lower today than during the last merger wave).”
At the time that the Pfizer/Allergan announcement was made, Allergan CEO Brent Saunders said, “Joining forces with Pfizer matches our leading products in seven high-growth therapeutic areas—and our robust R&D pipeline with Pfizer’s leading innovative and established businesses, vast global footprint, and strength in discovery and development research—to create a new biopharma leader.”
Evans also told CWWeekly that during the Nov. 23 call, Pfizer/Allergan indicated about one-third of its $2 billion synergy target will come from R&D, which translates into about $660 million in R&D cuts. That’s less than 10% of Pfizer’s estimated $7.6 billion R&D budget, which he said actually totals about $9 billion after the deal with Allergan.
“So, there’s not as much of a risk to CROs as some feared,” Evans added.
The Wells Fargo report also notes that Pfizer “is a heavy outsourcer” that primarily uses three CROs: INC Research and Parexel, which are publicly traded on Nasdaq, and PPD, which is a private company.
“Those are its three main strategic partners,” said Evans.
In the report, it is noted, “In the most recent quarter, Pfizer accounted for 31% of [INC’s] revenue and 13% of [Parexel’s] revenue. We believe Allergan’s outsourcing is likely fragmented among many CROs, given the recent roll-up of the company.”
Evans’ report concludes by stating, “The reality of this situation is that the degree and timing of disruption risk to CROs is highly uncertain, but we have high conviction in the long-term benefits to CROs. We advise investors to trade this event by buying any significant weaknesses in late-stage CROs.” It listed ICON, INC, Parexel, PRA Health Sciences and Quintiles in that category.
Representatives from the CROs mentioned in this story either did not provide a comment or did not return messages.
This article was reprinted from Volume 19, Issue 47, of CWWeekly, a leading clinical research industry newsletter providing expanded analysis on breaking news, study leads, trial results and more. Subscribe »