The constant activity of 2014 in the CRO industry—from large players PRA Health Sciences and INC Research going public to myriad smaller, specialized CROs merging or being acquired—is expected to continue this year.
“In our view, the pace of change in the CRO market will not slow down any time soon,” said Andrew Schafer, president of Industry Standard Research (ISR). “Look for more mergers as providers continue to scale up global capabilities and fill in their service offerings. Look for more sophisticated marketing and branding efforts as the battle for market share increases.”
Industry insiders say the dealmaking should continue well into 2015; some say further down the line, CROs may even consider acquiring site networks or forming strategic partnerships with them. Already in January, announced deals have included PE firm Vitruvian Partners taking a majority stake in CRF Health, Albany Molecular Research (AMRI) buying two business units from Aptuit for $60 million and CRO WuXi PharmaTech acquiring genomic/ bioinformatics company NextCODE Health for $65 million.
“We are seeing a lot of momentum in clinical pharmacology and research site services, as sites are the most fragmented part of the R&D delivery chain in clinical trials,” said David Blume, managing director and co-founder of Edgemont Capital Partners. “Longer term, large CROs will be looking very hard at acquiring some sites and site networks, but these sites also will have to gain scale over the next one to three years before that happens.”
But Michael Martorelli, director of Fairmount Partners, an investment banking firm with a focus on the CRO market, said he doesn’t see such acquisitions on the horizon. Instead, he sees stronger partnerships between CROs and large sites in the near future.
“Just as sponsors have strategic relationships with large CROs, there could be similar alliances with very good sites and CROs in which each side knows the other’s capabilities and has more of a common business model,” said Martorelli, citing Quintiles’ Prime Sites program, which comprises large sites, including hospitals, with which the CRO has successfully worked, in a more alliance-like relationship.
A recent trend expected to continue this year, according to Mark Goldberg, M.D., president and chief operating officer of Parexel, is greater IT outsourcing by sponsors to large CROs. He said the major CROs will be expanding their eClinical and informatics technology capabilities to meet the global needs of their biopharmaceutical customers. The ongoing shift to strategic partnerships between CROs and sponsors is supported by technology collaborations, he added.
Both PRA Health Sciences and INC Research saw their stock prices jump following their IPOs. Together with six other large CROs, eight companies control 62% of the market, according to a consolidation report from 11T Partners, a mergers and acquisitions service firm. IPOs could continue in 2015, with some speculating the two large CROs still privately held, PPD and inVentiv, could go public.
Icon CEO Ciaran Murray, speaking at this month’s J.P. Morgan Healthcare Conference, said the CRO market is set to grow at around 8% annually over the next five years. That growth, he added, is due to a combination of higher spending in global R&D and an increased penetration in outsourcing.
His estimate of CRO growth dovetails with that of Parexel, which sees low single-digit baseline growth from biopharmaceutical sponsors, increased R&D outsourcing and a market shift to large, global CROs capable of complex studies, according to Goldberg.
“We see more demand as a large global player and look for M&A opportunities that can complement or enhance our existing portfolio of capabilities. We are constantly assessing the marketplace for these kinds of strategic fits,” he said. “As for greater consolidation, we quite possibly could see another IPO or two, but I don’t expect to see the large CROs merging because of the lack of synergies in such combinations.”
Clinical trial complexity also is helping Quintiles grab a larger share of the market, Quintiles CEO Tom Pike said on CNBC last month.
“As we look out over the next two to three years, we see a tremendous, continued opportunity in helping with drug development and drug commercialization,” said Pike.
Blume, of Edgemont, said sponsors are preferring to work with a smaller number of big CROs, particularly if a CRO provides a wide range of global services for their clinical trials.
“CROs can increase their visibility with sponsors by working with research site networks, which also provide services directly to sponsors,” he said. “Just as sponsors prefer to work with a limited number of CROs, CROs also prefer to work with fewer vendors.”
He views some of the biggest changes coming from the consolidation of small, narrowly focused providers, notably CROs with specialties in a given therapeutic area that stand apart or a service model for small biotechs handling clinical trials to treat rare/ orphan diseases.
According to ISR’s report on Annual CRO Market Sizing, the company does not see “the split between the R (research) and the D (development) moving much, nor do we see the percent of phase I–IV development spending shifting much. That leaves the outsourcing penetration as the major lever for total CRO revenue growth.”
ISR estimated the CRO market climbing modestly from $23.6 billion in 2014 to $24.6 billion in 2015. However, if outsourcing were to increase by three percentage points, ISR said the CRO market could reach $27.7 billion this year.
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