The wave of merger and acquisitions that has washed through the contract research organization sector this year is set to continue as the pharmaceutical industry increasingly turns to outsourcing for its clinical needs.
As big pharma repositions itself to thrive in a more cost-conscious environment, running the increasingly complex (and hugely expensive) clinical trials to develop the drugs that get through the pipeline has created more opportunities for CROs. The past couple of years has seen many of them beef up to meet demand, with the most eye-catching deals being LabCorp’s $6bn purchase of Covance Inc. in 2014 [See Deal] and IMS Health Inc.'s $9bn acquisition of Quintiles Inc. (Also see "IN VIVO’s Deals Of The Month: May 2016" - In Vivo, 1 Jun, 2016.)
William Blair & Co analyst John Kreger told Scrip it was particularly notable that both of these large deals “were driven by healthcare companies that are largely outside of the pharma R&D market.” That a diagnostics player (LabCorp) and a data provider (IMS) are prepared to splash out such huge sums for CROs shows that the sector remains a highly attractive one but also highlights the wider range of services that outsourcers need to offer to retain and win new business from big pharma.
With regards to QuintilesIMS specifically, Kreger said that while the combo can produce “intriguing efficiency gains for clients”, he is a little concerned that there has been “some merger disruption as well. So which of the major CROs does he think are likely to perform best?
Kreger likes the look of Medpace Inc., PRA Health Sciences Inc. and INC Research Holdings Inc. They “are arguably best positioned among the major CROs because they all focus on serving smaller clients that tend to have the highest levels of spending growth.” He was speaking after authoring a research note based on a major survey of the outsourcing experience of pharmaceutical and biotech sponsors, which shows that their R&D budgets over the next three years are going to be higher than previously expected.
Outsourcing Penetration On The Rise
This will mean more work for CROs as “outsourcing penetration is increasing and is expected to continue the upward trend over the next several years.” Currently, that penetration is roughly 50% for late-stage development, with a longer-term target of 65%-70%. Of the public CROs, QuintilesIMS, LabCorp/Covance and Parexel International Corp. remain best positioned in the clinical group, while Charles River Laboratories International Inc. and LabCorp/Covance have the best growth prospects in the early stages of development, the William Blair analysts believe.
An industry source from the venture capitalist world who wishes to remain anonymous agrees that the multinational CROs will continue to win major contracts as “traditionally big pharma likes to play with big CROs and it can be difficult for smaller companies to steal market space.” He told Scrip that he expects to see more consolidation in the CRO arena and in the future, the smaller players need to be able to show real differentiation in their offerings.
Private equity is also getting more involved in clinical development services and last month, New York-based Metalmark Capital stumped up an undisclosed sum to give it a majority stake in Premier Research. This month, the CRO inVentiv Health Inc., which dropped plans for an initial public offering that would reportedly have raised $500m, closed a major investment from Advent International in which it joined Thomas H. Lee Partners as a joint owner, while earlier this year, Cinven acquired BioClinica in a deal reportedly worth around $1.3bn.
Michael Martorelli, a director at investment bank Fairmount Partners, told Scrip that “there will definitely be more consolidation across many segments of the broad pharmaceutical outsourcing industry.” As for which segments will grow - preclinical, clinical, analytics - he claimed that “it’s difficult to name any particular sector of M&A focus or of market growth. My best answer is ‘all of the above’.”
“Discovery work and post-marketing outcomes studies are the areas that we think will stand out” – William Blair & Co analyst John Kreger
It is a view shared by Kreger, who said “we expect to see more consolidation in the sector, particularly if LabCorp/Covance and QuintilesIMS turn out to be successful in driving share gains and more efficiency R&D overall.” As for the areas of growth, he said that discovery work and post-marketing outcomes studies “are the areas that we think will stand out.”
Phase IV Studies Increase In Importance
He believes that carrying out Phase IV studies for big pharma partners is going to increase in importance “because every new drug will need to demonstrate economic value”. In order to do this, the CROs that are going to be winners are those that are genuinely embracing digital healthcare.
Using mHealth tools for clinical studies present companies with a number of operational, technical and regulatory challenges but also a huge opportunity for CROs. However, they need to come up with meaningful endpoints in studies that will demonstrate genuine therapeutic efficacy and will also need to work closely with regulators as they try to make sense of the holy grail of real-world data that is produced.
Accessing and analyzing the vast amounts of real-world data that is being produced is set to be an area of deep collaboration between big pharma and CROs and not just between individual companies. Indeed, in November QuintilesIMS unveiled an initiative involving Bristol-Myers Squibb Co., Eli Lilly & Co., Merck KGAA and Pfizer Inc. which has the goal of “providing clearer and more proactive insight into how anti-cancer treatments are used in actual practice across key European markets”.
The collaboration aims to bridge current information gaps and inconsistencies in knowledge related to how oncology products are used, the partners claim, i.e. for which types of patients and indications and with what sequences and combinations of therapies. Filling these gaps will hopefully improve the quality of care for cancer patients and will also not do any harm to the drug makers involved as they try to demonstrate the full value of innovative medicines to increasingly cost-conscious regulators,
The CRO landscape is looking promising, and few observers believe the surprise US presidential victory of Donald Trump will have a huge effect on the sector. However, on both sides of the Atlantic, Asia and everywhere else, payers will want to see differentiated products that offer value for money - the CROs that can give their big pharma partners clinical and real-world data that help demonstrate value for money will continue to thrive.
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