Although the contract research organization market is still a relatively fragmented industry, pharmaceutical companies have increasingly turned to CROs in the past five years to stay competitive, improve their efficiency and therapeutic expertise, while adding more widespread geographic capabilities.
In the last few weeks, several mergers and acquisitions were announced that continue the trend of consolidation in the contract research and development space, as demand for these services has continued to heat up.
In one of the deals, InVentiv Health and INC Research merged to form one of the world’s largest businesses for outsourced research services. The new company will be a top three CRO with net revenues estimated at $3.2 billion.
Perhaps more significantly, Thermo Fisher Scientific's $7.2 billion acquisition of Patheon will create a contract services giant, offering pharmaceutical companies end-to-end solutions for drug development, delivery and manufacturing.
Thermo Fisher Scientific provides research, clinical trials and production support for the pharmaceutical industry, while Patheon is a leader in the contract development and manufacturing organization (CDMO) market. The merger is expected to enable the two companies to offer a more comprehensive portfolio of services to pharmaceutical clients, reduce costs and add $30 million in adjusted operating income within three years.
Pharmaceutical companies have also begun to use CRO services to assess post-market outcomes for their drugs — data now required by many payers — and for making decisions about personalized medicine, or which drugs are most effective for different patient populations.
"In the CRO space, we are seeing more demand for expanding footprints in justifying the economic and health benefits of drugs, through reduced hospitalizations, side effects and improved quality of life. Both large pharmaceutical companies and smaller biotechs also need increased capabilities in precision medicine," said John Babitt, partner, transaction advisory services, life sciences for Ernst and Young.
The quest for greater capabilities in precision medicine can be seen in the 2015 LabCorp acquisition of Covance — creating a healthcare diagnostics company that can provide both laboratory services and drug and diagnostic development and commercialization, according to Babitt.
The merger between IMS Health and Quintiles in 2016 was also driven by the need for more personalized medicine, greater patient access to innovative and effective medicine and improved healthcare information.
Larger impact for smaller pharmas
Still, consolidation in the CRO space is likely to have just a minor impact on big pharmaceutical companies, who already have preferred provider relationships with top-tier CROs. "These are long-term relationships, so we are not seeing much consolidation among the large top-tier CROs," Babitt said. Yet, small and medium-sized biotechs are experiencing significant benefits from consolidation in the CRO space.
"Mid-sized CROs are getting bigger and adding more capabilities so that they can more easily serve the needs of mid-sized pharma companies," said Michael Martorelli, director at Fairmount Partners.
Mid-sized pharmaceutical companies and biotechs simply don’t have the infrastructure that big pharma does, so they are more likely to make use of big CROs, he noted. "In outsourcing pharmaceutical services, it’s difficult to get clinical trials that are faster, better and cheaper, but with CRO consolidations, it is possible that we will see all three improvements in the pharmaceutical industry," Martorelli said.
With a larger CRO, a small biotech can address more therapeutic areas, increase capabilities in new geographies, and use technologies that improve the quality of clinical trials and efficiencies in running these trials. Babitt noted that most investors in small pharmaceutical companies do not have the appetite to fund large-scale research capabilities. With the expansion of biotechs, however, there will be more demand for CRO industry services — so it’s likely the market will continue to grow and consolidate, Babitt noted.
Cost savings, but quality is paramount
Large CROs also offer mid-sized and small biotechs some cost savings, since CROs have a workforce that can be used flexibly during drug development. Using a CRO lessens the need for permanent employees and clinical staff, according to Martorelli.
As well as adding therapeutic expertise, use of a CRO that provides end-to-end solutions can help a pharmaceutical company research, run clinical trials, launch and market new drugs, and capably use health informatics. When there is a merger with a CDMO, they also gain manufacturing expertise and capacity.
For most pharmaceutical companies, CRO pricing is not a driving factor in choosing which companies to choose for outsourcing research and services. So, changes in costs for CRO services produced by consolidation won’t have as large an impact as might be expected.
"Therapeutic expertise and quality in trial design, enrollment and being able to navigate IRBs are more paramount factors," Babitt said. "Most drugs get just one shot at approval, and if the quality of the clinical trial is sacrificed, there’s a long-lasting, if not permanent, impact," he said.
Since pharmaceutical companies are still striving for improved quality and efficiencies in conducting research and running clinical trials, however, it’s likely that growth and consolidation among CROs will continue, Martorelli said.
Consolidation will in turn have a beneficial impact on the bottom line for many CROs. In the past, CROs have been formed by clinical entrepreneurs, but as CROs continue to grow and merge, it’s likely that more private equity investors will buy these companies.
"As a result, CROs will have more financial resources as well as more business discipline that will appeal to their pharmaceutical clients," Martorelli added.