Outsourcing

Disruptive Structural Change in the CRO Landscape

Outsourcing

07:00, May 15 2018

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Ken Getz, Tufts CSDD, examines the ever-changing CRO landscape, drawing close attention to how efforts to consolidate businesses will have a lasting impact on the industry

The announced acquisition of Parexel in May 2017 by private equity firm Pamplona Capital Management represents a denouement for the top four market-leading contract clinical research organizations (CROs). Quintiles, Covance, Parexel and PPD have each now experienced a change of ownership. The owners are strategic partners, well-positioned within the broader health care and life sciences arena, and private equity investors with considerable capital and broad life sciences portfolios. In all cases, the acquiring companies are not clinical research insiders.

These buyers see opportunity in re-positioning contract clinical research services. They anticipate operating efficiencies and strategic advantages that can be gained through the increasing use of rich data and sophisticated analytics, as well as the integration of technology solutions and data across the dimensions of project management, study conduct, clinical research, and clinical care.

Charting the Biggest Transactions

To recap the market-leading CRO strategic transactions: In early 2015, Covance was acquired by LabCorp, one of the nation’s largest health care diagnostic companies, for an estimated $6 billion (U.S.). In May 2016, IMS Health – a market-leading global health information and technology services company – acquired Quintles. The total value of the transaction was approximately $9 billion (U.S.).

Private equity has been looking for deals in the CRO market for some time. In late 2011, market-leader PPD was acquired for approximately $4 billion (U.S.) by private equity firm Jaguar Holding Company. Since then, Jaguar has been actively acquiring clinical services firms (e.g. patient recruitment firm Acurian) and site management organizations (e.g. Synexus, Radiant Research and Clinical Research Advantage).

The most recent transaction, Pamplona’s acquisition of Parexel, is valued at approximately $5 billion (U.S.). The valuation represents a 28 percent premium over Parexel’s May 5, 2017 stock price. Pamplona has a number of health care assets including physician practice management company Formativ Health and health care provider evaluation company Spreemo Health.

Consolidation within the contract clinical research services market during the past five years has been brisk and it has facilitated substantial market share gains among the top 10 largest CROs. In 2011, The Tufts Center for the Study of Drug Development (Tufts CSDD) estimated that the ten largest CROs captured 43 percent of the total contract clinical services market. Since 2011, the ten largest CROs have gained 11 percentage points to capture nearly 55 percent of the overall market.

At the other end, small niche or specialty service providers have enjoyed strong relative growth approaching 10 percent annually. It is the mid-sized, full service contract clinical services provider segment that is shrinking. These companies have experienced the slowest annual growth (4 percent annually between 2011 and 2016) and the highest level of consolidation through acquisitions, downsizings and divestitures.

Drivers of Structural Change

There are numerous factors contributing to changes in the contract clinical services landscape. During the past five years, pharmaceutical and biotechnology companies have continued to downsize. As a result, their dependence on outsourced, variable capacity to handle project execution demands has increased. Tufts CSDD estimates that between 2011 and 2016 nearly 55,000 R&D positions and personnel have been eliminated.

Smaller companies also make up a significantly larger proportion of organizations sponsoring molecular entities in the pipeline. Whereas in 2011, small sponsor companies funded 56 percent of all projects in the R&D pipeline, in 2016, they funded nearly two-thirds (64 percent). Many of these small companies are less experienced in managing clinical development projects. Contract clinical services companies offer expertise and act as development functions for these smaller companies.

A very large percentage of mid-sized to large pharmaceutical and biotechnology companies outsource under functional service provider and alliance models. A 2016 CenterWatch survey, for example, found that the vast majority (81 percent) of sponsor companies report using these types of models with the hope of deriving economic and efficiency advantages.

Taken together, Tufts CSDD estimates that in 2016 nearly 50 cents of every R&D dollar was spent on outsourcing. Spending on contract clinical services specifically has grown at a significantly faster rate than spending on overall drug development – 7.4 percent annual growth between 2011 and 2016 versus 3.6 percent. The contract clinical services market now exceeds $30 billion annually with study monitoring (20 percent of the total), investigative site management (22 percent of the total), and data management (12 percent) making up the largest contracted services segments.

The Quest for Efficiency, Speed and Higher Success Rates

Despite the very high dependency on a contract clinical services workforce and changes in the types of outsourcing models used, drug development speed, cost, and success rates have not improved during the past two decades. In some cases operating conditions have worsened considerably. Tufts CSDD studies have shown that the cost of drug development continues to rise by nearly 9 percent each year. Development cycle times have gotten longer with a higher incidence of unplanned delays and changes. And success rates are the worst they have ever been with only 11 percent of INDs filed ultimately receiving FDA approval.

There is tremendous pressure on pharmaceutical and biotechnology companies and their contract research services partners to reverse these perennial operating conditions. Complex protocol designs and consistently poor collaboration execution are major contributors to these conditions. Where else can efficiencies, performance and economic improvements be found?

Investors and analysts inside the traditional contract clinical services market recognize that most services (study monitoring, statistical analysis, medical writing, and data management) are mature areas that are commoditized. Consolidation among players within the CRO market may deliver scale economies and efficiencies but these gains will be short lived. Although activist investors have been putting pressure on the large public CROs to downsize operations to improve their margins, private equity firms and strategic buyers anticipate a far larger and more strategic opportunity. They believe that the drug development landscape – as it transitions to better target ever smaller patient subpopulations and establish itself within continuous learning health systems – will increasingly turn to differentiated CROs that can offer integrated clinical research and clinical care services, massive databases and advanced informatics.

Strategic executives and investors also anticipate major opportunities for contract service organizations that have structures, processes and systems in place that support higher levels of patient engagement and collaboration efficiency.

Intensifying Service Breadth and Competition

Niche contract service providers will continue to support sponsor company demand directly and as subcontractors. Large full-service CROs will continue to look for ways to differentiate and, in a bold move, some have vertically integrated into the study conduct and patient recruitment arena (e.g. ICON’s acquisition of site network PMG Research).

The market-leading CROs are well positioned to offer more integrated and creative solutions that will drive innovations in rich data management and analysis and will help accelerate the convergence of clinical research and clinical care.

Several private equity backed companies, including Arsenal Capital’s WIRB-Copernicus Group (WCG) and Cinven’s Bioclinica, are acquiring and rolling-up clinical research services and technology solutions. WCG and Cinven, among others, have found another entry point to consolidate and combine clinical research services. 

These private equity funded companies have grown dramatically and they have built diverse portfolios offering numerous services including oversight, study support, site and patient identification and selection. During the past several years, WCG acquisitions include several major and regional institutional review boards (e.g. WIRB and Copernicus), technology company ePharma Solutions, central review firm Medavante, and clinical trial enrollment support firm ThreeWire. 

Among a number of its recent acquisitions, Bioclinica bought Blueprint Clinical and its risk-based monitoring technology solution. Furthermore, it bought patient recruitment provider Medici Group, pharmacovigilance services company Synowledge, and site network Compass Research.

Competition is expected to heat up among integrated service and solution providers – particularly those with deep pockets and available capital to grow, expand, add and market capabilities and services. As these firms look to drive efficiencies through achieving synergies among their integrated portfolio of assets, the boundaries between project management and study execution, as well as between clinical research and clinical care are blurring. Perhaps we will finally see improvements in data quality, efficiency, performance, and innovation success.

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