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May 28, 2013 8:09 pm

Mid-tier CROs face pressures staying independent as consolidation wave intensifies, bankers say

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This article is provided to FT.com readers by BioPharm Insight—a news service focused on providing insight into the most price sensitive issues in the global pharmaceutical market. www.biopharminsight.com

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Mid-tier contract research organizations (CROs) with no differentiating or competitive edge will struggle to maintain independence, and most M&A activity is expected in this segment, healthcare services bankers told Biopharm Insight.

It has become increasingly difficult for mid-tiered CROs to compete in the current market environment, said David Blume, partner at Edgemont Capital, a boutique healthcare-focused investment bank. “There are a number of reasons, but the trend continues where large CROs are looking to continually lock-up business from larger sponsors under preferred sponsor agreements,” he said, citing Pfizer’s five-year deal with Parexel and Icon in 2011.

Merck Serono recently announced a five-year exclusive clinical development agreement with leading CRO Quintiles (NYSE:Q).

As more exclusive deals between large CROs and pharma firms get done, the CROs that are being “squeezed out” are the mid-tier, a second services banker commented, adding this is where he expects the most consolidation. If companies are larger than a niche size, around USD 100m in annual revenues, they typically compete for projects with larger services players and last year was very competitive, he added.

A number of these other large pharma companies guarantee a certain volume of work for “discount” pricing, Blume explained. “The mid-tier CROs don’t have the resources to win these contracts. They are also not small or specialized enough to provide high-end services like the boutique CROs that focus on particular diseases,” said Blume.

In order to secure lucrative contracts, CROs now need to be large global players, as regional is not a strategy anymore, especially for strategic alliances, noted one former large CRO senior executive.

Premier Research, Theorem Clinical Research, Worldwide Clinical Trials and Chiltern are probably the best examples of larger mid-tier players who have struggled, said Blume. Synexus is another one to watch, noted the second banker.

“Because of the strategic alliances created between large CROs and large pharma, there is an attractive opportunity for the mid-sized CROs to win a lot of contracts from maybe not Pfizer or others with established CRO partnerships, but pharma and biotech clients in the next size tier down,” said Chad Moore, director of Baird’s pharma services investment banking group, who previously worked at PRA International.

There will be a natural alignment of large CROs with large pharma and mid-sized CROs with mid-sized pharma, said Moore. Some of the mid-sized CROs could merge together, but it’s unlikely the large CROs will acquire these smaller competitors unless they have unique therapeutic expertise, geographic footprint or expand service offerings, he noted.

Smaller, boutique CROs are known for their regulatory and therapeutic focus. “What differentiates these smaller folks, is a very high level of customer service, and senior level staff are regularly available,” said Blume. The mid-sized players are unable to offer either global or ‘high touch’ service, said Blume. “They’re too big to spend as much time with each client. As a result, you have a whole level of mid-tier players who have struggled with achieving comparable margins to the large CROs,” he explained.

Many mid-tier CROs may need to be acquired or merge in order to survive, said the second banker, adding that a merger of equals amongst mid-size companies could also take place although questions of management control could be tricky.

The second banker added he sees more mid-size private equity (PE) deals occurring as the PE backers “certainly have money to spend” on these assets.

There are a number of small to mid-sized CROs in both the EU and US, which are owned by the original founders, who are looking to exit, he said, but declined to name them.

Mid-tier CRO success stories

Aptiv Solutions has really moved to become the leader and pioneer in adaptive clinical trial design, said Blume.

Mid-tier CROs face difficulties trying to win business from a large pharma firm that has signed a long-term partnership agreement with a large CRO, said Phil Birch, senior vice-president, Global Strategic Marketing at Aptiv Solutions. The adaptive trial design capabilities are central to our strategy, he said.

“We have three preferred partnerships with large pharma, despite the fact that they have these long-term partnerships with larger CRO providers,” said Birch. In one case, Aptiv won the study over a larger CRO, but was asked to work alongside the larger CRO as the larger provider had better site coverage globally, he added.

Novella Clinical has also been able to stand out from the competition, said Blume. “They made a huge investment in IT systems and paper-less clinical trials is their mantra. They’ve tried to be creative and carve out their own niche and strategy,” he added. “The founders of the company started on the very premise of not wanting to be a me-too CRO. We started with a differentiation model,” said Novella CEO Richard Staub. As the e-clinical trial model started to mature, the company started to expand its focus to biotech and medtech, he said.

The firm’s global expansion strategy will focus on the Pacific Rim, Staub said. There are additional opportunities to augment Eastern Europe, which is important to the oncology business, and Latin America is third on our list, he added. “We’re very active in the M&A space right now and we’ve got a couple of things in discussions,” he added.

Synteract, owned by PE firm Gryphon Investors, recently acquired Harrison Clinical Research to form a new multinational CRO called SynteractHCR, noted the second banker. The combined company will have offices in 16 countries with operations in Western and Eastern Europe, Israel and South America and the US.

Synteract’s CEO Wendell Barr was the former Chief Operations Officer of Covance. Harrison’s founder Francisco Harrison now owns around 20% of the combined company, the banker claimed.

“[SynteractHCR] is owned by PE and I expect them to make further acquisitions of small or medium [services] companies,” he said.

Edgemont recently advised Vince and Associates Clinical Research in its sale to Altasciences Group, which is owned by Kilmer Capital Partners, which also owns Algorithme Pharma, a Montreal-based full service early-stage clinical CRO.

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