Consolidation continues in the CRO space, with the acquisition of Chiltern by LabCorp being just the latest example of top CROs expanding and increasing their breadth of offerings. As large CROs continue to acquire smaller competitors, can sponsor companies expect to benefit from this development?
I recently spoke to Andrew Schafer, president of research firm Industry Standard Research (ISR), about the consolidation and what he thinks it will mean for the industry.
Ed Miseta: We recently learned Lab Corp will be acquiring Chiltern. Do you see this acquisition enhancing the services already offered by Lab Corp?
Andrew Schafer: Yes. LabCorp completed its acquisition of Covance in 2015, and I believe this is where Chiltern will help the most. Covance is the dominant player in the clinical development central lab arena, but they have historically taken a cautious approach to expanding their Phase 2/3 CRO business. The Chiltern acquisition provides Covance with immediate scale in this area. Another thing to think about is that Chiltern now has a central lab, so their service offering is enhanced as well.
Miseta: Recently we have seen a number of mergers and acquisitions in the CRO space. Based on ISR’s CRO Market Size report, you estimate that the top 9 CROs now boast around a 60 percent market share. Is this trend good for the CRO space?
Schafer: I’ll approach this question from the perspective of sponsor organizations and say that I don’t think this is a bad thing for them. Every sponsor has different needs and wants when it comes to selecting its service providers, and I don’t think the recent mergers or acquisitions or recapitalizations will reduce the options that sponsors have. That said, I think one might want to keep an eye on staff turnover as uncertain times can often lead to increased employee turnover.
Miseta: Is there a belief among the large CROs that they need to keep growing to stay competitive?
Schafer: That is an interesting question. At ISR, we’ve researched for our clients the importance of, the value of, and the perceptions of “CRO size.” When you look at the economics of a CRO, winning one $300 million Phase 3 study can carry you a long way. It takes a lot of Phase 2 studies to equal one mega Phase 3 study. What we are really talking about is, “How large is large enough and what capabilities do you need to have to service a large, global Phase 3 study?” For the largest CROs, it is important to be perceived as “large” as it gives a CRO the opportunity to engage in more strategic relationships and preferred provider arrangements.
Miseta: If you are a mid-sized CRO (not one of the top 10), is consolidation creating an increased pressure to merge and become larger?
Schafer: I’ll answer this by saying “probably.” Everyone likes to be asked to dance. That said, many of the mid-sized CROs have recently had investments from private equity firms, so they might not be in the market to be absorbed right now. I don’t think the consolidation is nearly finished, and I do expect some of the mid-sized CROs to either merge with each other or be acquired by the larger CROs. Something to watch for is the possibility of non-traditional CRO companies (e.g. IBM, Accenture) buying a mid-sized CRO to try and create a differentiation play based on data or process expertise.
Miseta: What will this consolidation mean for large sponsor companies looking to forge strategic partnerships?
Schafer: For large sponsors, I think that CRO consolidation (so far) is good news. They still have plenty of choices and now several CROs have augmented their service offerings. Except for INC Research and inVentiv Clinical, we haven’t seen any mega CRO mergers in the past 12 to 18 months. No PPD-PAREXEL. No ICON-PRA. And I am not counting the Quintiles-IMS merger, as their services were complementary rather than competitive. As a large sponsor, you want a competitive CRO market with strong providers and plenty of choices. I think that is what you have now.
Miseta: Will this create greater challenges for the small- to mid-sized sponsor companies looking for a CRO partner?
Schafer: I think there will always be options for small and mid-size sponsors. Often these companies prefer to work with smaller CROs – regardless of CRO consolidation. I think there will always be small and niche CROs around to service these sponsors. When you look at the CRO industry from a 30,000-foot view, there are few barriers to entry in establishing a CRO.
Miseta: Will consolidation lead to increased competition and more/better services offered to sponsor companies?
Schafer: I think so, especially for the larger studies and the preferred provider/strategic relationships. What people should keep in mind is that the CRO industry is based on people. Data and technology and process and scale are all important in the delivery of a study, but it is the people who make-or-break a study and/or a relationship. It’s a relatively small industry. When you go to the larger industry conferences, you see the same people every year. That said, yes, I think consolidation will lead to increased competition and that should benefit sponsors. But keep track of the people.
Miseta: Are there any other concerns you are hearing from sponsors or CROs about this consolidation trend?
Schafer: Maybe not a concern, but one thing to watch is the impact on the “next level down” service providers (e.g. EDC, patient recruitment companies, IRT, labs). Just as when two large pharma companies merge it sends ripples through the CROs that work with each, CRO consolidation will have the same impact on their service providers.
Again, not a concern, but I’ll bring up “differentiation.” This has historically been extremely difficult to achieve in the CRO industry. In the past, one of the more effective avenues to differentiation was size and scale. The industry now has more “large” CROs, so where will differentiation come from? I think CROs probably need to re-think the underlying drivers for service provider selection.
This is a great time in our industry. Fifteen years ago, there may have been one Wall Street analyst following the CRO industry, today there are dozens and private equity interest has skyrocketed. As we’ve stated in previous ISR documents, we don’t see the pace of change slowing in our industry.
ISR has produced an infographic on CRO Consolidation and Employee Distribution. You can view it here.