Contract Research Organisations (CROs)
The CRO market is reasonably consolidated, with market leaders including IQVIA, Syneos, Parexel, PPD and ICON. Large CROs have become key strategic partners of their sponsors/ pharma companies and the high growth of the market is the result of the following factors:
The need to reduce R&D expenditure
With rising costs of R&D, it is becoming increasingly inefficient for innovators to maintain development teams and facilities. Outsourcing has allowed innovators to rationalise fixed R&D cost bases and achieve operational efficiencies.
Increasing complexity of drugs and clinical trials
The complexity of therapeutics in development is constantly increasing, making them more costly and challenging to develop in-house. Furthermore, heightened regulatory protocols have increased the duration, cost and complexity of clinical trials.
Time and efficiency
Innovators are increasingly reliant on CROs to optimise R&D activities, shorten development timelines, reduce attrition rates and expand clinical trial management capabilities globally.
Expanding CRO solutions and technologies
CROs are constantly expanding their addressable markets by broadening their service offerings, capturing an increasing share of pharma R&D expenditure. Investment in technology and big data will continue to play an important role in the expansion of the CRO sub-sector.
Despite the growing range of services offered by CROs, they can broadly be grouped into the three following categories:
Pre-clinical services can be sub-divided into drug discovery and pre-clinical trial services:
- Drug discovery services are typically lab-based and involve the identification of promising ‘lead compounds’.
- Once selected for further research, the molecules then enter pre-clinical trials. Assuming the compound shows signs of efficacy and is safe, the innovator will submit an Investigational New Drug Application (IND). If approved by regulators, the innovator has permission to proceed with clinical trials.
Clinical trials are typically conducted in three distinct Phases (I, II and III), each with different objectives, increasing numbers of patients and costs.
Phase I trials are focused on basic safety and pharmacology in patients who may not necessarily have the target disease (c.20-100 patients). These studies are typically conducted at specialised research centres and are designed to monitor the metabolic reactions and patient tolerance to the compounds at multiple dosage ranges.
Phase II and III trials are primarily efficacy studies on patients afflicted by the target disease. Phase II trials (often known as proof of concept trials) test efficacy alongside dose ranging and further safety testing (c.100-500 patients). Phase III trials are much larger (c.500-1000 patients), in which advanced efficacy and safety testing are conducted at multiple testing centres. These are typically the longest and most expensive trials, and regulatory authorities typically require two successful Phase III trials to obtain approval.
Post-approval, regulatory agencies typically require innovators to collect and periodically report additional safety and efficacy data - sometimes referred to as real world evidence or ‘RWE’ studies. If marketed internationally then surveillance data from all countries must be collected.
The market remains reasonably fragmented, with the top nine players accounting for c.60% of the global market
Across clinical and post-approval trials, many CROs have developed a full suite of services allowing innovators to fully outsource their R&D activities and partner with CROs in the design and delivery of research operations. Services CROs typically include trial planning, project management, patient recruitment, site access, clinical staffing, patient monitoring, pharmacovigilance and data analysis.
The market remains reasonably fragmented, with the top nine players accounting for c.60% of the global market and several hundred smaller players making up the remainder of the market.
The market has undergone a period of intense consolidation over the last decade as a result of numerous landmark mergers including LabCorp/Chiltern, INC/ InVentiv, LabCorp/Covance, which have been primarily driven by the desire of big pharma to partner with fewer full-service providers.
Despite this, among small and midsized players, there is often a preference to partner with mid-sized CROs that will focus on maintaining a long-term quality relationship. Small and mid-sized biopharmaceutical companies are also more likely to partner with CROs with a therapeutic focus or specific expertise.
COVID-19 impacts on the CRO sub-sector
Whilst the preclinical CRO market has continue to perform strongly throughout COVID-19, the clinical CRO sector has been adversely impacted, with numerous clinical trials being delayed, suspended or cancelled altogether, predominantly as a result of patient recruitment and monitoring challenges throughout the pandemic.
Many organisations transitioning to ‘hybrid trials’ involving the remote enrolment and virtual monitoring services
The clinical CRO sector has, however, begun to recover as a result of substantial investment in R&D for COVID-19 vaccines and therapeutics, alongside many organisations transitioning to ‘hybrid trials’ involving the remote enrolment and virtual monitoring services to conduct clinical trials. COVID-19 has resulted in a rapid increase in the adoption of such approaches, which is driving the recovery of the sector and is expected to have long lasting impacts on how clinical trials are conducted in the future. A recent acquisition demonstrating this trend is Syneos’ acquisition of Illingworth (a specialist in clinical research home health services) in December 2020 for €97m.
CRO M&A trends
The sub-sector continues to consolidate, with PE continuing to be highly active in the sector. Key drivers include:
Increased competition for niche CRO assets
The large CROs are continually seeking small, niche acquisitions to fill any gaps in or expand their existing portfolios. As smaller and specialised CRO customer bases tend to be comprised of small and mid-sized biopharma, acquiring such companies allows larger CROs to better compete with small CROs. ICON’s €40m acquisition of MedPass in June 2020 is a good example of this, providing ICON with increased access to the medical devices CRO segment.
Entry into emerging therapeutic areas
Rather than develop therapeutic area expertise in new and complex areas in-house, many CROs have used M&A as a means to acquire this expertise. An example is Sygnature Discovery’s June 2020 acquisition of Alderley Oncology, adding expertise in preclinical oncology research.
Entry into high-growth mid-sized and emerging biopharma segments
Although big pharma have the largest CRO outsourcing budgets and make up a significant portion of the global CRO market, the highest growth segment is emerging and mid-sized biopharma companies, which prefer to partner with smaller, more specialised CROs. In order to participate in this high growth, large CROs have used M&A as a means of adding more emerging and mid-sized biopharma to their customer portfolios, as demonstrated by Syneos’ acquisition of Synteract in October 2020.
Increased interest in data-driven CRO services
Data and analytics are becoming increasingly important in the delivery of CRO services and a number of companies specialising in these fields have been M&A targets in recent years, particularly since the onset of COVID-19. The use of big data in trials is growing rapidly and has improved the quality of data collection, allowing improved analysis of large data sets. Examples of this are WCG’s December 2020 acquisition of Trifecta, a provider of tech-enabled clinical trial solutions, Charterhouse’s January 2021 acquisition of Phastar, a provider of biostatistics services to the CRO industry, and Diamond Light Source and Scripps Research partnership with Existencia, an AI-based drug discovery company, to identify COVID-19 antiviral therapies in March 2021.
PE continues to be active in the mid-market for CRO assets
PE continues to be bullish on CROs
PE has played a key role in the consolidation of the CRO market, examples including Pamplona/Parexel, Advent/InVentiv Health, Bioclinica/ERT. Although these are examples of large PE transactions, PE continues to be active in the mid-market for CRO assets. Examples include Permira’s acquisition of Quotient in 2019 and GHOs acquisition of X-Chem in June 2020.