Have Small and Mid-Size CRO’s Overachieved?
Last week Outsourcing-Pharma.com ran a story based on a KPMG industry analysis stating that the top 10 Contract Research Organizations (“CROs”) have over 50% market share. Like most, I wasn’t surprised by that fact and had assumed that was general knowledge. Back in 2010, while I was Chief Financial Officer for Omnicare Clinical Research (“OCR”), I learned first-hand that large CRO’s were dominating the market. We were in the midst of a sale process and I remember one private equity partner telling us that he didn’t think the world needed another $90 million dollar CRO. He had valid reasons for his concern. 2010 was a tough period for mid-size CROs due to:
A Biotech funding slow down
Consolidation in the pharmaceutical sector led to high cancellations and delayed decisions on new opportunities
The negative economic impact created by the financial markets meltdown
The private equity partner echoed the conventional wisdom at the time that consolidation would squeeze out small players and only large CROs would survive.
The KPMG report peaked my curiosity so I decided to research how much market share the top 10 CROs had in 2010 and see if it was materially different than 2015. I made one small change, I excluded the preclinical and focused strictly on clinical CROs.
I found that market share for top 10 CROs in 2010 and 2015 was remarkably similar. I would have expected a material increase over the past 5 years, but clearly that wasn’t the case.
Three members (i3, PharmaNet & Kendle) of the 2010 top 10 were acquired by current top 10 CROs (InVentiv & INC Research). Additionally, several top 20 CROs (Novella, Aptiv, RPS & Theorem Clinical Research) had been acquired as well (by Quintiles, ICON, PRA & Chiltern).
Consider that combined revenues of PharmaNet, i3, Kendle, RPS, Novella & Theorem would total more than $1.7B of acquisition revenue which would represent 7% of 2015 market share. Take away the 7% of growth via acquisition and the market share of the top 10 CROs could have declined to 50% in 2015. I was surprised at the success experienced by small and mid-size CROs over the past 5 years. I think there are several factors contributing to the continued success of small and mid-size CROs:
Biotech funding has come back in a big way. Many small & mid-size CROs changed their business models to service the biotech market and that has been very successful. This was one of the reasons Novella was attractive to Quintiles.
As industries mature, innovation tends to come from smaller nimble companies. The top 10 CROs now have more than $14.5B of clinical work. Companies at this size tend to have more bureaucracy.
Rapid growth in Asia created opportunities for companies to expand their geographic coverage.
I expect several of these trends to continue. There are still several mid-size CROs – names such as Premier Research, Worldwide Clinical Trials, Pharm-Olam and SynteractHCR come to mind. New companies with innovative ideas such as Elligo Health Research being (run by John Potthoff Theorem’s former CEO) are being established all the time. Elligo allows patients to enroll into clinical trials under the care of their own trusted clinician. In addition, several industry analysts expect Asia to continue experiencing above market growth into the near future.
I wish had a crystal ball back in 2010 when that private equity partner wondered aloud if the world needed another $90M CRO. The answer would have been a definitive yes. Clearly pharmaceutical and medical device sponsors have shown the continued desire to work with for small and mid-size CROs, particularly those with differentiated offerings. What I find most ironic is that large CRO’s also found them attractive as well.