Will More Large CROs be Acquired?
Recently, IMS Health announced they were acquiring Quintiles Transnational in a deal worth an estimated $9 billion. This comes on the heels of LabCorp acquiring Covance last year in a deal worth an estimated $6.1 billion. Consolidation in the CRO sector isn’t unique, it’s been the norm and is expected to continue. The industry is still somewhat fragmented as it has been estimated there are 700 to 1,500 CROs globally. What was unique is that the acquirers of Quintiles and Covance came from outside the traditional CRO sector. Typically, CRO M&A speculation centers around either:
Large CROs acquiring mid-size or small CROs to obtain scale and capabilities;
Large CROs merging to increase scale to better compete for large pharma contracts, or;
Midsize CROs consolidating to gain scale to service larger trials.
I wonder if CRO’s being acquired by data rich healthcare organizations will become commonplace. While two deals don’t signify a trend, it is interesting to note that earlier this year Bloomberg reported that LapCorp had deal discussions with INC Research.
The Covance and Quintiles deals make strategic sense – having access to IMS’s and Labcorp’s patient data should improve decision making and patient recruitment for complex clinical trials and lead to more efficient clinical trials. IMS and Labcorp get a diversified low risk (i.e. not tied to insurance reimbursement) revenue base made up of customers with strong financial profiles (i.e. large pharma) that can and do pay their bills. Lastly, both sides get the opportunity to cross-sell services and capture more revenue from their combined customer base.
Potential risks that come to mind are:
The patient data not being as valuable as expected;
Losing focus with the core mission of efficiently managing clinical trials;
Becoming less entrepreneurial with increased size and bureaucracy;
Having to fight for capital with other parts of the combined business.
Clearly, management felt the future opportunities far outweighed these risks. Quintiles and Covance have historically been leaders in the field of clinical research and based on their track records, I wouldn’t bet against them (thus far it seems like Covance is performing well). Large CROs are attractive partners as they have diversified backlogs to weather an underperforming sales quarter or significant cancellation, strong cash flows and provide operational synergies ($100M was the expectation for both deals).
Where do these deals leave other large CROs such as ICON, Parexel, InVentiv, PPD, PRA and INC Research? If Quintiles and Covance are able to demonstrate a material decrease in trial study durations and budgets, then it’s likely the other large CROs will need similar access to the aforementioned data and technologies to satisfy customer expectations. Frankly, most if not all of them have strategies in place (see PPD’s acquisition of Accurian and Icon’s acquisition of PMG Research) to improve access to patients. Regardless, it will be interesting to see how the Quintiles & Covance deals impact the other large CROs over the next couple of years. Recent history suggest more deals are on the horizon.