CRO: Does Size Matter?

March 16, 2018

The (seemingly) age old debate of whether a mega/large CRO is a better choice over a mid-size CRO still rages.  Per Outsourcing-Pharma.com, the gap between mega/large CROs and mid-size CROs has never been greater (due to recent CRO consolidation).  Consider that in 2009, INC Research had approximately $250M of revenue  and now after combining with Inventiv, Syneos Health boasts $2.1B of annual clinical revenue and more than $3B of annual total revenue (including commercial solutions).   INC Research has gone from mid-size to mega CRO in less than 10 years - quite an accomplishment!  To answer the title of this article, I believe size does matter, but maybe not in the way you are thinking.

 

A Tale of the Tape

 

Let's compare Syneos Health and Medpace, widely assumed to be the largest mid-size CRO in the market.  I have also added a column assuming that the average mid-size CRO us roughly half the size of Medpace.  I'll use the average mid-size CRO analysis later in this article.

 Pretty vast differences:

  • Syneos has roughly 5.4 times more clinical revenue than Medpace and 10.8 times more than the average mid-size CRO.

  • Syneos has roughly 5.7 times more estimated employees in their clinical business unit than Medpace and 11.84 times more than the average mid-size CRO.

  • Lastly, Syneos has roughly 7.3 times more clinical backlog than Medpace and 14.6 times more revenue than the average mid-size CRO.

 

Another big difference:

 

Below is Syneos Health's Customer Concentration tier profile for 2017 based on total 2017 service revenue. Red represents top 20 pharma, gray represents top 21-50 pharma and yellow represents small to mid-size sponsors.  Roughly 2/3rds of Syneos's focus is with the world's top 50 sponsors.  That makes sense as roughly 80% of all work outsourced to CROs comes from large and mid-size sponsors.

 

 

 

Below is Medpace's Customer Concentration tier profile for 2017 based on total 2017 service revenue. The chart is completely flipped compared to Syneos.  89% of Medpace's customer concentration is with small and mid-size sponsors (which is not unusual for a mid-size CRO).  I can verify that Clinipace focuses on the same customer segment, while Premier Research states on their website that 85% of their business is with biotechs.

 

 

 

Mega/large CROs need to focus on large sponsors in order to maintain their large revenue bases.  Additionally, mid-size CROs have carved out their niche as being great partners for small to mid-size biopharmaceutical and device sponsors.

 

The Mid-Size Battle

 

I can say at Clinipace even though we focus on small and mid-size biotech and pharmaceutical companies, we quite often find ourselves competing against mega/large CROs.  Often sponsors feel that larger CROs are the safe pick due to their vast difference in size and scale.  It's often been said that you won't get fired if you hire Quintiles.  However, I'd like to present a different perspective.

 

Let's assume a biotech has a $5M project to outsource.  The biotech is trying to decide between a mega/large CRO or a mid-size CRO.  Project team and therapeutic capabilities are equal and both have adequate staff in the required countries.  Internal consensus may be that choosing a mega/large CRO is the safe play - it could actually be the riskier choice.

 

Sponsors should consider how much visibility their project will have inside the CRO.  CROs (like other industries) will focus a preponderance of its management time and focus on "high visibility" projects that are "materially significant".  A project that is materially significant to one CRO may be materially insignificant to another.  

 

The analysis below shows financially how that $5M project is viewed financially inside each CRO.  Within Syneos, that project would represent roughly 0.1% backlog and 0.1% of revenue (assuming the study were to burn over 24 months).  However, within a mid-size CRO, that same study could represent close to 2% of total backlog and 1.3% of total revenue - a materially significant amount.

 

 

 

Why are those figures significant?  All things being equal, wouldn't a sponsor want to go with the partner where their study will get a higher degree of oversight due to its internal materiality?  I guarantee you that my Board of Directors at Clinipace would want to know our performance for a customer that represents  2% of our backlog.  A $5M study wold likely fall below that level of scrutiny at a mega/large CRO.  The reason is that a majority of mega/large CRO revenue comes from their top 10-20 customers.  Below is Syneos Health's 2017 customer concentration - you can see that 41% ($1.3B) of total revenue came from their top 10 customers - I am assuming a biotech with a $5M project would fall out of that grouping.  I guess the question is would more focus from a mid-size CRO be less risky than the scale benefits provided by a large CRO.

 

 

Mega/Large CRO Advantage

 

I know, I am a mid-size CRO CEO and I just wrote a segment touting all the benefits of working with a mid-size CRO - clearly no bias there.  Time to level the playing field.  I guarantee that Pfizer won't be outsourcing 25% of their clinical work to Clinipace - we don't have the scale to handle that assignment.  Nor would we be the beneficiary of a $50M global project - not our sweet spot either.  Syneos, IQVIA, PPD and all the other large/mega players could handle those types of assignments.  They have the experience and have made the investments in scale and geographic reach to handle those types of projects.  Based on customer concentration data, large sponsors agree.

 

Final Thoughts

 

I believe that as long as mid-size CROs stay in their swim lanes and focus on the right SIZE projects and the right SIZE sponsors within the geographic and therapeutic expertise they can be the perfect partners for their desired customer base (small-midsize biopharma & device sponsors).  However, I can't stress enough that strategy, quality of project team and a history of service delivery are key drivers.  A mid-size CRO that competes with the "B" team against the "A" team of a larger CRO will lose a majority of the time.  Sponsors are buying the quality of your team and strength of your strategy - get either or both of those wrong and you can expect the dreaded "runners up call" from the sponsor.  I could do unlimited calculations, but at the end of the day, the quality of your people and service delivery matter.  I like to say, "Bigger isn't better, better is better".

 

Jason Monteleone is CEO of Clinipace & President at Pivotal Financial Consulting, LLC.  Clinipace is a global mid-size CRO with operations in the Americas, Europe and Asia-Pac serving small and mid-size pharma and biotech sponsors.  Pivotal provides Divestiture Assistance, Acquisition Advisory Services and Strategic Planning to the Pharmaceutical Outsourcing Industry.  Jason can be reached at jmonteleone@pvtfinance.com. Follow me on Twitter @JMPivotal.  Sign up for Jason's latest blogs and updates at my www.pivotalfinancialconsulting.com.

 

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