Are Large CROs Still Buying Mid-Size CROs?

When I joined MDS Pharma Services (November 2007), the prevailing thought was industry consolidation would accelerate and mid-size CROs would eventually be acquired by large CROs. The end result would be 5 or 6 large CROs completing the majority of outsourced drug development work while simultaneously wiping out the mid-size CRO sector. Actually for a while that seemed to be true. Examples include:

• INC Research acquired Kendle International (2009)

• Inventiv acquired i3 Research (2011)

• Inventiv acquired PharmaNet (2011)

• Quintiles acquired Novella (2013)

• PRA acquired RPS (2013)

• Icon acquired Aptiv Solutions (2014)

We now know the tremendous biotech sector growth created ample work for CROs of all sizes. Mid-size CROs not only survived but flourished and have captured financial investor interest. Let's take a look and see if mid-size CROs are still acquisition targets for larger CROs? By the way, the business units of MDS Pharma Services are now components of Celerion, Charles River and Syneos Health.

Recent CRO Deal History

The chart below lays out many pure play CRO transactions over the past several years. The list is not all-inclusive as not all transactions are published (nor am I aware of every completed transaction).

A few thoughts:

• Out of 19 transactions listed above, 10 were financial investors acquiring either a mid-size or large CRO

• 6 CRO consolidations (4 midsize and 2 large CROs)

• Only 2 instances of a large CRO acquiring a mid-size CRO

How come large CROs are not acquiring mid-size CROs? Clearly based on the news about Worldwide Clinical Trials and Ergomed's recent deals, there have been solid assets available. What has changed? Well for one, employee headcount at large CROs has tripled over the last 10 years. Large CROs (with the exception of parts of Asia) have the scale, geographic reach and therapeutic expertise to run just about any clinical trial.

The schedule below shows that outside of acquiring Tigermed, acquiring a mid-size CRO will not really move the needle for large CROs. Acquiring Tigermed for $7B+ is not likely in the cards either.

Strategically and economically, paying a large multiple for a mid-size CRO may not make sense. Ergomed's sale price is a reported $886M for an estimated $39M of EBITDA in 2023 or a 21.7x multiple. Considering the large public company EBITDA multiples all range from 6.5x (Syneos which is not currently private) to 11.6x (Icon), it feels like a large CRO paying 20x+ for a mid-size CRO is a bit rich (synergy potential not withstanding).

So, if Large CROs are not acquiring Mid-Size CROs, what capabilities have they been acquiring?

Recent Large CRO Acquisitions

The chart below lays out 25 acquisitions made by large CROs over the past couple of years. Again this is not an all-inclusive listing.

A few thoughts on the 25 acquisitions listed above:

• 9 transactions contain a technology, data analytics or artificial intelligence component

• 4 relate to digital advertising (mostly by IQVIA)

• 3 CRO transactions (Synteract, PRA Health & MedPass)

• 3 Clinical trial site businesses

• Lab businesses, decentralized clinical trial services and other software were also included

Perhaps an NIH publication ("The Future of Clinical Trials and Drug Development: 2050") from February 2023 can shed some light on where the industry is headed.

A few key insights from the article:

• "With the expected revolutions in data collection, the clinical study teams that devise and run studies must also change. Equally, the amount and type of data we can expect dictates that it will not be clinical pharmacologists or clinicians but more likely algorithms managed by data scientists that will be driving drug development."

• "The wider adoption of AI would accelerate the process to move studies from the planning stage to delivery."

• "Simulation would contribute to the preclinical characterization of new therapies; identification of optimal dosing strategies and, through the availability of actual patient data, the modelling of large-scale, simulated/synthetic cohorts; provide instantaneous safety and population profiling; and deliver estimates of economic benefits that could be achieved following the deployment of new medicines."

• "Improved data accountability, technology and automation will mean that there would no longer be any need for CRAs. Clinical trials were expected to be managed centrally, with data being provided from a variety of tools (wearables, etc.)."

The key takeaway being that technology/real world data/artificial intelligence will not only drive cost reductions and operational efficiencies in the clinical trial process, but also improve success rates. Fantastic news for patients and investors. A lot of articles discuss how AI will reduce the overall cost of drug development - I believe that to be true. I also believe that while the cost to bring a product to market will go down, the overall spend on clinical development will increase. I will explain as that sounds counterintuitive.

Today 90% of drug development fails. What if AI, were to meaningfully improve that success rate to 20-30% (instead of 10%)? Drug development spent would increase along with success rates as greater spend would provide more opportunities for a successful outcome. Imagine an environment where total R&D spend goes up, individual study costs go down, time to market decreases and successful clinical trials increases. Sponsors, CROs and patients would all win (I'll assume savings are passed on with lower drug prices - but that topic needs it own blog).

Wrapping Up

Large CROs have shifted their acquisition strategies from acquiring scale and geographic reach to capabilities necessary to change to drug development paradigm. Artificial intelligence, machine learning, real world evidence and simulation modeling are just a few of the latest technologies that will organize, interpret and streamline clinical data resulting in more efficient higher success rate clinical trials. Mid-size CROs are still popular acquisition targets with financial investors as evidenced by recent transactions. Forward thinking mid-size CROs with strong financial partners also have an ability to transform their operations with technology and data via acquisitions and partnerships. The competitive dynamic between large and mid-size CROs will be interesting to track. Leveraging data/AI does not require massive geographic coverage or large employee headcounts. A technologically focused strategy and culture along with required personnel could allow a few of today's mid-size CROs to move up to the large CRO category.

Jason Monteleone joined Ancillare as President in October 2022, bringing extensive expertise in the clinical trial pharmaceutical outsourcing services sector. A recognized health care and life science leader with 25+ years experience, most recently as CEO of Clinipace (now Caidya), a global mid-size Clinical Research Organization (CRO). Under Jason's leadership, Clinipace merged with dMed, an Asia-Pac based CRO, creating at the time, the mid-size CRO with the largest Asia-Pacific presence. Jason is also on the Board of Directors for the Drug Information Association (DIA), a global association that mobilizes life science professionals from across all areas of expertise to engage with patients, peers and thought leaders in a neutral environment on the issues of today and the possibilities for tomorrow. Prior to Clinipace, Monteleone founded Pivotal Financial Consulting LLC, was Executive Vice President and Chief Financial Officer of Theorem Clinical Research, was Chief Financial Officer of Omnicare Clinical Research and held executive finance positions at MDS Pharma Services and VIASYS Healthcare. Jason can be reached at jason.monteleone@ancillare.com & jmonteleone@pvtfinance.com. Follow me on X @JMPivotal and sign up for Jason's latest blogs and updates at www.pivotalfinancialconsulting.com.