Small CROS Feel the Squeeze

Small and medium sized contract research organizations (CROs) have experienced a period of aggressive acquisitions and mergers, reports Jason Monteleone in Pharma Finance. As the number of smaller firms diminishes, they face increased competition, with each other, as well as with the larger companies.

“Consolidation has changed the landscape of the top 10 CROs in the last couple of years,” says Monteleone. “Medpace, by virtue of not getting acquired, moved up from number 10 to number 8. The revenue gap between number 7 PRA and number 8 Medpace is vast as PRA’s full year of 2017 forecast guidance was for between $1.825 billion and $1.855 billion of revenue (or over 4 times Medpace).”

The process is illustrated by LabCorp’s recent acquisition of Chiltern International, which earned around $550 million last year and was the biggest of the middle-sized companies. Chiltern itself was big enough to have acquired Theorem Research, before being absorbed. Chiltern will become part of LabCorp’s Covance Drug Development business. The acquisition creates a market-leading CRO, with more than 20,000 employees around the world.

LabCorp, an S&P 500 company headquartered in Burlington, North Carolina, is a leading global life sciences company that is deeply integrated in guiding patient care, providing comprehensive clinical laboratory and end-to-end drug development services. Delivering diagnostic solutions and medicines and using technology for the delivery of patient care, LabCorp reported net revenues of $9.5 billion for 2016.

“The addition of Chiltern advances a key element of LabCorp’s strategy — to bring innovative medicines to patients faster which ultimately will improve patient outcomes,” said David P. King, chairman and CEO of LabCorp.

Medpace, earning $188 million through June (an estimated $400 million for the year), is now the largest medium-sized CRO. It is publicly traded and does not have a history of doing larger acquisitions.

While the giants like Quintiles/IMS, itself the result of a merger; INC Research/InVentiv, also a merger; Parexel; and others cast a large shadow over the middleweights, these smaller firms have still been preferred by small and medium-sized drug companies for conducting their research and clinical trials. Nearly all the income of the middle-sized CROs comes from their drug industry parallels.

Nevertheless, now the big research outfits are starting to look at the small-to-medium market. For example, INC Research, one of the biggest, has seen its income from small and medium-sized clients grow from 41 to 47 percent of total revenue, an increase of $470 million. This is $70 million more than Medpace’s whole income. Likewise, Parexel has seen its business with small and medium-sized drug firms increase by 25 percent in a year.

Biotech industry observers expect that acquisitions of smaller CROs by larger ones will soon stop. The big companies may now have all of the assets, resources and global locations that they need, and the remaining smaller firms may try to survive by developing specialized niches to serve particular customers, rather than trying to absorb each other.