DIA 2013: Big or small, CROs need clout to survive

BOSTON--It's nearly impossible to spend time around members of CRO industry without feeling the weight of M&A.

Walking through the annual Drug Information Association meeting, in which pharma contractors of all stripes pile into booths and bars with an eye on partnering, you can't miss the signs of consolidation, from the "HCR" tacked onto Synteract's logo to the buzz around PRA's corner of the conference when attendees found out it was soon to change hands for $1.3 billion.

Between IPOs, tuck-ins and megadeals, the world's largest CROs have only gotten bigger over the past few years, and, in turn, have snatched up intricate deals with large drugmakers, going beyond transactional services and getting seats at R&D decisionmaking tables. All those top-heavy team-ups have made it tough for small and midsize contractors to land deals with Big Pharma, and that's not going to change any time soon, Parexel ($PRXL) COO Mark Goldberg said.

"If you're going to be a strategic partner, you have to be a large global player," Goldberg said. "That's why the market share has shifted to the big CROs."

The industry's gradual change from a lot of piecemeal contract work to multiyear collaborations evolved as sponsors realized they could get more out of outsourcing by better integrating their contractors, INC Research Executive Vice President of Global Business Development Neil Ferguson said.

But while the new models of outsourcing have changed the game at its highest levels, don't count out the midsize labs of the world, he said.

INC's Neil Ferguson

"The industry will still need small and niche CROs to support work that doesn't make sense for strategic partnerships," Ferguson said. "There's room for everybody. It's just a matter of recognizing that this business is evolving."

That's exactly what SynteractHCR is counting on, Vice President of Biometrics Philip Doren said. While the company expanded its size and capabilities with its March buyout of Germany's Harrison Clinical Research, it still prides itself on working to help emerging and midsize biotechs push their compounds forward. And though the company may not often compete with the likes of Parexel, its attention to clients and commitment to their satisfaction means it doesn't have to, he said.

"Having worked at the largest and smallest companies in the industry, one very big concern is that sponsors will get lost or overlooked by large CROs," Doren said. "That's not going to happen at SynteractHCR."

Same goes for Rho, as the North Carolina CRO and its roughly 300 employees have carved a space in the industry that makes their small size a benefit to sponsors, Vice President of Operations Tara Gladwell said. More than half of Rho's employees have been at the company for more than 5 years, Gladwell said, and because the majority of the CRO's revenue comes from repeat business, that reliability is key to Rho's success.

"We're not playing the M&A game; we're truly private," she said. "That puts us in a nice spot to survive whatever's going to come (in the industry). We provide a needed alternative to what's out there now."

That being said, size has its benefits, and Quintiles ($Q), the world's largest CRO, is capitalizing on them. Shortly after hauling in nearly $1 billion in an IPO, Quintiles inked a deal with Merck Serono that goes far beyond arbitrage-eyed outsourcing.

Rick Sax, the company's global head of clinical design and reporting, said the Merck Serono partnership allows Quintiles to optimize every stage of drug development using the wealth of data it has amassed from decades of clinical work, guiding every decision from candidate selection to late-phase trials. The partnership goes much deeper than run-of-mill transactional work, he said, and Quintiles can offer the same full-scale development service to companies of all sizes.

Quintiles' Rick Sax

"It's scalable, so we can do Merck Serono and separately build a customized structure for another partner," Sax said. "We can leverage our size to build bespoke, end-to-end solutions, and our size allows us to do that and do it quickly."

Still, the basic principles of successful CRO work apply whether your revenue is expressed in 11 figures or just 6, PPD Vice President of Global Product Development Rob Dow said. Most CROs, no matter their scale, operate at margins hovering around 10%, meaning you're only as good as your reputation, he said.

"That margin erodes very fast if things go wrong," Dow said. "(The industry) will never have the flexibility that pharma companies have. Because CROs have such a high volume of work, if they don't succeed, they won't be able to stay in business."

The key to staying alive, for CROs of all sizes, is transparency with sponsors, Ferguson said, and INC approaches each of its deals with the goal of finding common ground to cut away any trans-company divisions that could stand in the way of clinical success, whether handling a virtual biotech or a top-10 drugmaker.

"Us-and-them is a path to failure," Ferguson said. "The most successful relationships are about clear expectations and clear communication."

-- Damian Garde (Twitter | email)

ALSO: In the FierceCRO at DIA 2013 slideshow, take a look through Fierce's trip through the conference for a glimpse at where our industry stands and where some of its leaders think it's going. Check it out >>

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