The Healthcare Investor
Private Equity Opportunities in Contract Research Organizations (CROs): Part I
Contract research organizations (CRO) provide research services support for the biotechnology, medical device and pharmaceutical industries on a contractual basis. They offer such services as preclinical and clinical research, clinical trials management, biopharmaceutical development and pharmacovigilance. CROs run the gamut from international full-service organizations to niche specialty businesses. The emergence of the strategic partnership model, with some of the largest global pharma companies pairing with leading CROs in R & D, has stimulated the industry's growth.
A survey by RW Baird analyst Eric Coldwell found that 42% of pharmaceutical companies saw prices increase during the second quarter 2012, up from one-third in the first quarter. The scene is set for a projected 3.6% to 8% growth in R&D budgets among both pharmaceutical and biotech firms. Coldwell speculated, “Looking ahead several years, we have generally concluded that client R&D budgets will be flattish in total, yet the CRO industry secular market move to higher involvement will continue as clients replace less efficient internal functions with more efficient and cost effective external solutions.”
An article in Forbes found that of 388 drugmakers and biotechs that were surveyed reported that CRO clients expect a 9% increase in outsourced R&D budget, with total market penetration by CROs increasing from 35% in 2010 to 38% in 2011. Among large drugmakers, 27% expect to outsource, while 47% of the smallest companies expect to outsource.
The Association of Contract Research Organizations (ACRO) conducted a survey of its own members and examined 11,508 trials carried out by ACRO members; the results showed that each CRO was involved, on average, in over 750 studies. By comparison, ACRO states that approximately nine of its members worked on roughly 400 trials in 2008. They also contributed to 33 of 38 drugs approved in the US and Europe in 2010.
For these reasons, the last 18 months have been a buying spree of CRO’s by private equity funds with the next 12 months looking to be similar. The ability of CROs to improve performance even when R & D budgets have remained flat has made them a darling of investors.
In Part II of this report we will examine key industry players and the firms that have recognized the growth potential of the segment and invested accordingly.