The Health Care Investor : Healthcare Lawyers & Attorneys for Life Science Companies & Investors

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.

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Accountable Care Organizations (ACOs) have become a catchphrase within today’s healthcare industry. As we have discussed in prior posts, ACOs are intended to be a vehicle for providing physicians and medical centers financial incentives to continue offering high-quality medical services to their Medicare patients while keeping costs at an acceptable level. Currently, Medicare habitually reimburses physicians and hospitals more when patients are on the receiving end of more tests and additional procedures, increasing costs. By emphasizing preventative care and monitoring patients with chronic illnesses, the ACO approach is designed such that doctors and their institutions would receive higher reimbursements for keeping their patient population healthy.

Under the new law, which goes into effect January 2012, an individual ACO would manage the health care needs of at least 5,000 Medicare beneficiaries for a minimum of three years. ACOs will, ideally, systematize such components of patient care as hospitals, primary care and specialty physicians, as well as both in-home and institutional long-term health care, ensuring optimal patient care and physician financial benefits. Medical centers, health care practices and insurers across the country are looking to form ACOs that will include privately-insured patients as well as Medicare recipients.

Multispecialty groups have begun establishing ACOs throughout the country, with several initial efforts appearing in California. Large medical centers are buying up practice groups for a variety of reasons, a consolidation trend that now also has the additional benefit to some systems of formation of ACOs that would employ a majority of their providers. With more access to the necessary start-up capital, these institutions will, conceivably, have at least a monetary advantage over many smaller private practice groups. Some of the largest health care insurance providers in the country, such as Cigna, Humana and United Health Care, have also announced plans to form ACOs; these companies already collect a plethora of information on patients, vital for coordinating and reporting healthcare.

Start-up and first year cash costs will typically come from an ACO’s providers, with a CMS estimate of $1.76 million. As with any venture, particularly innovative ones, careful contractual delineation of the parties’ relative rights and responsibilities is paramount for success. For example, if funding obtained via financing, loan documents should be clear as to the extent to which ACO participants are obligated to guarantee such debt (e.g. dollar and time limits on the guarantees relative to the entire ACO investment, etc.). At the conclusion of each year, an ACO will either receive payment from CMS or, conversely, remit funds to the agency. These profits/losses will then be allocated to the participants.   Investors may opt to place finances in escrow or offer bank letters of credit to ensure the availability of funds potentially owing back to CMS should the ACO fail to hit performance targets. Normally, an ACO would issue profits and losses based on a formula that incentivizes providers to meet the organization’s objectives, details of which would be included in negotiations, another aspect of ACO contracts critical in determining investors’ rights as well as risks.
 

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