Pharma Outsourcing Trends: Industry Leaders, Equity Financing, And Vendor Consolidation

By Ed Miseta, Chief Editor, Clinical Leader

The latest installment of the Pharmaceutical Outsourcing Monitor by Michael Martorelli and the pharmaceutical services team at Fairmount Partners is out, and this time around it provides an interesting look at the leaders in the world of outsourcing, and examines trends in equity financing, industry consolidation, and innovation.

It’s no surprise the outsourcing industry continues to gain a bigger share of the dollars spent on preclinical, clinical, and post approval functions. While it would be nice to accurately quantify the size of various segments of the outsourcing market, the report acknowledges that task is next to impossible. All the consultants and analysts in the world could not accurately maintain up-to-date figures on the activities of thousands of service providers around the globe.

However, the financial reports of several of the publicly-held firms in the industry can at least provide a glimpse into the companies that hold a sizeable share of the market.

On the clinical side of the house, the CRO segment is led by Quintiles, with annualized revenue estimated to be over $3.9 billion. Parexel ($2.1 B), ICON ($1.65 B), PPD ($1.6 B), and InVentiv ($1.5 B) round out the top five. Other CROs appearing in the top 10 include PRA Health, INC Research, Chiltern, Theorem, and PSI.

When looking at outsourcing firms that provide preclinical, laboratory, and manufacturing services, Lonza, Covance, and DPx Holdings top the list, with Lonza talking in the lion’s share of annualized revenue with over $3.9 billion. IMCD, Catalent, Charles River, Aenova, WuXi, Famar, and Almac round out the top 10.

Are Private Equity Firms Down On Outsourcing?

At the inaugural Outsourced Pharma West conference in San Francisco last November, a lot of the conversation centered on the acquisition of funding by pharma and biotech firms. A panel of experts speaking on the subject seemed to be in agreement that outsourcing is a good way to get to market, especially for companies that do not have the financial resources to make large investments in capital.

But what about venture capital firms actually making investments in the vendors themselves? While some who track investment spending by private equity firms are suggesting there appears to be a declining appetite for outsourcing vendors, Martorelli disagrees. Although recent or forthcoming IPOs reflect a disinvestment by PEs, Martorelli notes every PE fund must eventually liquidate its holdings. They would otherwise never return invested capital to investors. Since these IPOs can occur over months and even years, many PE firms still hold substantial amounts of stock in CROs and CMOs/CDMOs, including INC Research, IMCD Group, Quintiles, Catalent, PRA Health Sciences, IMS Health, and DPx Holdings.

“Most PE funds have a contractual life of ten years,” notes Martorelli. “Typically, they spend the first three years making investments and the last three years liquidating them. So the time frame of the ‘round trip’ of capital from limited partners to a PE fund and back to the limited partners can vary from as little as three years to as many as eight.”

Will Outsourcing Firms Continue to Consolidate?          

Martorelli’s answer to this question is simple: Of course! He notes outsourcing is a large and fragmented industry with many participants still owned by their founding entrepreneurs. Many are attractive targets for larger service providers seeking a greater market presence. Some of the smaller CROs are also attracting the attention of non-traditional buyers wanting to become involved in the world of clinical research. Others may be acquired by private equity firms pursuing a “roll-up” strategy of consolidating several small participants in an industry into a larger firm that will have its own appeal as an acquisition target.

Possible M&A trends in 2015 may include larger CMOs and CROs focusing acquisition activities on specialty technologies, mid-sized providers expanding their businesses without diluting the special nature of their operations, and small providers being wary of not wanting to become one of the last in their industry to attract a partner for long-term growth. Martorelli notes these laggards rarely receive the highest valuation when management finally decides to sell.

Why Did Lab Corp Acquire Covance?

One of the topics the report addressed was the acquisition of Covance by LabCorp., which was certainly one of the bigger stories from the last six months of 2014. LabCorp will use cash and stock to make the acquisition, which carries a price of $6.1 billion, or $105.12 per share of Covance stock (per the closing price the day prior to the announcement). Comments by Covance CEO Joe Herring and other executives prior to the announcement made no mention of sale considerations. However, a LabCorp proxy statement indicates that over the last two years, the company’s management, Board, and financial advisors had been evaluating:

• The purchase of LabCorp’s central lab business by Covance
• The sale of Covance to a larger competitor
• A Covance purchase of a smaller competitor
• The sale of Covance to LabCorp.

We now know the advantages LabCorp expects to gain from the acquisition, which include diversifying the company’s business mix and client base, enhancing its global reach, and, of course, increasing the scale of its central lab business, a critical component of the company. Martorelli notes another benefit that may not be so obvious: the acquisition promises to help the company leverage its role in the development of personalized medicine.

The deal can also provide LabCorp with new platforms for organic growth and future acquisitions, as noted in a release put out after the announcement. Regardless of the reasons for the merging of the two companies, Martorelli notes he is intrigued by the possibilities for growth that now exist for the company and its widespread business base.

Are Innovations Really Innovative?

Finally, the report takes a stab at disruptive innovation in the industry. The report has suggested in the past that disruptive innovations would most likely occur in biopharmaceutical companies, rather than service providers. Although many “disruptive” ideas have been presented at various shows and conferences, with some even getting as far as implementation, Martorelli notes it is not obvious that any have truly revolutionized clinical trials.

To be fair, many of these ideas (adaptive trial design, risk-based monitoring, mHealth, etc.) have not been adopted in a majority of clinical trials. Martorelli notes it may take further adoption before the benefits can be truly appreciated. It’s also possible that a new generation of clinical professionals will incorporate many of these ideas into their daily activities without labeling them “revolutionary.” He also notes many of these ideas may sound good at a conference, but may represent nothing more than well-written sales pitches.     

While giving a nod to respected industry visionaries and consultants, he wonders if the real innovation changing the industry isn’t happening in manufacturing plants and clinical research labs around the world, rather than in board rooms in the C-suite. The worker-bees in those facilities, solving the problems they encounter on a daily basis, may be the ones making real advances in the drug development world. They should not be overlooked, lest we risk missing out on ideas that can truly bring down costs, create better and safer medicines, and produce a more positive experience for patients. 

The latest issue of the Pharmaceutical Outsourcing Monitor also delves into crowdfunding in drug development and regulatory agencies. A preview of the report can be viewed here. To obtain the complete, please email Holly.Cribbins@fairmountpartners.com.