Who Is Next? Consolidation And Proliferation In The CRO/CMO Market

By Louis Garguilo, Chief Editor, Outsourced Pharma

You can almost hear the questions blowing in on the winds of spring: Who is next? Could it be WuXi PharmaTech looking for a partner in the West or another Chinese provider for consolidation? Or from India, maybe a Jubilant in the hunt? Renewed talk of mergers and acquisitions is in the air.

Charles River Laboratories (CRL), which nearly wed WuXi a few years ago, and in so doing would have brought East and West outsourcing together in a dramatic fashion, has made it through the ceremony this time and acquired the discovery assets of Belgium-based Galapagos NV, an intriguing U.S.-Europe combination. The specific target assets are BioFocus and Argenta, with both of those being past acquisitions of Galapagos. This one deal is clearly indicative of what the industry – perhaps including pharmaceutical sponsors – has been anticipating.

Even more than foreshadowing, though, is pharma catalyzing provider consolidation? Recent trends point to this. For example, according to business development professionals in the CRO/CMO industry, and certainly those in their executive suites setting corporate direction, the 2013-2014 buzz words from existing and perspective pharmaceutical clients are strategic “partnerships” and “vendor consolidation.” We’ve seen public pronunciations from CEOs of big pharma about the need for service providers to step up their strategic involvement and serve as mutually invested partners in the drug discovery process (and beyond). In the mundane parlance of other industries, global sponsors are looking for “one-stop shops.” Expressed in a more dignified discourse, “comprehensive service integration and deeper mutual relationships.” When providers face these sentiments from sponsors, they need to react. One action is to look for assets to add to current offerings. That’s what Charles River and Galapagos have done, and throughout the industry the sentiment is there is more to come.

Consolidation AND Proliferation: Mutually Exclusive?

There are a lot of places for the acquisition-minded and more established CROs/CMOs to look. The provider universe is infamously fragmented, and despite the above discussion for consolidation, continues to proliferate faster than existing pieces can be put together. It has been widely reported that if you look hard enough you can find well over 3,200 research and development service companies in the U.S. alone. Anecdotal but strong evidence shows that more scientists and industry executives around the world are setting up their own CRO/CMO shops in order to grab a piece of the pharmaceutical outsourcing business, and in some cases to survive the downsizing they have personally experienced. The two-engineers-in-a-garage days of tech have been replaced by the two-scientists-in-a-lab era of biology and chemistry outsourcing. Have hood will travel, to adapt an old saying. You don’t hear much about ‘start-ups’ in our industry, but you should.

The question, “Who is next?” might then also be taken to mean who among the scientists and entrepreneurs in the industry will hang the shingle out announcing they too can provide services. Thus the current state of the CRO/CMO industry sees on the one hand a push from pharma sponsors towards providers offering comprehensive relationships extending throughout the discovery-development-manufacturing chain, but on the other a proliferation of smaller (start-up) CROs/CMOs around the world who forecast a growing market for their (limited and focused) service offerings. Can the industry successfully combine and proliferate at the same time? Sounds like a question for the biologists in the room, doesn’t it?

The answer from this definitely non-biologist is yes, and here is why. Simply stated, it is a good time to be providing outsourcing services in the world of new drug discovery, development and manufacturing. Pharma has decided (decisively) that fixed assets need to be reduced, and unfortunately for those involved, that the scientists and engineers working within those assets move on. Arguably, now more than at any previous time outsourcing is top-of-mind for pharmaceutical companies watching the bottom line of the insanely expensive new drug discovery balance sheet. Outsourcing is winning in the chief financial officers’ offices. Consequently, there are growing opportunities out there for providers. And while the bigger deals (or ‘opportunities,’ excuse the salesman getting excited) for integrated discovery projects will be won by those who can provide an amalgam of services – the Charles River strategy – many CRO start-ups and smaller shops are betting on an increase in smaller deals as well.

So today in the outsourcing provider industry we see a strategic move to consolidation versus an expanded market with renewed energy for new business creation. Further consideration, though, informs us these are not really opposing market forces or a new phenomenon. This is the cycle of outsourcing that pharma participates in and spins with its decision-making at the same time. For the most part it is both a virtuous circle and self-fulfilling.

The Industry Through This Deal

Let’s go back to the deal of the day for final illumination. If you look at the formation of Galapagos, it took place with the combination of two smaller companies, Crucell and Tibotec. Over the years Galapagos also acquired service assets of a variety of competitors, as well as acquiring assets from big pharma itself (GSK) that were turned into a service arm. And now Charles River adds to the mix. In summary, a “start-up” CRO gains traction with pharma (and bio) clients, even with limited scope and capacity; they reach a point where they need to grow capabilities to turn customers into more strategic key accounts and thus find partners for M&A activity; another established provider steps in to better globalize the operations. As assets continue to combine the comprehensive provider that sponsors want thus emerges. Everyone seems to win.

The conclusion, then, should be that pharmaceutical sponsors can have a positive influence on the maturation of its key provider network if they continue to work to a certain extent with some of the smaller CROs as well as the more established ones. Innovation wins, start-ups survive and assets combine to form a healthy and dynamic outsourcing industry.