Clinical Research Industry: Changing Dynamics of Clinical Research Organizations – Part 2
With the clinical research industry taking more globalized form than local, and development has a global impact. So, when four major organizations of an Industry goes through transformations, the dynamics of the industry changes. This is what is happening currently with the Clinical Research Industry as well.
Geographically, the market is focused primarily in North America, which also has the greatest market share. European countries take the next two spots.
The Asia Pacific region is also seeing unprecedented growth in the sector, with India, China, Singapore, and South Korea making great inroads in recent years. Clinical research organizations like QuintilesIMS (formerly Quintiles), INC Research, Parexel, Covance, PPD, PRA international, etc have their reach in almost all of these regions.
In the previous article, two recent developments in these clinical research organizations (QuintilesIMS and Parexel) were discussed, which signaled a big change coming in the industry. While we saw a merger happening in one case, another case was significant with a global giant deciding to close an office along with looming massive layoffs.
It’s noteworthy here that there is a significant operational dependence on clinical research organizations for all drug development projects today. Moreover, from the industry sector point of view as well, these two CROs contribute a significant chunk to a steadily growing international clinical research market.
In 2015, the international clinical research market was valued at approximately $54 billion. By 2016, that figure was $63 billion, and it is expected to grow to $72 billion by 2020. Accordingly, interest in these happenings is understandable.
Interestingly, these developments just refuse to subside. After these two CROs, another two, or three, CROs brought similar news to us recently.
INC Research and inVentiv Health
Attracting just as much attention as Quintiles-IMS merger is the handshake between INC Research and inVentiv Health which was announced on 10 May 2017. This move creates the world’s biggest Contract Commercial Organization (CCO) in terms of net revenue, the second-largest provider of Biopharmaceutical Outsourcing, and the third-largest CRO.
The outcome of the unanimous decision by both boards of directors gives the new business an enterprise value of $7.4 billion and combined net revenue of over $3.2 billion. The merger is estimated to realize approximately $100 million in annual run-rate cost synergies.
This is huge of course!
With combined resources of 22,000 employees in over 60 countries and serving more than 110 nations, this new partnership is well placed to reap outsourcing potential of $150 billion in established and emerging CRO and CCO markets. The union of INC and inVentiv comes at the right time to capitalize on the growing inclination around the world for commercial outsourcing. The clinical development market served by CROs is growing at 6% CAGR and is expected to reach $36 billion by 2020; and the CCO market is growing at almost 8% CAGR and is expected to reach $34 billion by 2020.
With complementary areas of operation that INC and inVentiv serve, management must be expecting great synergy between both teams. INC has strong relationships with and specializes in providing services to small and mid-sized biopharmaceutical companies, while inVentiv has established relationships with all of the world’s top 20 biopharma. Its access to subject matter experts like medical science liaisons, nurse trainers, patient advocates, and strategic consultants is invaluable in this respect.
This means that each unit can continue to specialize in its proven area of expertise while enjoying a flow of clients between them without any loss of revenue to either. In fact, this arrangement further insulates the new enterprise from revenue leakage.
However, the picture does not seem to be as good for the 5th CRO (after QuintilesIMS, Covance, INC Research, and inVentiv) in this story. Parexel seems to be heading towards a shaky situation, as signified by recent layoffs.
Parexel, one of the major CROs globally, had outlined in 2016 its intention to slash 400 jobs in 2017 after laying off 850 staff. In 2017, this number has grown three times. Papers filed with the SEC on May 4 now reveal that the figure has trebled to 1,200 for 2017.
This does not seem to be good news for the employees and the clinical trial enthusiasts. The slashing of employees does not speak well about the business prospects in the near future. However, in the long term, this may turn into a good movie (or, shall we say a similar move as QuintilesIMS and INC / inVentiv).
Investors seem to be taking this up as a positive development. Since the layoffs result in huge savings, it would indicate a better bottom line at least in the near future. The 2016 cuts alone represent savings of between $20 million and $30 million to the company’s coffers. For 2017 layoffs, figures maybe even better.
Stocks of this Boston-based global clinical trial specialist saw a 7% bump in value, and while it has a market cap of approximately $3.8 billion, it is anticipated that a revaluation will see it touch the $4 billion mark.
When the news broke, Starboard Value, a New York-based investment adviser instantly snapped up almost 3 million shares which represent a 5.7 percent stake in the company. It is only the latest investment operation that has hitched itself to Parexel. Expressing confidence in Parexel’s potential, Starboard said that the shares “were substantially undervalued” and that it believes there is “a substantial opportunity to improve (Parexel’s) operating margins.”
These saving figures, rise in the stock value and positive perception by investors have also inspired persistent rumors about a potential buyout.
This also seems to indicate a large reserve of resources that may be injected into the concern in the coming year. Increased efficiency attained through layoffs may have given investors the confidence that a leaner Parexel will be better geared for market domination and stability.
These developments in the clinical research industry clearly indicate a turning point. There is a consolidation in the industry. Big CROs are coming together and joining forces to create big entities.
Other CROs are improving their efficiency by cutting down costs and moving towards better financial structures. This may also be leading to another potential buyout/merger opportunity.
It does appear that
- There is a fair amount of competition in the industry, which is good news, as more competition may lead to better services.
- There is certainly a positive outlook on business opportunities in the future. With the pharma industry preparing for decreasing their drug development cost and improving new molecule turnover time, more CROs are getting ready to manage research more cost-effectively and with better timelines.
- Consolidation in the industry is leading to the creation of stronger organizations, which might offer more reliability and ability to offer better services.
- Smaller companies will need to be prepared for a more competitive future and a stronger operational presence that can help them compete well.
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