CRO Sector Update – M&A Impact & Increased Consolidation – 19 August 2021

Could you start by contextualising recent non-M&A developments in the CRO [contract research organisation] sector? How do these inform your general outlook for outsourcing over the next few years?

The pandemic has accelerated the push towards decentralised models. Have you noted an increased push towards outsourcing clinical research, and how should we estimate the uptick in the next couple of years?

What is your longer-term growth outlook for Iqvia, the largest player in this sector? The firm recently readjusted its 2021 revenue expectations. What are the hurdles to that strategy materialising as expected, and are there any underestimated or overlooked growth avenues you would pinpoint for the company?

Icon finalised its acquisition of PRA Health Sciences in July 2021 to become the second-largest player in the sector. What was your overall assessment of the acquisition? How should we frame Icon’s ability to extract value, and are there particular synergies you would highlight for the combined company?

How did you assess Thermo Fisher’s acquisition of PPD, announced in April 2021? Thermo has a very clear goal of an end-to-end offering for pharmaceutical outsourcing. Labcorp’s end-to-end model with preclinical and clinical hasn’t necessarily driven the crossover the company had hoped for. What synergies do you expect for Thermo and PPD, and how should we gauge the crossover for their different service lines?

How should we frame the value accretion for Thermo, given the particularly impressive portfolio in cell and gene therapy manufacturing? Could this be akin to Labcorp – whereby Thermo doesn’t necessarily drive crossover in verticals, but does have an end-to-end CRO model – or do you anticipate a sponsor going to Thermo for its broad range of service offerings? There are considerable differences in the provider selection process of a sponsor between each input or each step. Could Thermo’s model disrupt that dynamic?

How would you grade Covance’s clinical capabilities? The company has an end-to-end model with preclinical and clinical. How does it stack up against Charles River – the other major player in the preclinical realm – which has been expanding into manufacturing? What strengths or gaps would you highlight in Covance’s strategy and offering by comparison to the activity around the company?

Do you think Syneos is a strong player, particularly in light of Icon-PRA’s far more significant scale? Previous specialists have shared mixed feedback. Some have suggested the commercialisation piece of its portfolio could be divested, because the firm is far more known for its CRO offering [see Syneos Health – Coronavirus Impact & 2021 Outlook – 15 April 2021]. Conversely, others have suggested the firm is more known for its commercialisation capabilities, while its CRO capabilities aren’t competitive against players such as Iqvia or Covance [see Outsourced Pharmaceutical Services – Increased Input Conversion & Expected M&A Activity – 6 August 2021]. What’s your assessment of the Syneos discussion?

Could you frame Parexel’s positioning and growth opportunities, given its recent change in PE owner? Its technology and CRO offering were divided in that sale. Where can it compete without that tech piece?

Which players are best-positioned to win disproportionately over the next few months, particularly amid post-coronavirus normalisation? Could it be players such as Iqvia, Syneos, PPD under Thermo or even Wuxi, or is it more likely to be smaller mid-tier CROs?

A previous specialist indicated Iqvia is struggling with smaller biotech and still working to gain a footing among these clients [see Iqvia – CRO Business Analysis & H2 2021 Outlook – 9 August 2021]. What right sized, mid-tier players could strengthen their status through success with this particular client type?

What is your outlook for further consolidation? You noted Syneos might be doing too much and that it hasn’t necessarily found its footing since the merger. We’ve heard it might need to add scale to fully compete. Do you therefore anticipate continued consolidation in the industry across the next year or so in response?

What combinations do you expect players to take on? There’s Thermo’s acquisition of PPD and its contract manufacturing vertical, and the ongoing push towards complex therapeutics and cell and gene therapy. What are the advantages for CROs in partnering more closely with CDMOs [contract development and manufacturing organisations] such as Catalent or Lonza vs developing in-house capabilities?

What are the best criteria to assess the success of acquisitions, given you expect further consolidation? You noted the INC-Inventiv merger into Syneos didn’t materialise as expected, and that it will take Thermo a while to realise the value in its PPD acquisition and potentially disrupt selection of outsourcing partners.

Which further combinations might be of most interest to sponsors? There’s the combination of CRO and CDMO, Syneos’s combination with commercialisation and Iqvia’s technology offering in the TAS [Technology & Analytics Solutions] segment. What else would you highlight as beneficial or differentiated?

How might the changes we’ve noted read through to the pricing and economics of the CRO model? We discussed the potential for greater conversion between inputs or outsourcing partners, alongside decentralised trial capabilities. One area of significant interest is biosimulation, and whether CROs compete against players such as Certara and Simulations Plus. How will this impact CROs’ financial profiles?

How might the labour shortages play out, and which other key risks or opportunities should we track?

Who do you expect to be the industry-leading CROs in 10 years? Do you think it will be players with an end-to-end model, similar to Thermo’s approach, or will it come with scale?