The Polish company KCR conducts clinical research in 17 countries across Europe. It is now making its first steps toward expanding business in the US, where budgets for clinical trials of new drugs are the largest.

 

Caption: Adam Kruszewski and Marek Kiecana, the owners of KCR, who test new drugs and explore new markets

 

 

Marek Kiecana never intended to give his company over to a private equity fund. When Adam Kruszewski, an Investment Director representing Enterprise Investors (EI) first contacted him in 2002 and offered to buy out Kiecana Clinical Research (KCR), he decided he would not sell any shares. International corporations had only just discovered that carrying out clinical research in Poland cost half the price they would have to pay in the US, highly qualified healthcare professionals constituted a very cheap labour force, and millions of patients found participation in clinical trials of new drugs their only opportunity to gain access to the latest medical advances. Persuaded by his wife, who is a cardiac surgeon, engineer Kiecana decided to capture the niche market. KCR had a great number of contracts and soon attracted new clients – from Bayer to Sanofi.

 

Bringing a new drug to market takes from 6 to 12 years and costs almost one billion dollars. No wonder only international pharmaceutical corporations can afford to develop and seek patent protection for their innovative drugs. Competition is stiff because the cost doubles every ten years, and only three out of ten drugs launched to the market bring a profit that can exceed or at least balance the related outlays. Before a new drug reaches pharmacies, its safety and efficacy is tested on animals for 5 years. The tests are followed by clinical trials involving human subjects, which continue for another 6 years. This part of the drug approval process is the most expensive: it accounts for as much as half of the total expenditure. In order to save time and money, pharmaceutical corporations increasingly outsource clinical trials from clinical research organisations. However, even the most thriving local CRO businesses find it extremely difficult to compete on the pharmaceutical market: Phase III clinical trials require that the new drug be administered to several thousand patients from many countries.

This is hardly a problem for such global CRO players as Parexel, Covance, PPD or Quintiles. But Kiecana found it increasingly difficult to operate his company without any support. In 2004 he recalled Kruszewski’s offer. This experienced manager and healthcare professional holding an MBA degree started out by launching Medicover, a chain of outpatient clinics, and then entered into cooperation with EI, taking over Medycyna Rodzinna clinics on behalf of the fund. Two years after their first meeting, Kiecana called Kruszewski and offered a partnership.

“At that time KCR was a small, boutique company, and I considered Adam as a finance and management guru. His business experience  exceeded my own by far,” explains Kiecana. “I thought it was a really fascinating offer. My colleagues from larger funds were also interested in making investments in KCR, but it was I who eventually got this great opportunity to develop the company,” recalls Kruszewski.

 

In 2004, Kruszewski started working for KCR. He soon purchased half the shares and became the president of the company, while Kiecana became the chairman of the Supervisory Board. At the beginning of their cooperation, KCR’s turnover was 2 million euro; this year it is forecasted to reach 16 million euro, and the net profit in the last four years increased by 100% on a year on year basis. The company has conducted clinical research for more than 300 drugs representing many different therapeutic areas including cardiology, diabetes, oncology, and psychiatry. The company conducts Phase II-IV clinical trials (preliminary trials on groups of several dozen subjects, international multicentre trials involving thousands of patients, and post-marketing surveillance studies) in 17 countries. In 2008, KCR acquired the largest Czech CRO, DUX Consulting, as well as its Slovak subsidiary. It also opened its branches in Russia, Ukraine, Baltic countries and France.

“We needed the Czech acquisition to finally feel we were no longer a local organisation, but a regional player. Today, however, we prefer to establish our international branches from scratch” says Kruszewski.

The new president wanted to go public, but the prospectus was approved shortly before the global stock market meltdown, so the plans had to be shelved for a while. Interestingly enough, CRO companies quoted on the US stock exchange such as Parexel, Covance, or PPD resisted the slump for quite a long time. But one could hardly hope that European investors would take it into consideration. Rather than lay low and wait for better business outlooks, Kiecana and Kruszewski opened their business development division in the US. KCR representatives now contact the headquarters of pharmaceutical companies and offer CRO services.

“It was the right move to make. In order to be able to compete on the global CRO market, you must be present wherever pharmaceutical corporations make decisions about the allotment of their clinical research budgets: in the US, UK, Japan, or Switzerland,” explains Wojciech Przybyś, Quintiles Director for Central and Eastern Europe.

He adds that KCR is facing hard times. Although it is the region’s largest CRO with local capital, its international competitors have already opened their branches in Poland and further east: Covance is opening its subsidiaries in Ukraine, and PPD acquired InnoPharm in Smolensk a year ago.

 

The price of innovation

1 billion US$:

the average cost of bringing a new drug to market. Clinical trials account for as much as 50% of the money. The whole process takes 6 to 12 years.

 

Market consolidation is well advanced: out of more than 1000 CROs on the 20 billion dollars worth clinical research outsourcing market, 45% belongs to the five biggest players. But then again, the market is growing by 8% each year, and the capacity of our region has not been fully explored yet. In Poland, only 12 clinical trials per 1 million people are conducted annually. In Hungary, the proportion is 25 per million – the same as in the UK. Wojciech Masełbas, the president of the Association for Good Clinical Practice in Poland, explains that in order to establish its position on the global market, KCR should merge with a small CRO from the US, or a similar-sized company from one of the Nordic States. “This way they would gain new markets and would be able to offer outsourced clinical trials involving a larger population,” believes Masełbas.

In his opinion, another solution would be to specialise in testing drugs from selected therapeutic areas, following the example of such companies as the British INC Research, which only focuses on oncological and psychiatric drugs. Investment funds, which keep knocking on Kruszewski’s door, have a similar vision of KCR’s future: a couple of years for organic growth, then an international merger or buyout by a strategic investor. The partners have decided to wait for two more years to see the results of their operations on the US market.

The experience of other Polish companies representing the healthcare industry, which operate on international markets, indicates that sooner or later further growth will necessitate the support of a foreign investor. The Polish manufacturer of ophthalmological diagnostic devices, Optopol, is about to get under the umbrella of the Canon Corporation, and the manufacturer of lancets for capillary blood sampling, HTL, has already been taken over by the Swedish EQT fund. Kruszewski does not preclude the possibility that KCR might soon need an infusion of new foreign capital, but for the time being, independence gives him and Kiecana a lot of satisfaction.

“In this market, ‘it takes all the running you can do, to keep in the same place,’ as the Red Queen said to Alice in the novel Through the Looking Glass,” adds Kruszewski. “We are still pulling it off.”