29 January 2019

#KCR_Trends: Mergers & Acquisitions are rampant in the healthcare industry, but what do they mean?

With several major healthcare deals announced last year, it is obvious that the industry landscape is changing dramatically. This isn’t shocking, nearly a year ago we discussed the expansion and ever-changing needs of the pharmaceutical industry and its effects on the potential of FSP services. Today, we will address the trend that this industry is always talking about: consolidation.

In 2017, industry analysts calculated that there were over 1,100 Clinical Research Organizations around the world. They range anywhere from giant corporations offering global services to local, family owned organizations that focus on a single therapeutic area. While this number may seem large, analysts also estimated that the 10 largest CROs (less than 1% of total) generate approximately 61% of the total industry revenue. This staggering figure is the result of the trend of consolidation among CROs in the past few years. Even though merger activity has slowed recently, it certainly does not show any signs of stopping.

10 largest CROs (less than 1% of total) generate approximately 61% of the total industry revenue

Consolidation occurs in many shapes and sizes, although there are generally two methods; vertical and horizontal. Each method responds to unique problems and aspects of the industry and thus has different consequences on it.

Vertical consolidation implies the acquisition of companies to strengthen the scope of services provided by the purchasing company. Examples include M&A with medical consultancies, laboratories, CROs specialized in a specific therapeutic area or a technological service. Often, the resulting organizations rebrand themselves as “health information companies” to more clearly market the breadth of services offered.

In contrast, horizontal integration implies the consolidation of CROs to increase their scale or geographical coverage. The acquisition of regional players or mergers between several mid-size CROs to improve efficacy and scale are common examples of this tendency. While there is no clear growth track, companies typically follow a path of horizontal consolidation and once they have created a sufficiently large industry footprint, they start a process of vertical integration. M&A activity during 2018 generally followed this pattern.

The effects of consolidation on the CRO industry are evident. As shown in the graph by IgeaHub, consolidation has outlined several clusters of CROs. Recently, there have been a couple of “XXL” organizations that vertically and horizontally integrated, a group of large companies that followed behind, and several smaller organizations with a niche service offering that have begun to target new sectors.

What is perhaps the most noticeable is that since 2017, “medium” size companies have virtually disappeared from the map, leaving a clear gap in the CRO industry. Interestingly, there are signs that the pharmaceutical industry is experiencing a similar trend, although it is not clear if there is a correlation between both changes. The CRO industry seems to have recently stabilized itself by decreasing M&A activity in 2018.

There are signs, though, that smaller regional players are racing to fill the absence of “medium companies”. There are also hints that companies are embracing new growth strategies focused entirely on the “boutique” or “niche” concept, either by pursuing specific therapeutic areas (e.g. dermatology or oncology) or specific types of customers (biotech, medium-size pharma). The latter is the approach perused by KCR, as the company strategy is fully focused on its organic growth. Organic growth might not be the fasted path to growth, but it is the most sustainable as you cannot buy culture.

The future of the clinical research industry is being shaped every day and we will certainly explore updates on points addressed today in future versions of #KCR_Trends.

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