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Health Matters
May 17, 2018

Lifesaving Therapies and Eye-catching Returns in the CRO Market

MHT Partners  | Healthcare Investment Bank

On average, pharmaceutical companies spend $2.6 billion over the course of 10 years to develop a single new drug. That equates to over $115 billion invested in the 46 novel drugs approved by the FDA in 2017—not to mention the 90%+ of therapeutics that never advance further than clinical trials.

With such astronomic costs looming over the industry, it’s no surprise that pharma companies are doing whatever they can to make R&D processes as efficient as possible. The need to cut costs and optimize development has given birth to a number of ancillary industries, from specialized PR firms to outsourced drug manufacturers (“CMOs”). The value proposition is simple: provide the time and labor-intensive services necessary to take drugs across the finish line at a lower cost, while allowing pharmaceutical companies to focus on what they do best: developing lifesaving therapies.

Contract research organizations (“CROs”) constitute one of the largest industries to emerge from pharma’s mandate to lower costs. CROs design and conduct clinical (as well as pre-clinical and post-clinical) trials for the drugs in pharma firms’ pipelines, carrying out studies and analyzing the statistics that are imperative for FDA approval. CRO specialties run the gamut, from statistical analyses for Phase-I biologics development to Phase-III infectious disease trials. No matter where they sit in the arduous drug approval process, CROs create meaningful efficiencies throughout pharma firms’ product pipelines by bringing their clinical trial recruitment, management, and data analysis expertise to bear in the development of new drugs and therapies.

CROs’ value proposition is so compelling that in 2017 industry revenues approached nearly $20 billion in the U.S. alone. It should come as no surprise that investors have taken notice. Notably, high-profile deals have been closed successfully between both strategic and private equity (“PE”) buyers over the past several years, including Quintiles’ $9 billion merger with IMS Health in 2016 and Pamplona Capital’s $5.3 billion take-private of Parexel in 2017.

The thesis for consolidation among CROs is supported by efficiencies of scale, enhanced capabilities to better serve customers, and access to specific patient cohorts around the globe. Scale provides both operating benefits, like purchasing and administrative synergies, and an opportunity to consolidate vast amounts of institutional knowledge. For example, some CROs specialize in biostatistics for Phase-I oncology trials, while others design Phase-III trials for neurological conditions. If the CRO that works on neurological conditions runs trials for a major pharmaceutical company with a robust cancer drug pipeline, a merger with its oncology-focused counterpart may increase the oncology CRO’s chance of winning future contracts with the pharma company. Additionally, a merger may bolster the consolidated company’s competitive edge as best practices, such as data analytics capabilities and trial-optimization techniques, are shared.

One aspect of the CRO industry that has been particularly attractive to PE groups, is its significant fragmentation. While the six largest CROs have approximately 43% market share, the other 57% of the U.S. market consists of an estimated 3,919 firms, each of which serves pharma companies with unique expertise.

Many PE groups seek to employ a “buy-and-build” strategy in which they acquire a company in a fragmented industry as a “platform” and subsequently build the platform through acquisitions. These strategies can build capabilities, create market access, and diversify customer/trial sponsors in a cost-effective manner, allowing consolidating groups to rapidly build assets of scale in advance of an exit. As an example, Pharmaceutical Product Development (“PPD”) is the product of a successful buy-and-build strategy in the CRO market. After the company was acquired by the Carlyle Group and Hellman and Friedman for $3.6 billion in 2011, PPD purchased 6 companies in 5 years. In 2017, the group of PE buyers decided to double down on their investment, recapitalizing the company at a value of over $9 billion rather than taking it public (an alternative that the group originally considered). With returns like that, it is no wonder that PE firms continue to show strong interest in the space.

As CROs consider strategic alternatives or prospective M&A, it is imperative that owners/decision makers partner with healthcare services investment bankers who possess a deep knowledge of the healthcare industry to ensure that their business is positioned to maximize options and value for the seller. MHT Partners focuses on serving market leaders in the healthcare services industry. If you would like to learn more about MHT’s experience in the space, please e-mail Taylor Curtis ( or Alex Sauter (

“Cost to Develop New Pharmaceutical Drug Now Exceeds $2.5B,” Scientific American, November 2014.
FDA, “Novel Drug Approvals for 2017.”
“I Do Hate To Tell You This, But…” Science Translational Medicine, January 2017.
Ibisworld, Contract Research Organizations in the U.S., February 2018.
“PE-backed PPD valued at $9B in recap”, Pitchbook, April 2017.


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  1. […] allowing pharmaceutical companies to focus on what they do best: developing life-saving therapies. Contract research organisations (CROs) will constitute one of the largest industries to emerge from pharma’s mandate to lower […]