INC Research‘s new CFO revealed a lofty goal for the clinical research organization shortly after joining the Raleigh, North Carolina company in February. Within five years, David Gill said, INC aims to be one of the top five CROs in the industry.
Privately held INC’s $232 million acquisition of the larger Cincinnati, Ohio-based Kendle International (NASDAQ:KNDL) is a major step toward that goal. But this deal, and others made in the last year, suggest more than consolidation is afoot. INC and other CROs are amassing the pieces they feel are necessary to shape themselves into the CROs of the future.
Kendle last year was the number six CRO on the Scrips Clinical Research 25, an annual ranking of the top CROs based on the prior year’s revenue. INC was number 10 in the rankings with 2009 revenue of $250 million– less than half of Kendle’s $552 million in sales. The combined $802 million in revenue brings the combined company closer to the top five CROs. While Durham, North Carolina-based Quintiles’ more than $3 billion in annual revenue is far and away the leader, the other four– Covance (NYSE:CVD), PPD (NYSE:PPDI), Parexel (NASDAQ:PRXL) and ICON (NASDAQ:ICLR)– are closer at between $1.3 billion and $1.8 billion in revenue.
In announcing the deal, which is expected to close in the third quarter, INC and Kendle said the two companies complement each other and the merger will broaden both their therapeutic capabilities as well as their global geographic presence.
Lauren Migliore, an analyst with Morningstar, said that while Kendle has grown as the overall CRO industry has grown, its growth has not kept pace with the top CROs in the space. Migliore is unfamiliar with INC because it is a private company. But she describes Kendle as “one of the larger smaller CROs.” That smaller scale hurts the company’s effort to develop lucrative strategic partnerships with pharmaceutical companies.
“As the industry moves to a strategic partnership model, we don’t think Kendle has reached the scale to compete,” said Migliore, who owns no shares in Kendle.
Strategic partnerships take CROs a few steps beyond the basic outsourcing of staffing and services that was the basis of the industry at its beginning more than 30 years ago. CROs have developed particular areas of expertise and they are increasingly looking to take on a greater role in the development and commercialization of drugs. As CROs evolve from outsourced vendor to strategic partner, they take on a greater share of the risk involved in developing new drugs. When a drug is successfully commercialized, CROs also win a greater share of the reward, through royalties from drug sales. That makes these partnerships potentially very lucrative.
Quintiles moved into this strategic partnership model early. One such partner is Eli Lilly (NYSE:LLY), whose antidepressant Cymbalta, approved in 2004, was developed and commercialized through strategic partnership with Quintiles. More recently, Takeda Pharmaceuticals entered into strategic partnerships with both Quintiles and Covance.
James Ogle, INC’s CEO, noted the company’s strategic partnership goals when the deal was announced. “The combination of INC and Kendle will enable us to deliver broader capabilities and reach a critical mass for the emerging drug development outsourcing and alliance partnership models,” Ogle said in a prepared statement.
But signs that INC and others were also looking to move into strategic partnering became evident much earlier this year, said Kevin Olson, CEO of Industry Standard Research, a research firm in Cary, North Carolina. In January, INC acquired consulting firm AVOS Life Sciences, a move that bolsters what INC can offer pharmaceutical companies. Days after the AVOS announcement, inVentiv Health announced it would acquire CRO i3 Research as well as Campbell Alliance, a Raleigh consulting firm. Those deals broaden the scope of services that the CROs can offer to pharma companies.
The last decade has seen CROs trying to broaden the kind of contract services they can offer pharmaceutical companies. By adding therapeutic areas or new services, CROs have been aiming to become “full-service providers.” Rather than working with several CROs, a pharmaceutical company can turn to one full-service CRO for one-stop service. But CROs are increasingly looking to add new types of services, such as consulting as they go beyond contract services to become strategic partners.
“Pharma is looking for CROs to be different than they were five years ago; They’re looking for expertise,” Olson said. “It redefines full service.”
INC has added expertise. The Kendle acquisition gives it greater scale. Now the company needs to make the case that it can provide an attractive strategic partnership alternative to Quintiles, Covance and PPD. The company’s ability to do so will determine whether INC reaches its goal of becoming a top five CRO in five years or instead remains just outside of that top tier.
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