As opposed to pharma companies hit by high costs, patent expiration and trailing pipelines, contract research organisations (CROs) are reporting high growth rates: “about as high as they’ve ever been with Wall Street thinking they will continue to do well,” Director of Fairmount Partners Michael Martorelli told a crowded room at PCT Vienna last week.
However, he warned, “trees do not grow to the sky” and whilst the overall industry may be in a boom there are still a number of potential landmines that could overturn both individual companies and the wider market.
One of these is the growing interest from private equity (PE) firms in the sector and the future opportunities for them to exit as - he pointed out - a fruitful exit strategy was why they had invested in the first place.
Paul Richter, Head of Life Sciences at Jina Ventures also spoke about PE’s involvement in CROs, saying whilst there is a certain amount of transparency amongst the public CROs - Quintiles, Icon and Covance for example reporting book-to-bill ratios of 1.44, 1.4 and 1.21 respectively - when it comes to the private CROS and how they are doing: “We have no idea!”
He concluded: “PE firms have to exit its CRO investments within the next five years” but how exactly is unclear.
However, Martorelli acknowledged private equity firms didn't all have the same motive. “Saying one PE is the same as another PE is like saying one CRO is the same as another CRO. All PEs are different and differently motivated.”
“Done correctly, a PE should use appropriate amounts of private finance,” he continued and “some CROs only find out they needed financial discipline once a PE came in.”
Other fears Martorelli highlighted that may make the CRO industry stumble included clinical research issues in India, nervous stock investors and unexpected quality and financial problems.
One other is Big Pharma’s limitations on R&D spending. For example Merck & Co.’s recent announcement that it was to cut R&D by $2.5bn has since led to stakeholder uncertainty and questions at CROs Charles River Laboratories and WuXi.