Guest column

M&A in the CRO industry: The Good, The Bad, and The Ugly

By Matthew Barrows, senior business consultant

- Last updated on GMT

(Image: Getty/kritchanut)
(Image: Getty/kritchanut)

Related tags: CRO, M&A

M&A is a huge part of the CRO space. Inorganic growth has long been the go-to strategy for any CRO and we’re never surprised to see this month’s latest deal. However, I’d like to challenge the idea that this is always the best way to grow a CRO business.

So, let’s take a look at the pros, cons and costs of M&A in CROs.

The Good

There’s a reason that M&A is so prevalent in the industry. In fact, there are lots. The first and probably most important is that it works​.

Next, if you have the cash and want to grow, doing it inorganically can be faster and significantly easier. Rather than spending years cultivating your team, hiring in new markets and putting heavy investment into R&D it can be far more efficient to just buy a smaller, or merge with a similar, competitor and very quickly have a significantly stronger business.

An acquisition could mean that the newer, larger business has a wider product offering or more in-depth expertise in an existing area. Take Concept Life Sciences and Charles River, for example. They acquired two small niche CROs in Aquila BioMedical​ and KWS Biotest​, respectively, to enhance their expertise in immuno-oncology and immunology. Both these acquisitions have been productive and therefore deemed a great success.

Another reason for an acquisition could be as simple as the company you’re buying works with a client you’d love to work with, or someone that you’ve long targeted but has ties elsewhere. The clients you work with can add credibility and potentially add significant future value too.

As well as finding new customers, acquisitions can help you develop relationships with existing ones. Increased geographical coverage can do this. George Clinical put this theory to good use effectively when they acquired Vector Oncology to enter the US market in 2017.

An acquisition might also fill a hole in a service offering. Take PPD’s acquisition of specialist FSP/ Patient Handling company Acurian back in 2013. This was to help them enhance their patient enrolment capabilities and ultimately find more patients for their trials – traditionally a major headache for CROs, especially when talking about rare disease trials for example.

Put frankly, M&A works. And it will continue to work. It’s a huge business too, hence the growth of specialist private equity companies in the biotech and health care space like Great Point Partners (and many others) exploring the market.

Whilst PE investment isn’t strictly M&A in its purest terms, their injection of cash usually gives these companies control of, or at least a say in, that companies direction which is usually aimed towards a future sale.

The Bad

Amongst all the benefits, there are some drawbacks to the constant M&A roundabout that the industry is locked into. Less choice for customers is one. Now, this is something that I touched on in my previous article​, so I’m not going to sing the praises of smaller CROs again here, but the market benefits from more choice both in name and in company size. 

Whilst a freshly acquired CRO might all of a sudden be able to do more in more regions, it could have lost that unique identity that made them a great employer, for example. I’ve spoken with candidates who have been acquired and lamented the loss of their culture. Additionally, larger companies might not be able to offer employees as much flexibility and insist on more bureaucratic processes.

Customers may also lose out. With a smaller CRO partner and customer, perhaps processes were flexible, or an agreement had been arranged which suited both parties perfectly, but no longer works in a post-acquisition landscape. Bigger doesn’t always mean better, especially if bigger means less choice for the end user.

Also, more M&A means less choice which means fewer companies which means that the market becomes more homogenous. As giants dominate, smaller and more innovative companies get picked off at will, which means that competition between smaller CROs could become an illusion.

This is particularly evident when we’re seeing some of the huge players in the market spin-off ‘standalone’ businesses designed to appeal as a niche provider or smaller entity when in actual fact they’re bound by the same rules as the giant parent company.

The Ugly

Seeing M&A from my role, in the staffing sector, there’s also a very real human cost to M&A activity. In many ways, the perfect acquisition would be a company that offers a different, yet complementary product range in a territory that you already have a strong presence in. A simple, relatively straightforward process to bring the companies together.

However, this does mean that there are clashes or ‘synergies’ if we are talking in a more corporate manner. This means that there are many instances where suddenly two people are doing the same job. Sometimes, that simply means double the team size, but that’s rare – after all, a merger is all about making more money, which also means saving money.

This translates, often, to heavy redundancies to eliminate these synergies, which can happen anywhere from senior management, to support functions, right down to the newest employees, as when teams have to be trimmed, the old faithful ‘last in, first out’ rule comes into play.

So, what now?

Well, unfortunately, the human costs of M&A aren’t changing. It’s business and, for some, getting acquired is the reason that some choose to work for smaller companies in the first place. So whilst my sentimental last point may sound great in practice, in reality, it doesn’t hold much weight.

For those higher up, an acquisition can mean a huge payoff as a reward for the work they put into developing the smaller business (which is one of the reasons companies so rarely say no to being acquired). And that’s fine. In fact, a lot of executives I speak with have said just that. They actively seek out companies who are looking at being acquired or merged as a financial incentive.

In fact, it could be the case that it’s exactly these payoffs and subsequent redundancies that mean cash-rich entrepreneurial minds are on the market, out of work, and available to start something new. Perhaps then, that M&A and the associated synergies, cost-cutting and streamlining is, in a weird way, actually helping incubate the next great batch of smaller CROs.

An exciting thought then, that consolidation is funding innovation. But what do you think? Could the constant merry-go-round of M&A be hurting the market?

Matthew Barrows is a senior business consultant specializing in the CRO industry for Charlton Morris, which specializes in the placement of mid- to senior-level professionals across the life science industry.

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