As I prepared to head to this week’s J.P. Morgan’s Annual Healthcare Conference in San Francisco, I came across an article written by Lauren Migliore, Equity Analyst at Morningstar, titled “Strengthening Moats Mean Improving Returns For CRO Investors.”  In the piece, she covers public companies and by definition, very large CROs. While I believe she is spot on in her commentary the dynamics she describes also bode very well for mid-tier and strategic CROs with a solid differentiation and a strong global footprint, like Clinipace Worldwide.

Here’s why. Strategic partnerships, as she describes, are almost exclusively a sport for the biggest of specialized CRO and pharma companies. For these partnerships to exist, a company must have a portfolio of products, or at least multiple large-scale projects that can be packaged into a discounted bundle (note: Lauren predicts increased margins from these deals…however, in my experience, margins are typically decreased…time will tell).

Small and mid-sized pharma and biotech companies rarely have a portfolio that can be packaged in a way that single sourcing to one strategic CRO partner makes sense. Doing so is too risky for these companies. In the land of big pharma, the big CROs battle it out for these deals. Smaller CROs are not usually in the battle anyway…so essentially the market share up for grabs in these deals is just that which exists in the big pharma sector.  As the big CROs land more of this business, they become bigger themselves and increasingly become less competitive in the mid-market because they become less attractive to it.

Smaller pharma companies may feel like the big CROs do not give them the kind of attention they give their strategic partner clients. If a company has to hire 700 people, like Icon just did to support Pfizer, how much attention is a small client with one study going to get? A CRO is simply not going to focus on a $4M project the same way it focuses on a $250M partnership. So, the more of these deals big CROs can do, the better for smaller CROs down market, because in a sense these deals bind up the machinery of larger CROs to effectively work down market.

There is yet one more major macro trend that bodes well for smaller CROs. It’s what I call outsourced innovation. Historically, big pharma outsourced just the D part of R&D…development. The R part, or research part, was the proprietary domain of the pharma company. Discovering and inventing new drugs was supposed to be their core competency, and it was for decades. Today, however, pipelines are not robust in these big firms and innovation is now happening at a faster pace outside the four walls of big pharma.

So where is innovation happening? It is happening at small and mid-sized firms that can move faster and innovate better. Who is funding these firms? In large part, it is big pharma (either through direct investment or licensing deals). So now the R is also being outsourced to these firms.  And it is this segment where Clinipace Worldwide, with its technology-amplified digital CRO model and strong global footprint lives and prospers. And we have strategic partnerships as well. They are just defined differently than they are in the big pharma sector and they come from delivering high quality work on every project.