Recently, Outsourcing Pharma published two articles on the topic of private equity (PE) investment in the CRO industry (“PE’s unclear role in CRO industry leaves sponsors ‘uncomfortable,’ says expert” and “Private equity investments scare pharma clients, says CRO”).
From my perspective, many people quoted in both articles simply don’t understand the role that PE has played for many years in this industry or why PE firms and CROs have found these relationships so compelling. To start, let’s look at a few of the PE deals in this industry.
Since One Equity Partners took then public firm Quintiles (QTRN) private in 2003, a flood of deals has led to a situation where PE investment has actually become the norm for medium and large CROs. At the start of 2013, more than half of the 30 largest CROs had PE investors. In 2012, those firms collectively delivered about $4,000,000,000 in CRO services. The following is an abbreviated list of CROs and PE investments showing this close relationship:
- Quintiles (Bain Capital & TPG Capital, 2007 acquired firm from One Equity Partners who took QTRN private, 2003)
- PPD (Carlyle Group and Hellman & Friedman, 2011)
- PharmaNet/I3 (Thomas H. Lee Partners, L.P., Liberty Lane Partners, 2010)
- PRA International (Genstar Capital, 2007)
- RPS (Warburg Pincus, 2010)
- INC Research (Avista Capital Partners and Ontario Teachers’ Pension Plan, 2010)
- Aptiv (SV Life Sciences, Halifax Group,& Comvest Group, 2011)
- Aptuit (Welsh, Carson, Anderson & Stowe, 2005)
- CRA/Radiant Research (Kinderhook Enterprises, 2007)
- Chiltern (Czura Thornton, 2006)
- Worldwide Clinical Trials (The Jordan Company, 2007)
- Theorem (Nautic Partners, 2011)
- Medpace (CCMP Capital, 2011)
- Synteract (Gryphon Investors, 2008)
- Premier (Harbourvest Partners, 2008)
- SIRO Clinpharm (Kotak Private Equity, 3i & Daftarys)
As you can see, PE firms and CROs have entered into long-term relationships. While PE investors most certainly look for returns on their investment, this can happen in many ways, such as recapitalization or IPO, leaving current management teams in place.
The more interesting questions are “why this has been happening?” and “what does it mean for sponsors?” Private equity firms are among the largest and most sophisticated investors in the world. They exist to provide growth capital to companies and industries that show promise. Obviously, CROs have been a promising investment and successful industry for many years. In fact, despite the economic downturn in 2008-09, CROs continued to attract these investors.
Perhaps what attracts PE investors to the CRO industry is the steady growth in outsourcing and the numerous forecasts of continued growth in the future. These investors are quite sophisticated—they put their money to work in businesses that are growing and/or demonstrate value. Well-run CROs have proven their worth to these investors and, as a result, have been the recipients of growth capital.
So, if CROs are successful and growing, why would they take on that growth capital? Two main reasons come to mind. The first reason is that growing businesses need more working capital. Outside investment allows a growing business to grow even faster. The second reason is that the CRO industry has been changing. A pure services business isn’t capital intensive. Fifteen or twenty years ago anyone could start a CRO. Today, our industry requires substantial investments in software and information technology to meet essential quality and regulatory requirements. External financing allows CROs to upgrade their software and IT quickly, which benefits their customers. These investments can also be structured to further optimize the financial structure of the business and reduce costs. This savings can be passed on to customers.
Another point to keep in mind is that the CRO industry is now about 30 years old, which means there are many founders/owners of CROs who may be looking to retire. This creates an environment in which PE liquidity can bring about many benefits. Consider the risky situation for sponsors when working with a CRO that has a single founder/owner. Imagine being a client of a CRO when the owner decides to retire. What does that mean for your projects? As founders of some smaller CROs seek to retire, PE provides liquidity for them to do so, while providing business continuity within a larger CRO.
In addition, founders often have multiple business interests or may encounter situations where their company is at risk, such as divorce or death (where the business may enter into probate as heirs contest ownership). In other cases, founders may extract needed capital to fund other parts of their lifestyle, rather than reinvesting in the future of the business. This cannot happen in a PE-backed company. PE firms diversify ownership and provide business expertise, while holding CRO management accountable and ensuring business continuity in unexpected situations.
Ultimately, PE investment has greatly benefited sponsors and CROs, enabling the industry to invest in new technology, globalize operations, and maintain business continuity in a rapidly changing environment.
Mark Shapiro is the Vice President of Clinical Development at Clinipace.