Business as usual for CROs as megamerger optimism subsides

Pfizer-AZ deal collapse may have quashed some CRO optimism, but mid-to-high-single-digit growth still predicted

When it comes to pharma acquisitions size does matter, according to analyst Ross Muken who says the momentary lapse in megamergers means business as usual for CROs.

Drug industry megamergers like Pfizer’s recent effort to buy AstraZeneca are usually seen as good news by contract research firms on the basis that, while such deals may cause short term disruption, in the longer term they generate more work.

Icon’s CEO Ciaran Murray, for example, recently said that large acquisitions by customers “ultimately provide opportunities for new business for CROs.” 

Similarly, Parexel CEO Josef von Rickenbach told shareholders at the contract research organisation’s (CROs) most recent results presentation that every time a megamerger occurs “outsourcing goes bigger.”

Size matters?

But with both Pfizer’s £69bn ($120bn) bid collapsing, and Valeant’s attempts to woo botox maker Allergan for $53bn now looking less likely, attention has shifted to assessing the likely impact smaller deals – like Merck & Co.’s $3.85bn acquisition of Idenix – will have on CROs.

ISI Group analyst Ross Muken said in a note that although “M&A activity is likely to remain elevated medium-term…the potential follow-on impact to service providers (including the CROs) from smaller deals is far more muted relative to the aforementioned mega mergers.”

Smaller deals mean business as usual for CROs according to Muken, who reiterated his estimate of mid-to-high-single-digit gains for contractors based on customers’ “low single digit Research & Development growth."

He also predicted that – in the absence of megamergers – larger CROs will benefit more from any increased outsourcing coming as a result of smaller takeovers than smaller niche players with narrower offerings.

Late-Phase Favourable

Muken remained positively biased toward late-phase service providers, despite saying there had been an increase in early-phase demand.

“While early phase utilization appears to have improved, it appears that early stage pricing has yet to pick up meaningfully,” he said, despite reports of a turnaround in the preclinical space following several years of recession.

“We continue to be skeptical of a ‘V shaped’ recovery in early phase pricing as capacity utilisation (inclusive of dark rooms) remains fairly inefficient, and human capital requires re-investment after years of layoffs / pruning.”

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