CRO Contract Research Organization

(1)

Anchor Academic Publishing

disseminate knowledge

How Drug Research is Evolving

CRO – Contract Research Organization

Jakob Miera

(2)

Miera, Jakob: CRO – Contract Research Organization: How Drug Research is Evolving.

Hamburg, Anchor Academic Publishing 2014 Buch-ISBN: 978-3-95489-198-6

PDF-eBook-ISBN: 978-3-95489-698-1

Druck/Herstellung: Anchor Academic Publishing, Hamburg, 2014

Bibliografische Information der Deutschen Nationalbibliothek:

Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar.

Bibliographical Information of the German National Library:

The German National Library lists this publication in the German National Bibliography.

Detailed bibliographic data can be found at: http://dnb.d-nb.de

All rights reserved. This publication may not be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publishers.

Das Werk einschließlich aller seiner Teile ist urheberrechtlich geschützt. Jede Verwertung außerhalb der Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlages unzulässig und strafbar. Dies gilt insbesondere für Vervielfältigungen, Übersetzungen, Mikroverfilmungen und die Einspeicherung und Bearbeitung in elektronischen Systemen.

Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten wären und daher von jedermann benutzt werden dürften.

Die Informationen in diesem Werk wurden mit Sorgfalt erarbeitet. Dennoch können Fehler nicht vollständig ausgeschlossen werden und die Diplomica Verlag GmbH, die Autoren oder Übersetzer übernehmen keine juristische Verantwortung oder irgendeine Haftung für evtl. verbliebene fehlerhafte Angaben und deren Folgen.

http://www.diplomica-verlag.de, Hamburg 2014 Printed in Germany

(3)

V

Index

Index V

LIST OF FIGURES ... VII LIST OF TABLES ... VIII LIST OF ABBREVIATIONS ... IX

INTRODUCTION ...11

METHODOLOGY ...12

1. MERGER & ACQUISITIONS FUNDAMENTALS ...13

ͳǤͳ ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͳ͵ ͳǤʹ ƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͳͶ ͳǤ͵ƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͳͺ 2. CONTRACT RESEARCH ORGANIZATION INDUSTRY ...20

ʹǤͳǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤʹͲ ʹǤʹ ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤʹ͵ ʹǤ͵ ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤʹͷ 2.3.1 Macro environment – PESTEL ... 25

2.3.2Microenvironment - Porter ... 27

ʹǤͶǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͵Ͳ 2.4.1 Structural Changes in the CRO Industry ... 30

2.4.2 Growth Strategies ... 32

2.4.3 Mergers & Acquisitions in the CRO Industry ... 33

3. EXPLANATORY APPROACHES AND MOTIVES FOR M&A ...35

͵ǤͳǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͵͸ 3.1.1 Synergy ... 36

3.1.2 Market Power ... 37

3.1.3 Portfolio Hypotheses / Diversification ... 38

͵Ǥʹ ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͵ͺ 3.2.1 Valuation Theory ... 39

3.2.2 Tax Hypothesis ... 39

͵Ǥ͵ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͶͲ 3.3.1 Hubris ... 40

3.3.2 Agency Hypothesis ... 40

(4)

VI

4. SUCCESS FACTORS FOR THE MERGER & ACQUISITIONS PROCESS ...42

ͶǤͳƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͶʹ 4.1.1 The Planning Phase ... 43

4.1.2 The Execution Phase ... 44

4.1.3 The Integration Phase ... 46

ͶǤʹ ƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͶͺ 4.2.1 Potential Success Factors in the Strategic Planning Phase ... 48

4.2.2 Potential Success Factors in the Execution Phase ... 51

4.2.3 Potential Success Factors in the Integration Phase ... 53

5. CASE STUDY: MERGER & ACQUISITIONS IN THE CRO INDUSTRY ...56

ͷǤͳƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͷ͸ ͷǤʹƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͷ͹ ͷǤ͵ ƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͷͻ 5.3.1 Strategic Planning Phase ... 59

5.3.2 Execution Phase ... 61

5.3.3 Integration Phase ... 62

ͷǤͶ ƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͸Ͷ ͷǤͷ ƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͸ͷ 6. CONCLUSION AND RECOMMENDATIONS ...68

APPENDIX ...61

BIBLIOGRAPHY ...73

(5)

VII

List of Figures

Figure I-I Structure of the book Figure 1-1 Concept of M&A definition Figure 1-2 Merger Waves in the US Industry

Figure 1-3 Merger Waves in Europe and Asia Pacific (total numbers of deals) Figure 1-4 Recent world-wide Mergers & Acquisitions

Figure 2-1 The drug development process Figure 2-2 CRO revenue growth 1992 – 2013E Figure 2-3 The CRO scope of operations

Figure 2-4 The ten largest CRO corporations by revenue Figure 2-5 Clinical Trial Management Systems

Figure 2-6 Revenue growth for the CRO industry Figure 2-7 Worldwide distribution of clinical trials Figure 2-8 EBITDA multiple 2007 – 2012

Figure 3-1 Possible synergy benefits Figure 3-2 Diversification Strategy

Figure 4-1 The development of the M&A process Figure 4-2 The planning phase and its first three steps Figure 4-3 The execution phase with steps 4 – 6 Figure 4-4 Valuation approaches

Figure 4-5 The integration phase with its three last steps Figure 4-6 Stages for a successful screening process

Figure 5-1 Sent and completed surveys and analysis in which kind of M&A the participants were involved

(6)

VIII

List of Tables

Table 2-1 Selected takeovers in the CRO industry Table 3-1 Potential reasons for Merger & Acquisitions

Table 4-1 Potential success factors of the strategic planning phase Table 4-2 Potential success factors in the execution phase

Table 4-3 Potential success factors in the strategic integration phase Table 5-1 Summary of the potential reasons for M&A in the CRO industry Table 5-2 Potential success factors in the strategic planning phase

Table 5-3 Potential success factors in the execution phase Table 5-4 Potential success factors in the integration phase

Table 5-5 Summary of potential reasons for M&A in the CRO industry Table 5-6 Determinants and evaluation of success after an M&A

(7)

IX

List of Abbreviations

CAGR Compound Annual Growth Rate

CRO Contract Research Organization et. al. et alii (and others)

f. folio (following page) ff. folios (following pages) FDA Food and Drug Administration HTS High Throughput Screening ibid. ibidem (the same place)

IND Investigational New Drug

IPO Initial Public Offering

LBO Leveraged Buy-Out

M&A Merger and Acquisitions MBO Management-Buy-Out

NDA New Drug Application

op. cit. opere citato (in the worked cited) p. page

pp. pages PLC Product Life Cycle

PPD Pharmaceutical Product Development PPP Public Private Partnerships

R&D Research & Development

(8)

(9)

11

Introduction

This book deals in general with mergers & acquisitions in the CRO industry, and more specifically with reasons for M&A, success factors during the M&A process, and why M&A can fail in the Contract Research Organization industry.

The pharmaceutical industry faces increasing obstacles in respect to the development and introduction of new medications. That has to do with stricter requirements for admission and sharper controls by authorities. Today, the research and development of a new drug can easily consume more than $800 million and lasting between 10 and 15 years. Due to these admission, money and time pressures, pharmaceutical companies are looking for an alternative in the drug development process. A very popular alternative is the outsourcing or in-house working with Contract Research Organizations (CRO). Contract Research Organizations are specialized in coordination and monitoring of drug development activities. Due to their focus they often offer a more sophisticated and faster process.

Demographic changes, chronic diseases like cancer and diabetes, and completely new cluster of symptoms demand new therapeutically treatments. The size of the CRO market in 2012 was around $32 billion and had an estimated market growth of around 9 – 12% for 2013.

Increased outsourcing and allocation of R&D money towards CRO reflects a driving force for prospective growth. To benefit from the good industry outlooks CROs adjust their service offerings and strengthen their competitive situation.

More and more Contract Research Organizations consider mergers & acquisitions as a vital solution to achieve their objectives. Since couple of years we can observe an increased number of deals. Large corporations can close the gaps in the internal service pipeline and smaller firms can use mergers as a financial exit.

However, many M&A activities are considered as ineffective and contra-productive for the shareholder value – either destroy or merely add. Depending on the study, the numbers of M&A failures vary from 50% to even 80%. Possible reasons may be not enough integration planning and unrealistic expectations on the cost and time. The reality shows that it is not that easy to cut costs by simple combining two departments after a merger or acquisition. Addi- tionally, we can see that mergers and acquisitions basically not succeed during the actual process.

(10)

12

Methodology

Mergers and Acquisitions in the CRO industry are a relatively new field from the perspective of academic research. When we have such a high number of M&A failures in general, is it possible to identify and counteract the reasons. The purpose of this book is, whether the possibility exists to workout specific factors in avoidance of failures for M&A.

In order to answer this question, the book is structured in the following way. After the introduction, the fundamentals of Merger & Acquisitions will be described. The definition, the history and what are recent trends for the M&A market.

The next chapter is to get acquainted with the Contract Research Organization industry.

After the description of the drug development process, the book presents the fundamentals of the CRO business. The structural analysis consists of the PESTEL and Porter-5-Forces.

The third chapter is about explanatory approaches and motives for mergers and acquisitions. It is divided in the parts of strategic, financial and managerial motives. The core of this chapter is to assess key motives of each part from the theoretical point of view.

After the merger and acquisitions process is described in chapter four, the book examines the potential success factors of the strategic planning, execution and integration phase. Similar to the previous chapter the factors are based on academically research.

Finally, the fifth chapter is a case study where theoretical and practical aspects are com- bined. The previous examined theoretical framework is evaluated on the basis of a survey.

The data is analyzed in tables and on the one side ranked according to the number of entries and on the other side according to the average score.

Figure I-I: Structure of the book