Guest Column

Reverse Acquisition - A new trend among CROs

Mergers and acquisitions were common in the pharma industry. Now the CROs are following suit. Murtuza Bughediwala and Arun Bhatt take a look at reverse acquisitions in the CRO industry

Arun Bhatt

“In the takeover business, if you want a friend, you buy a dog,” says Car Ichan.

CRO is the new sunrise industry and the Indian clinical trials market has been growing rapidly since 2002 and has now crossed the $100 million mark. Since most of the Indian CROs are still on the learning curve and are developing basic capabilities for clinical trials, many local financial investors and Indian pharma companies have set up CROs to cash on this opportunity. However, Indian CROs have to comprehend the changing scenario and develop strategies to meet the expectations of their global sponsors. They have to work towards developing credibility and reputation, which is a key criterion for selection.

Organic growth

In any new business, organic growth depends on developing one's internal capabilities. This option will succeed only if the Indian CRO can get a team of experienced managers, who have worked in similar CRO business settings. The path, however, is not that easy, as the Indian CRO industry is young and talented manpower is scarce. Besides, Indian CROs are facing competition from global CROs and pharma companies, which have launched their India operations. This makes the task of recruiting key managers quite difficult. Moreover, the history of the industry shows that this approach can take five to seven years to reach a critical mass. Taking all these points into consideration, the industry is considering other options to gain market share quickly.

Strategic Alliance

The option of strategic alliance is easy, as it allows both the partners to work in global markets without any significant new investments for expansion. However, the Indian CRO has to demonstrate significant organisational capabilities and have a talented pool of managers to be attractive for a US CRO to accept an alliance. In cases like these, the bigger business partner—the global CRO, would largely lead the alliance and the Indian CRO would usually become a sub-contractor. This might be detrimental to the alliance, and will lead to a conflict of interest if the Indian CRO wants to market its services in the conflicting geographical locations with the partner.

Mergers and acquisitions

Many international CROs have made rapid global expansion by using acquisitions of small local CROs to enter new countries. This route provides a quick approach to new markets and technologies and brings on board, new clients and services. This way, capabilities too get added to the business. People are the main asset for a CRO and acquisitions can enlarge its key team instantly. All in all, a successful acquisition creates a highly competitive company almost overnight. International companies, taking over Indian companies, has been the common pattern of acquisition, so far. However, now, a new trend in CRO industry is reverse acquisition, that is, the buyout of an international company by big Indian Pharmacos.

The other way round

Reverse acquisition is a business expansion in which a company of Indian origin seeks to acquire an international CRO. This strategy, though attractive, is fraught with challenges. The first challenge for Indian CRO is to decide whether it wants to acquire a CRO with similar capabilities or with complementary capabilities. For example, if the Indian CRO has Phase II and Phase III capabilities and acquires a global CRO with Phase I expertise, both can benefit. Similarly, if the global CRO has services like electronic data capture or central lab, it can add value to the Indian CRO.

The second challenge is to locate a small or medium size CRO abroad matching the requirements and then evaluate the assets, business, and client relationships. Estimated business growth and capabilities are a source of major concern while acquiring a company. Since the potential CRO is likely to be a small or medium size player, there may not be much information about its business and clients in public domain. Besides, the big pharma approach of outsourcing services to several big or local niche CROs and the confidentiality associated with the outsourcing process, makes the overall assessment of the CRO's capabilities and clients quite tough. The evaluation of the international CRO's strengths, weaknesses, opportunities, and threats will be quite difficult, unless the investor group backing the Indian CRO has global presence or hires international finance consultants.

One of the most critical issues with the acquisition of a CRO is how to integrate the two culturally diverse work forces. Jack Welch, in his best seller Winning warns: “The pitfall is focusing so intently on strategic fit that you fail to assess cultural fit, which is just as important to a merger's (acquisition's) success, if not more so.”

The employees of both companies may sense a feeling of uncertainty and insecurity. They will be concerned about the management structure and working practices of the newly merged CRO. For the staff of the acquired CRO, the feeling is similar to joining a new company. The employees of the acquiring company may experience a loss of importance as they lack the international clinical research exposure. Besides, the integration process will put an additional workload on key managers of both companies. New training will also be required for the employees in standard operating procedures and work processes. The usual human tendency of resisting any change can affect the basis of the new organisation. The physical distance too may make communications and decision-making process difficult and can affect overall work efficiency.

Post-merger scenario

The post-merger scenario depends on how the top management works together. If the acquiring Indian company acts as a conqueror and decides to install its own managers in important functions, it may lose the new talent of the acquired CRO. This can affect the relationship with global CRO's clients and can lead to potential loss of business. Similarly, if it decides to give key positions to the global CRO managers, its Indian organisation might suffer. People challenges need a well thought out strategy.

The acquiring Indian CRO and the acquired global CRO have to anticipate the potential issues and plan the right strategy for the merger process.

The integration of organisational structure, people, culture, and strategic direction should be swift and smooth. Unless, they decide on the issues quickly and communicate relentlessly, the merger will not succeed. The experience of other industries suggests that more than five percent of mergers do not add synergies or value. Instead of 1+1 = 3, they may end up being 1 + 1 = 1.5! To be successful, the merged CRO should remember the wise words of Henry Ford, “Coming together is a beginning; keeping together is progress; working together is success”.

(The writers are the President and the Head of Clinical Operations of ClinInvent Research Pvt Ltd)