A crop of San Diego companies quietly play niche roles in drug development. But suitors have taken notice.
Recently, Bioduro became the latest San Diego contract research organization, or CRO, to be acquired. Biotech watchers say the pace of consolidation has picked up in recent years, a function of large CROs swallowing up smaller ones to become one-stop shops.
Plus, private equity firms are now chasing CROs, a less risky part of the life sciences industry. And, the local CRO market is maturing.
“Many scientists locally in the mid-2000s started CROs. So it took them a while to grow these companies to a point where they’re a target for M&A,” said Richard Lin, who chairs the CRO committee of life sciences trade group Biocom.
Lin should know. In 2004, he founded Explora Biolabs, a San Diego CRO that specializes in preclinical rodent testing. Last summer, Seabright Fund took a majority stake in Explora.
For privately held Explora, the offer was right — and so was the timing. Lin grew the business to five facilities in San Diego and two in San Francisco, but he saw an increasing need for business acumen.
“I’m a trained scientist, not a businessman. In order to take Explora to the next level, I saw we need more business professionals,” Lin said.
CROs handle various parts of drug development — like running clinical trials — on behalf of pharmaceuticals and biotechs. Lesser known, diagnostic and medical device firms turn to CROs catering to those industries as well.
Figures aren’t kept on the number of CROs locally. But the industry became more popular with drugmakers trimming internal research and development budgets, observers say.
Bioduro provides drug discovery, development and manufacturing services, and like Explora, was purchased by a private equity firm: Advent International. Advent declined to comment.
Private equity firms, particularly those testing the waters in biotech, view the CRO industry as something of a safe bet.
In contrast to biotechs prone to boom or bust, CROs often generate steady — and fat — returns. The global industry is forecast to reach $57 billion by 2024, at a 7.4 percent annual growth rate, according to a 2018 report from Market Research Engine.
“If you want to capitalize on the growth of the life sciences industry but you don’t want to take on that much risk, the service sector is a very attractive area,” Lin said.
Sharing this view was Avi Kulkarni, a partner at KPMG’s life sciences division, who advises CROs. Kulkarni anticipates further — and possibly accelerated — consolidation in San Diego and other CRO hubs like San Francisco. That’s due to life sciences investment likely peaking.
“As the business cycle gets to mature, people start to think about being more risk-adverse with their investments,” he said. “With CROs, you can predict cash flows for two or three years in advance, and longer for larger CROs.”
Locally, most of the deals in recent years involved a larger CRO buying a smaller one, bolstering the bigger fish’s offerings, in a bid to land larger pharmaceutical clients.
Other than Explora and Bioduro, local CRO acquisitions since 2016 include:
• Last year, San Diego subsidiary Crown Bioscience was purchased by Japanese firm JSR Corp.
• Chinese firm Wuxi PharmaTech in 2017 acquired Shanghai-headquartered HD Biosciences, which included HD’s San Diego operation
• In 2017, Maryland’s Precision for Medicine purchased Carlsbad-based Agility Clinical
• Connecticut-based Amulet Capital Partners acquired Carlsbad-based Synteract in 2016. Synteract, a subsidiary that maintains a large Carlsbad presence, last year bought KinderPharm in North Carolina
• In 2016, Eurofins Scientific, headquartered in Brussels, bought San Diego’s Advantar Laboratories; and
• New Jersey’s Catalent Pharma Solutions in 2016 bought San Diego’s Pharmatek Laboratories.
Despite consolidation, boutique CROs continue to find niches. With technology rapidly evolving, smaller, nimbler CROs often enter a cutting-edge field first.
“It’s a chance for newer CROs, or more risk-taking CROs, to offer products and services that the large ones merely by size aren’t able to offer right away,” Kulkarni said. In turn, this makes the small CROs acquisition targets.
Most small CROs in San Diego are in the pre-clinical space, where there’s a lower barrier to entry and fewer regulations. That’s according to Suresh Chintalapati, president and chief business officer of Triangulum Biopharma in Carlsbad, a boutique CRO that designs and analyzes rodent studies for liver and metabolic drug candidates.
“Because of that you see a lot of new CROs springing up every year,” Chintalapati said. He added the brisker rate of CRO acquisitions speaks to “the quality work being done in San Diego.”
Besides consolidation, another local CRO story is playing out: Chinese CROs establishing a San Diego footprint. Chinese firms have realized that most San Diego biotechs are small enough to see outsourcing to China doesn’t make sense.
But it goes both ways. San Diego CROs like Irisys offering in-demand services have expanded into China. The CRO relationship between the two countries seemingly runs counter to the U.S.-Sino trade war narrative.
Marrying the two narratives — consolidation and Chinese-linked CROs — Wuxi entered San Diego by way of acquisition, as noted above.
Life sciences and health care reporter Jared Whitlock can be reached at
email@example.com or 858-634-4636.