Council Post: It’s A Marriage: Assessing Vendor Investment Impact On Operational Risk

Founder & Principal Consultant at Pure Health Consulting.

When it comes down to it, the relationship between your company and a service provider is like marrying someone you haven’t been dating for that long. If you want clarity before tying the knot, then you have to ask the hard questions. While uncomfortable, it is better to address the concerns now, rather than eight years later when you have a mortgage, a family and other responsibilities, like a four-year partnership agreement with $130 million on the line.

Let’s get into it. 

In biotech and pharma, we typically hear the news when one company merges or acquires another. However, many people in the industry don’t pay close attention to M&A trends relating to service providers that assist biotech and pharma companies with running their clinical trials. 

From the biotech and pharma company perspective, understanding a potential/current contract research organization’s (CRO) financial status and ownership structure is an essential consideration because changes in a CRO’s ownership may impact your company’s goals, time to market and cash flow. Here, I will discuss from a high level some considerations when engaging with a current/potential partner, and one of the common impacts I see flowing from M&A activities in the CRO/outsourced service provider arena. While this article is focused on the considerations and risks from the pharma/biotech company perspective, these same issues can be considered from the CRO/service provider side when engaging with a company.

What are the financial life-cycle considerations? 

A good starting point is to consider investment types in or by a CRO — i.e., strategic and/or financial investment — which may impact services provided to your company.

1. Strategic investment: This can be described as when a buyer invests/acquires a competitor to expand or augment its geographical presence, service line, market share, etc. (e.g., CRO “A” purchases CRO “B” to expand operations in the EU). In this instance, we are looking to identify emerging issues posed by the acquisition and potential merger that may impact the services being provided (e.g., impacts to interpersonal relationships, operational efficiencies, flexibility in negotiation, changes to the corporate structure, etc.).

2. Financial investment: Alternatively, financial investment in a CRO is typically a long-term investment made by a third party with the primary goal of generating a favorable return. Here, we are looking for the impacts that flow from changes increasing cash flow and cutting costs; the investor’s potential exit strategy, including a possible sale to a strategic buyer, likely materializes as changes to operations and workforce occur.

One potential impact: With M&A comes attrition.

Adaptability and flexibility are key selling points for many CROs. However, a corporate sale or purchase profoundly impacts a CRO’s operations regardless of how flexible and adaptable the organization may be. In the context of the investment types noted above, one common impact that spans both financial and strategic investments is workforce consolidation — i.e., eliminating redundant personnel and associated services to achieve savings and efficiency. This may occur when an investment matures or when one entity integrates into the other. We typically see workforce consolidation resulting in delayed timelines and increased costs due to personnel retraining, changes to contractual arrangements and fee structures and, potentially, changes to the relationship’s overall strategic direction.

Why does this matter?

Depending on your company’s size and funding, it could matter greatly. For a small company with minimal funds, the activities mentioned could functionally kill your organization, meaning that there is not enough capital to keep your company operating and onboard a new service provider to rescue the program/progress activities. For a large organization, this could mean a trial’s death due to missed timelines and allocated funding, ultimately impacting time to market and influencing stock prices.

So, what can you do? 

1. Be informed: There are plenty of publicly available resources and databases to help get a picture of a CRO’s financial status. A good starting place is to read the CRO’s 10k, research them via trusted news outlets and, if available, use resources and databases that aggregate M&A news and financial data to help gain a greater understanding of their status and overall investment landscape.

2. Have the hard conversations upfront: Ask your CRO direct questions to understand where they are in their corporate evolution and where they may be potentially going if they were recently acquired or sold. Consider asking about potential short- and long-term operational changes and risks. While it may be uncomfortable, this feeling is outweighed by the benefits of understanding the potential risks of entering into the engagement. This conversation allows both your company and the CRO to enter the relationship with a basic and mutual understanding of the potential risks and creates a baseline for having honest, upfront conversations to address concerns moving forward.

Let’s go back to the marriage analogy to close this out. Understanding the facts and issues are essential to have an informed discussion with your partner, and being candid can go a long way. Like a marriage, the goal here is to move the relationship positively for both parties.

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