Clinical research sites have historically been a highly fragmented industry, consisting mostly of physician practices conducting studies on a part-time basis and small stand-alone businesses. Now, consolidation is occurring, with sites coming together under common ownership, or management, to operate as a single network at an unprecedented rate.
The value proposition of a single network includes:
- Geographic and therapeutic diversification through multiple locations and PIs
- Economies of scale from centralizing functions such as business development, budgeting, contracting, study start up, finance and accounting, QA and IT
- Standardization of workflows and processes around best in class SOP’s
- Enhanced negotiating leverage with sponsors through the ability to offer volume, accelerated timelines, and data consistency
Basics of the Clinical Research Industry
Before we talk about the consolidation trend between clinical trial sites, it is important to distinguish between two business models in the clinical research industry:
1. Free-standing research sites, or dedicated research centers
These sites only perform research and do not provide ongoing clinical care (outside of the study duration). They have a dedicated facility, hire physicians as employees or contractors to serve as principal investigators, and source their patients from advertisements, their subject database, partnerships with health care providers, and community outreach. The advantages enjoyed by these free-standing clinical trial sites are focus and greater ability to control operations, but they generally require more capital and operate at higher break-even thresholds.
2. Physician affiliated clinical trial sites
These sites are co-located within physician practices and manage research on behalf of those practices. They use the physician’s facility, source patients primarily from the practice database, and share revenue with the physician. This arrangement is more subject to the whims of the practice, but is easier to scale, with lower break-even thresholds.
A site network is simply a combination of sites pursuing one or both of the above models. Some networks are exclusively free-standing; some are exclusively managed (SMO); and some combine both types under one operation. For instance, a local network might resemble a hub-and-spoke, with a large stand-alone site (the hub) that sends coordinators over to neighboring physician practices to manage operations (the spokes).
The Rise of Private Equity in Clinical Trial Sites
Private equity and other institutional investors have shown increased interest in the space. For private equity firms, the investment thesis is straightforward: An opportunity to consolidate operations in a highly fragmented industry, creating a predictable cash-flow business with economies of scale.
Many are actively pursuing freestanding sites in a roll-up strategy. When acquiring sites, firms like to buy operations with a minimum revenue size ($2 million is common), a track record of predictable positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and a diversified PI base, or, at minimum, an active PI who agrees to stay on for an extended duration.
Because of increased buyer competition, large, well-run sites often receive multiple overtures. One private equity investor tells us that EBITDA multiples are now in the 5-7x range for research sites with more than $1.0mm of EBTIDA and 8+x EBITDA for sites with over $3mm in EBITDA (where EBITDA includes the expense of market-rate compensation for the PIs/owners). For instance, a site with $3.0 million in revenue might generate $1.0mm in EBITDA (which is a 33% EBITDA margin) and therefore commands a purchase price of $5.0-$7.0 million.
Other institutional-backed companies are pursuing a purely physician-affiliated strategy. To scale, these companies are pursuing alliances with a large volume of physician practices. Large health systems are especially attractive partners because of their size and reach, both in the pool of PIs and patients.
Take a look at this table of site networks backed by institutional investors:
What Does Consolidation Mean for the Clinical Trial Industry?
In the long term, active consolidation should raise the level of professionalism in the industry. It should create more standardized operations, less variability in performance across sites, and, ultimately, more predictability for sponsors in terms of clinical trial enrollment and data delivery.
It could improve enrollment for the industry significantly by allowing sponsors to tap research-naive physicians with access to specific patient populations. Imagine a physician who has a patient population that fits a particular study, but does not have the experience or infrastructure to run research. With the rise of network operators, this physician can partner with an operator to perform clinical research. For a sponsor, this partnership combines the benefits of patient access with best-in-class operational know-how.
All of this will lead to more adoption of site technology. Already, the vast majority of site networks have a CTMS system to manage back-office operations, and now, many are adopting eSource and eRegulatory as a means of driving standardization and enabling the centralization of more functions. For example, instead of simply centralizing business development, finance and QA, a network can also centralize regulatory compliance, source design, and EDC entry with the use of these tools.
Why are research sites using eSource at an advantage? Read here!
Significantly, several of the start-ups targeting larger health systems have made the explicit decision to go with eSource as opposed to using the health systems? Electronic Health Record system so they can have better operational control. This means that the direction of the industry will be toward industry-customized data collection platforms as opposed to EHR systems that are optimized for patient care.
Given the pace of change in the industry, site consolidation could take years to fully play itself out. But this should lead the way towards superior operational performance and an expanded pool of research-ready Principal Investigators.
Author: David Blume is a Co-Founder and Managing Director of Edgemont Partners and has over 30 years of investment banking experience, including more than 25 years representing healthcare companies in M&A and capital raising transactions. He has completed over 150 transactions, representing more than $60 billion in value. He has provided strategic advice and raised capital for pharmaceutical research and development services companies such as CROs, clinical sites and networks, and other pharma services companies. David has closed over 25 M&A transactions for clinical research site companies. He graduated from Haverford College with a Bachelor of Arts in Philosophy in 1988.