Quintiles Launches Expanded Partnering Group as ‘NovaQuest’ and Announces Alliance With Top Global Investment Firm
A couple of points to be made about this development. First, you’ll recall my recent PCE post discussing Anormed and it’s hedge fund troubles. In that post, I predicted that hedge funds will increasingly actively manage their pharma/biotech investments, by taking board seats and using influence with other investors to force change on management. In this story, the large CRO, Quintiles, has received significant new fund commitments from a single hedge fund, TPG-Axon, suggesting that CROs too will be actively managed by hedge (and also private-equity) funds.
It’s a shift in the financing landscape that could spell trouble for established firms looking to seed new-growth businesses (either through internal NBU investments, spin-offs, licensing or acquisitions). Funds like these typically put pressure on management to show stock-price returns quickly; they don’t have a record of being patient and waiting the multiple years it might take for new-growth businesses to establish themselves. Interestingly, I don’t see Quintilies having this potential problem with TPG-Axon, since Quintiles is using the money to fund a spin-off called NovaQuest. It’s a very targeted investment towards a new-growth business. So TPG-Axon should know what to expect.
The other point to make relates to NovaQuest itself. Here, we see evolution in the CRO industry away from modularity (i.e. providing development outsourcing as a stand-alone business) towards re-integration. In other words, CROs like Quintiles (via NovaQuest) are becoming more like pharmaceutical firms and less like outsourcing vendors. Re-integration is what happens when outsourced functions become commoditized, as the drug development function has become. Major CROs need a new source of growth business, and they realize that integration of functional expertise and processes, like in major pharma, creates efficiencies and competitive barriers that can lead to new growth. Eventually, of course, already-integrated pharma clients will take their business away from Quintiles, which they will increasingly view as a direct competitor, rather than an outsourcing vendor. Quintiles will be fine with this, so long as they can find companies willing to partner with NovaQuest. If I were an investor in Quintiles, though, I’d worry that they will have a tough time competing with big pharma for these deals. Pharma’s been at it a lot longer, has just as much at stake and has deeper pockets.
