Clinical research organizations are on a rebound and the CRO industry is poised for 2012 growth led by the largest CROs exercising deals with large pharmaceutical companies, according to a new report by investment research firm Morningstar.

As a group, the publicly traded CROs that Morningstar covers increased revenue 11.1 percent year over year.

“We expect growth in the CRO industry to continue accelerating into 2012 and the rise of the strategic partnership model should concentrate these benefits in the hands of a select group of narrow-moat providers,” wrote Lauren Migliore, a Morningstar analyst who covers the CRO space.

The strategic partnership model involves CROs aligning with big pharmas in a broad relationship. These deals can span multiple product candidates extending from R&D all the way through commercialization.

The largest CROs, such as Durham-based Quintiles, which is privately held; Wilmington, -based PPD, which was recently taken private; and Covance (NYSE:CVD), have the breadth to reach such agreements with large pharmaceutical companies.

Some of the CRO M&A activity of the last year was driven by aspirations of mid-tier CROs to build up the expertise and geographic reach to serve pharmaceutical company needs. Raleigh-based INC Research, for example, made acquisitions of Cincinnati, Ohio CRO Kendle and Australian CRO Trident Clinical Research to expand its therapeutic and geographic reach.

Merger and acquisition activity will be tempered in 2012 compared to last year, Icon CEO Ciaran Murray said at the JP Morgan Healthcare conference this week in San Francisco. Murray said that small deals and bolt-on acquisitions will continue, but the CROs involved in the biggest deals last year will pause to “digest” their takeovers, Outsourcing Pharma reported.

Migliore notes that the second and third quarters of 2011 marked a return to revenue growth for CROs. Among public CROs, Covance and PPD were the biggest gainers. Both were among the earliest CROs to reach strategic partnerships with pharma partners. But Migliore adds that the CRO industry as a whole is still evolving into the strategic partnership model. And those growing pains are straining profits in the near term.

Migliore sees consolidation activity continuing, fed by the private equity industry’s interest in making deals in the sector. PPD went private in December with the closing of its $3.9 billion sale to The Carlyle Group and Hellman & Friedman at a nearly 30 percent premium over PPD’s stock price before the deal was announced. That deal “reinforces our favorable view on the prospects of this high-growth sector,” she said.

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