Pharmaceutical contract research organisations M&A update Autumn 2012 50% market growth driving M&A Contract research organisations (CROs) are becoming increasingly embedded in the drug development process. Industry research estimates that CRO revenues were worth US$22 billion in 2010 and are expected to reach US$33 billion by 2015 as the industry benefits from a long-term increase in spending on outsourced services and expansion into emerging markets. However, growth is occurring at the same time as structural change and this is creating volatility for market participants. Key findings from our research Globalisation and the move to strategic alliances favours specialists and those with scale. Emerging countries are now a core strategic market for pharmaceutical and biotech companies. At the same time, these companies are moving away from transactional relationships to strategic alliances. This favours CROs with scale, multiple capabilities and geographical reach. The survival of mid and small firms will depend on their ability to become market leaders within a particular geography or specialist research area. Large and mid-size CROs using M&A and joint ventures to meet sponsors needs. Companies are using joint ventures and acquisitions to infill therapeutic capabilities, extend geographic reach, especially in the high growth regions such as Latin America and China, and acquire different stage services in order to secure relationships with sponsors (including pharmaceutical and biotech companies). The evolving global marketplace for CROs is creating challenges and opportunities, with M&A activity driven by geographic expansion and private equity led consolidation Zachary Tsai, Catalyst Corporate Finance Private equity continues to grow platforms. Private equity have been long-term investors in the sector, attracted to the consolidation opportunities, ability to grow existing platforms and attractive returns. There have been a number of recent successful PE exits to strategic buyers including sales by Avista Capital and Welsh, Carson, Anderson & Stowe.
Pharmaceutical companies outsourcing non-core activities Industry Trends Increased outsourcing across the drug development lifecycle More stages of the drug development process are being outsourced as sponsors focus on reducing fixed costs, improving time to market and responding to increased global regulation (see Figure 1). Figure 1: R&D efficiency has declined significantly as regulation has become more stringent and biotechs have entered the market place No. of drugs per billion of USD R&D spending (inflation adjusted) 30 32 The pressure on pharmaceutical companies to replace revenue due to impending patent protection losses is leading to a greater focus on late stage development, the lucrative generics market and finding novel revenuegeneration opportunities. 1950 1955 25 1960 10 9.5 1965 1970 8 1975 5 6 1980 1985 3 1990 2 1 0.7 0.6 1995 2000 2005 2010 This is a positive environment for CROs which can expect to increase their share of R&D spend. As illustrated in Figure 2, the large majority of pharmaceutical companies expect to increase or maintain spending on outsourcing. Strategic alliances developing as sponsors rationalise drug portfolios Source: FDA Figure 2: Large majority of companies expect to increase or maintain outsourcing spend Predicted change in outsourced spending in 2013 Pharmaceutical companies have been rationalising their drug development portfolios to focus on a smaller number of core therapeutic areas. Mid and small CROs need to develop strong differentiators Consolidated portfolios mean sponsors are reducing their supplier base, preferring deep relationships with fewer CROs. Between 2010 and 2012, 13 large pharmaceutical companies had announced 22 major alliances. This includes Bayer HealthCare s long-term strategic partnership with Covance and Pfizer s two partner model, which cut its functional services providers from 17 to partnerships with just ICON and Parexel. This environment favours larger CROs with a multinational footprint and broad capabilities and expertise. The survival of mid and smaller firms will depend upon their ability to sell geographic expertise and demonstrate a specialist capability. Big pharma Top 10 biopharma Emerging biopharma Positively change Maintain current levels Decrease Source: Contract Pharma, May 2012 These pressures are driving M&A activity. Larger CROs which need to gain a particular strategic advantage are attracted to specialist firms. For example, US-based CRO QPS acquired a majority stake in Austrian JSW Life Sciences, a full service CRO specialising in central nervous system diseases which has operations in Central and Eastern Europe. Large and mid-tier CROs are using acquisitions to extend their geographic and therapeutic reach, as well as broadening their offering. 2
US-based INC Research acquired Australian Trident Clinical Research to gain expertise in Australia, New Zealand and India; regions which are important for cost-effective local and global drug development programmes. INC s second acquisition in 2011 was the 138.8 million purchase of US CRO Kendle. This strengthened INC s ability to manage large scale global trials by significantly expanding its therapeutic expertise and geographic reach (see Figure 5). CROs accessing emerging markets increasing share of global outsourcing revenues Pharmaceutical companies are attracted to the growing international market for drugs led by consumer demand and increasing national health budgets in emerging markets (see Figure 3). This is creating demand for locally based CROs expertise and knowledge of unfamiliar regulatory regimes. Emerging markets are challenging to penetrate organically and large Western CROs are using partnerships with local firms to ensure they can meet their local and global clients objectives. For example, US Quintiles is investing US$14 million in a regional Figure 3: Emerging markets are increasing healthcare spending significantly Growth in healthcare spending per capita The two-partner model will simplify our processes, significantly reducing the number of external service providers we use for clinical trial execution, and clarify accountability in risk and quality management. Dr. John Hubbard, Senior Vice President Development Operations, Pfizer Source: Pfizer press release, 26 May 2011, www.pfizer.com headquarters for China and a significant expansion of its local laboratory testing capabilities through a joint venture with the Shanghai Clinical Research Centre. The fragmented nature of these markets means careful selection of the right partner or platform is key. Increasingly, large CROs are establishing market leaders through buy and build strategies. For example, ICON (UK) acquired BeijingWits Medical Consulting, a full-service Chinese CRO. PPD (US) gained additional capacity and expertise in China and the wider Asia Pacific region via its acquisition of Excel PharmaStudies, and Chiltern (UK) acquired Brazilian CRO Vigiun to deepen its capabilities in the strategically important Latin America region. Emerging markets strategically important CROs using joint ventures and acquisitions to access high growth regions % 240 220 200 180 160 140 China Brazil India 120 US 100 UK 2007 2008 2009 2010 Source: World Bank, Healthcare spending per capita USD (sum of public and private spending) In the evolving global market, scale is a key competitive advantage to developing strategic relationships with our clients. Paul Meister, Chief executive officer, inventiv Health Source: inventiv Health press release, 17 May 2011, www.inventivhealth.com 3
Pharmaceutical companies focusing on late-stage development A shift to late stage investment The pressure on sponsors to improve revenues in the short and medium term is forcing them to prioritise investment in lower risk and lower cost late-stage development. Faster growth in drug candidates in stage III is delivering short term volumes to CROs providing later stage services (see Figure 4). Figure 4: Number of drugs pushed through to stage lll has increased 26% since 2009, but growth in new drugs added to stages l and ll have tapered off Growth in number of drug candidates at each development stage since January 2009 The longer term impact of this is a decline in novel therapeutics in the development funnel as drug discovery activities are neglected in favour of faster developments. This will lead to a period of fierce competition and reduced demand in the CRO market, a catalyst for consolidation and diversification until sponsors shift their attention back to refilling the earlier stage pipeline. 135% 130% 125% 120% 115% 110% 105% 100% 95% 90% Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Pre-clinical Phase ll compounds Source: William Blair Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Phase l compounds Phase lll compounds Oct 12 Figure 5: In focus: INC Research INC Research is a top-tier global CRO providing the full range of Phase I to IV clinical development services. Their strategy includes international organic growth, acquisitions and securing private equity backing. Acquisition strategy Increasing access to emerging markets In 2011, INC acquired Australian Trident Clinical Research to gain expertise in Australia, New Zealand and India, regions which are important for costeffective local and global drug development programmes. Increasing therapeutic and trial expertise The acquisitions of NDDO Oncology (2005) and Pharmaceutical Resource Corporation (2006) gave INC expertise in anticancer drug development, late phase study experience and strong pharmacovigilance and drug safety expertise. Adding scale Earlier acquisitions include European CRO Vujaklija, one of the first CROs in Central and Eastern Europe (2002), and the Phase II-IV operations (Global Clinical Development) of MDS Pharma Services in 2009 for 30.4 million. This extended INC s presence in emerging markets and deepened expertise in vaccine, respiratory, cardiovascular and endocrinology clinical research. A 2007 joint venture with GVK Biosciences established a platform for INC to run full service Phase I-IV clinical trials in India for its global clients. The 138.8 million purchase of publicly listed US CRO Kendle in 2011 strengthened INC s ability to manage large scale global trials by significantly expanding its therapeutic expertise and geographic reach and moved INC in to the top tier of CROs. Ownership In 2010, Avista Capital Partners and Ontario Teachers Pension Plan acquired INC from its backers, an investor group led by Crosspoint Venture Partners and Adams Street Partners, for around 382 million. 4
Valuations Using valuations of the leading CROs as a proxy for sentiment towards the whole sector, Figure 6 shows EV/EBITDA has averaged 9.4x since global stock markets bottomed in March 2009, consistently outperforming the broader pharmaceutical sector, albeit with greater volatility. Figure 6: Since stock markets bottomed in March 2009, EV/EBITDA of leading CROs has risen from 6.6x to 10.2x EV/EBITDA of leading CROs and Big Pharma 12.0x 11.0x 10.0x 9.0x 8.0x 7.0x 6.0x 5.0x 4.0x Mar 2009 May 2009 Jul 2009 Sep 2009 Nov 2009 Jan 2010 Mar 2010 May 2010 Jul 2010 Sep 2010 Nov 2010 Jan 2011 Mar 2011 May 2011 Jul 2011 Sep 2011 Nov 2011 Jan 2012 Mar 2012 May 2012 Jul 2012 Sep 2012 Leading CROs 10.2x Big pharma 8.4x Figure 7: Selected acquisitions of publicly quoted CROs acquired by private equity Target Acquirer Date Deal value ( m) PPD The Carlyle Group and Hellman & Friedman Oct-2011 2,502.9 Kendle International INC Research (Avista and May-2011 138.8 Ontario Teachers ) Theorem Clinical Research Nautic Partners Apr-2011 nd (formerly Omnicare CRO) inventiv Health Thomas H. Lee Partners May-2010 690 PharmaNet JLL Partners Mar-2009 nd PRA International Genstar Capital Jul-2007 498 Synexus Lyceum Capital Nov-2007 18.1 Source: Capital IQ, Catalyst Corporate Finance Source: Capital IQ Financial buyers facilitating consolidation A number of the largest CROs are private equity backed including Quintiles, PPD, INC Research, inventiv Health, QPS, Medpace and PRA International. Recent M&A activity has been characterised by add-on acquisitions as firms continue to invest in existing platforms. Thomas H. Lee-backed inventiv Health has been a serial acquirer in the sector. Acquisitions include PharmaNet Development Group which helped the company extend its geographical reach and enhance its early and late stage clinical development capabilities. PharmaNet was owned by JLL Partners and the sale represented a 5.9x multiple on their investment. Exit activity has included sales to strategic buyers. For example, Avista Capital s 227 million sale of BioReliance to Sigma-Aldrich, acquired in 2007 for 130 million, and the 249 million sale of Aptuit s Clinical Trials Supply business by Welsh, Carson, Anderson & Stowe to Catalent Pharma Solutions. Whilst IPOs are likely to be an option for the largest CROs such as Quintiles, the largest deal in the sector over the last few years has been the take-private transaction of PPD by Carlyle and Hellman & Friedman for 2.5 billion or around 10x EBITDA. This transaction followed a number of other PE acquisitions of publicly traded CROs including INC s acquisition of Kendle and Nautic s acquisition of Omnicare (now Theorem Clinical Research), see Figure 7. Private equity have a successful record 5
Expect further consolidation Outlook and prospects for M&A The pressures facing pharmaceutical companies mean that demand for outsourced R&D will increase, but the challenges facing CROs discussed above mean that the sector will continue to be volatile. In particular, we expect to see: CROs which lack a distinctive proposition will be increasingly vulnerable. Those CROs which do not have a particular specialism or lack breadth (geographically or therapeutic) will struggle to compete against fullservice global CROs and genuine specialists. Large and mid-tier CROs continuing to build scale and expertise. Under pressure to offer a comprehensive global offering, large and mid tier CROs will continue to build scale by expanding geographically, particularly into emerging markets, and developing broad service expertise. M&A will be a key part of this strategy as companies look for local specialists, smaller CROs with niche capabilities, or opportunities to consolidate market share in mature and lower growth markets. Ongoing private equity investment. PE will continue to be active, facilitating consolidation, strategic bolt-on acquisitions and investment in platforms. Contact us Catalyst Corporate Finance has an experienced team of healthcare experts. If you would like to discuss this report in more detail, contact us on +44 (0) 121 654 5000. Andy Currie, Managing Partner Andy is Managing Partner at Catalyst. His chief responsibilities include advising on MBOs, fund raising, company acquisitions and disposals. Andy has transacted across multiple sectors including the healthcare sector where completed deals include the sale of ScriptSwitch to UnitedHealth Group Inc. Justin Crowther, Director Justin is a Director at Catalyst and has over ten years corporate finance experience. His main responsibilities include advising on MBOs, fund raising, company acquisitions and disposals. Justin leads our global healthcare sector team with completed deals including the sale of Solor Care Group to Voyage Holdings Limited. Zachary Tsai, Principal Zac is a Principal at Catalyst and has over six years experience in M&A. His main responsibilities include advising on MBOs, fund raising, company acquisitions and disposals. He leads our focus on the UK and international pharmaceuticals market. Zac has completed a number of deals including the sale of UL Medicines to Quantum Pharmaceutical. James Knott, Executive James is an Executive at Catalyst where his main responsibilities include advising on MBOs, fund raising, company acquisitions and disposals. James specialises in the medical devices sector and has been involved in a number of deals including the sale of FirstAssist Services to Capita Group Plc. 6
Figure 8: Selected recent M&A transactions Date Target Country Description Acquiror Country Value ( m) Sep-12 Paragon Biomedical Inc USA Operate a full-service clinical research organisation Clinipace Worldwide Inc USA nd Sep-12 Vitalea Science Inc USA Provides contract research services in the pharmaceutical field Eckert & Ziegler AG Germany nd Aug-12 Expression Analysis Inc USA Provides genomics testing and analysis Quintiles Transnational Corp USA nd Aug-12 JSW Life Sciences GmbH Austria Provides preclinical and clinical Phase II IV drug development services QPS Holdings, LLC USA nd May-12 Centrum Medyczne Osteomed Poland Provides clinical research services Synexus Ltd UK nd Feb-12 Aptuit s Clinical Trial USA Provides clinical supplies services Catalent Pharma Solutions USA 249 Supplies business Feb-12 PriceSpective LLC USA Management consulting company for biopharmaceutical and medical technology assets ICON plc UK nd Jan-12 BioReliance USA Provides testing and manufacturing services Sigma-Aldrich USA 227 Dec-11 BeijingWits Medical Consulting China Provides clinical research services ICON plc UK nd Oct-11 Advion BioServices Inc USA Provides bioanalytical, immunoassay, sample management, Quintiles Transnational Corp USA nd metabolism, biomarker, and discovery services Oct-11 VCG & Associates Inc USA Provides pharmaceutical consulting and account Quintiles Transnational Corp USA nd management implementation outsourcing services Oct-11 PPD Inc USA Provides discovery and development services and products Private Group led by The Carlyle Group USA 2,502.9 and Hellman & Friedman Jun-11 Trident Clinical Research Australia Provides contract clinical research services INC Research Inc USA nd Pty Ltd May-11 PharmaNet Development Group Inc USA Provides contract research services inventiv Health Inc USA nd May-11 Kendle International Inc USA Provides contract research and development services INC Research Inc USA 138.8 Mar-11 Phlexglobal Ltd UK Provides contract research services Private Group led by Inflexion Private Equity UK nd Feb-11 Dec-10 Bioserve Clinical Research Limited Research Pharmaceutical Services Inc India Provides contract research services QPS Holdings, LLC USA 3.7 USA Provides comprehensive global Phase 1-4 clinical development solutions Aug-10 INC Research Inc USA Provides customised programmes in areas including paediatric and womens health trials Private Group led by Warburg Pincus LLC USA 170.5 Private Group led by Avista Capital Partners and Ontario Teachers Pension Plan USA 382.1 Aug-10 ClinTec International Ltd UK Provides clinical research support services Elephant Capital Plc UK 8.4 Jul-10 Xendo Drug Development BV Netherlands Provides contract research services QPS Holdings, LLC USA nd Jan-10 Chiltern International UK Provides contract research and development services Greenhill Capital Partners USA nd Holdings Ltd Jan-10 Medical Consulting Dr Germany Provides regulatory and pharmacovigilance services Medpace Inc USA nd Schlichtiger GmbH Dec-09 ClinPharm International GmbH Germany Provides contract pharmaceutical and biotechnical Synexus Clinical Research Ltd UK nd research services Nov-09 Excel PharmaStudies Inc China Provides clinical research, registration, biometrics, and training and consultation services PPD Inc USA nd Sep-09 Paragon Biomedical Inc USA Full-service clinical research organisation Clinipace Worldwide Inc USA nd Jun-09 Phase II-IV Operations of MDS Pharma Services Inc USA Provides research services and undertakes clinical trials INC Research Inc USA 30.4 May-09 Farma Resa Imp Srl Italy Provides clinical research services Hyperphar Group SpA Italy 1.4 Apr-09 Vigiun Brazil Provides clinical research services Chiltern International Holdings Ltd UK nd Apr-09 Piedmont Research Center LLC USA Provides preclinical discovery services focused on efficacy studies in oncology and other therapeutic areas Charles River Laboratories International Inc USA 31.9 Mar-09 Swiss Pharma Contract Ltd Switzerland Provides clinical pharmacology and research services Covance Inc USA nd Feb-09 AbCRO Inc Bulgaria Provides contract research services in Central and Eastern Europe Sep-08 Molecular Imaging Research Inc USA Provides contract research services specialising in anti-cancer and anti-inflammtory therapeutic agents Mar-08 Premier Research Group Plc UK Provides clinical trial management and informatics capabilities PPD Inc USA nd Charles River Laboratories Inc USA 6.9 Management buy-out backed by ECI Partners and Indigo Capital UK 88.4 Feb-08 InnoPharm Ltd Russia Provides Phase II-IV clinical trials support PPD Inc USA nd Jan-08 AppTec Laboratory Services USA Provider of contract research and development services WuXi PharmaTech China 81.9 Jan-08 Hyperphar Group SpA, Italy Italy Provides contract research to the pharmaceutical, biotechnology and healthcare industries Pierrel SpA, Italy Italy 6.4 Source: Catalyst Corporate Finance 7
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