The unprecedented level of M&A activity in the clinical research site sector during the past 24 months has spurred many investigative site owners to consider selling their businesses.
The transactions, largely driven by buyers or investors wanting to address inefficiencies in the site landscape through scale or capital improvements, include existing site networks buying businesses to expand their networks, CROs building vertically integrated models that include owning sites or having ownership interest in sites, and private equity deals to either partially or wholly acquire sites.
“Investors and large corporate entities have finally come to realize that the way research is conducted with research sites is incredibly inefficient,” said David K. Blume, managing director, Edgemont Capital Partners. “The $60 billion R&D industry depends on the execution of clinical trial protocols conducted by small, independent mom-and-pop investigator sites. This enormous industry is balanced on the head of a pin, depending on these small entities to recruit the subjects and do the work. That is changing and it’s changing rapidly in a dramatic way.”
As consolidation of the site landscape increases, CenterWatch frequently receives questions from principal investigators (PIs) and owners of clinical research sites about how to make their businesses more attractive for both strategic and financial buyers and what to expect during the acquisition process. Some site owners want to join larger site networks, which can offer economies of scale through centralized functions, while others aim to bring in outside investment to grow their business or add resources to remain relevant in the marketplace. At the same time, many experienced, long-time investigators are looking toward retirement and seek advice for selling their clinical research business.
This month, we asked investment bankers, financial consultants, analysts and others experienced in clinical research site acquisition processes to answer questions from investigators and site owners about preparing for an acquisition and how common mistakes could be avoided. In the August issue of The CenterWatch Monthly, we will look at what sites can expect during the first few months of the post-acquisition integration process.
Specific recommendations for selling a clinical research business would vary depending on the site’s ownership model. Yet the following considerations would generally apply to fully physician-investigator owned sites, small networks operated by a clinical research professional or owner who contracts with physicians and sites owned and controlled by a physician group in larger for-profit healthcare systems interested in being acquired or selling their investigative sites.
Which buyers should I approach?
Jennifer Byrne, founder and president of the Greater Gift and former CEO of PMG Research, said the first consideration for an individual or group considering some type of transaction is to determine what they want to accomplish through the deal. Is it short-term or longer-term financial gain? Do you want to get out of the business? Or do you want to sell a portion of your business and bring in equity that will allow you to grow and expand? Another important component involves understanding the impact of the transaction on key stakeholders, which could be other physicians or clients on whom your business depends. Thinking through these questions can help determine the types of buyers that site owners should approach.
“You want this to end up being a win-win: A win for the owner, the employees and the shareholders. If everyone is aligned, the probability for success is magnified,” Byrne said.
Both strategic and financial buyers have shown keen interest in acquiring sites and growing site networks in the past two years. Notably, Jaguar Holding Company, the parent company of Pharmaceutical Product Development (PPD), has acquired European-headquartered Synexus and U.S.-based Radiant Research, which have been integrated to create the world’s largest site network, and Icon bought PMG Research in a groundbreaking deal. Additionally, Bioclinica, which owns the European-based CCBR Clinical Research, acquired Compass Research in the U.S. last year.
For most investigative sites, particularly for the smaller physician-investigator owned sites, private equity-backed businesses are potentially the most likely buyers. Private equity has used different organizational models in this space. Some buy the whole company and others own only a piece of the site business. In one model, clinical research sites are acquired to serve as a platform and the private equity firm then makes additional tuck-in or roll-up acquisitions to increase the scale of the business. Investors have also focused on growing site businesses based on a specific geography or therapeutic specialty. Evolution Research Group, for example, has built a clinical research site company in the U.S. that specializes in CNS clinical study execution.
“There are a lot of different financial buyers who are just buying it as a business with the idea that someday they will sell it. They are not going to grow it and own it forever. That is the difference between the strategic buyers and the financial buyers, and different buyers will have different questions,” said Michael A. Martorelli, director at Fairmount Partners.
What makes a site attractive for an acquisition?
What makes a site attractive for an acquisition depends on the individual buyer’s motivation and goals. At Synexus, for example, Christophe Berthoux, chief executive officer, said decisions to acquire sites or networks are based on the company’s overall strategy. Synexus owns dedicated research sites across some 10 countries and just completed its operational integration with U.S.-based Radiant Research about a year after it acquired Research Across America. Synexus currently has a three-year plan that calls for continued geographic and therapeutic expansion, along with expansion of sites in hospital settings.
In general, Berthoux said potential buyers will look for targets with both a good scientific reputation and a good business.
“The first thing that comes to mind is the reputation of the business. How long have they been in business? Do they have a good reputation in terms of the PI and the key opinion leader? Are they thought leaders in their therapy areas?” Berthoux said. “We will also look at the financials and backlog. More specifically, we are looking at the potential for growth for this business. We look at what is constraining the growth. Is it capital? Is it people? Is it more studies?”
Additionally, Synexus evaluates whether the site works with certain large pharmaceutical companies, different types of sponsors and the concentration of its customer base. If a particular sponsor accounts for a large portion of the site’s revenue or backlog, for example, it could represent greater risk for the new owner and lower the value of the business. Synexus also conducts customer interviews during the acquisition process for feedback about working relationships with the sites.
“We look at what makes this business attractive and why sponsors are working with a particular site. What makes them so unique in terms of attractiveness on the market?” said Berthoux.
Sites that lack a high degree of specialization and a recognized leadership position in a therapeutic category, according to Edgemont’s Blume, could make themselves more attractive to buyers by diversifying across multiple therapeutic areas. Edgemont also likes to see diversification across phase, such as the ability to conduct early phase or inpatient studies, and strong access to subjects.
“Having a high-quality database of validated subjects that you can show are active and that you recruit actively out of the database has real value. Any other proven subject recruitment tools also make sites more appealing,” Blume said. “The ability to operate multiple locations also gives you enhanced value.”
Fairmount Partner’s Martorelli said the best acquisition targets are sites with active businesses, experienced PIs and staff, infrastructure and resources, and special capabilities.
“It makes it easier for a buyer to buy you if you’ve already got some of that in place. If a buyer has to spend millions of dollars upgrading your IT network, replacing old computers, making sure staff members are certified, replacing the paint and the carpet, it makes you less attractive,” said Martorelli. “There are different approaches that buyers would take. But generally, if you are relatively large and have some infrastructure, you are going to be attractive to more potential buyers than if you are very small and have little or no infrastructure. Sites should do everything they can to make themselves as attractive as possible to the highest, broadest range of buyers.”
When is it a good time to sell my clinical research site?
Site owners need to think about timelines and plan carefully for selling their business. Mark Lacy, president and CEO of Benchmark Research, an integrated site network with six locations that specializes in vaccine studies, is frequently contacted by both buyers and sellers interested in exploring the feasibility of a deal. For businesses owned by the PI, Lacy said, most buyers want an agreement that the PI will stay with the company for at least 24 to 36 months and then find another acceptable investigator to fill that role. When acquiring a business not owned by a PI, the buyers will want a similar agreement with all key investigators; if it’s a single-site without infrastructure and the owner is integral to the success of the site, the buyer will want the owner to stay for an extended period as an employee.
“Not everybody is going to ask for that, but if they don’t, the valuation is going to be discounted. If the business is owned by a PI, you have to have agreements in place that you are going to stay on for at least a 24-to-36-month period. Otherwise you are going to suffer on the multiple in a big way. It’s something that is often overlooked by PIs,” said Lacy.
Chris Bitler, managing partner, Advisory, at Warbird Consulting Partners, advises investigative site owners to enter the market for a transaction only during a time they are confident about the strength of their pipeline of studies and their ability to maintain revenue momentum throughout the sale process.
“You want to sell under strength and you have to assume that it can take six months to sell a business. You don’t want to go out if you feel at risk with your pipeline,” said Bitler. “There are disruptions with any sale process. The last thing you want is to be trying to maintain revenue momentum and sell your business. It’s really difficult.”
How should I prepare for entering the market?
Before putting a site business on the market and talking to potential buyers, owners need to be adequately prepared for the diligence process. Once buyers are interested in a business, they immediately want to start analyzing documents, financials, business data and operational information. If those records aren’t ready in advance, it could slow momentum for the acquisition and maybe even break the deal.
“One of the biggest mistakes is when somebody tries to sell their business and thinks they can just print their financial reports out of QuickBooks, send it away and think that is diligence,” said Jason Monteleone, president of Pivotal Financial Consulting, a firm that serves the clinical research industry. “Selling your business and providing appropriate diligence is also doing a lot of analysis that helps the buyers understand why they want to buy your business. There is competition out there for which businesses are going to be acquired. Buyers are going to be more interested and pay a higher value for businesses when they have a better understanding of them.”
Owners should hire an investment banker or financial consultant with experience completing clinical research site transactions to gather the data needed to place a proper value on the business and organize documents requested by the buyer during the due diligence phase of negotiations. Owners also will need appropriate legal and tax assistance for the deal.
“The biggest issue in working with these clinical research sites, which are generally privately held owner-operator businesses, is they enter the market to do a transaction, but don’t understand what is involved in getting a deal done from a diligence perspective or what the buyers may need on their end to facilitate the transaction,” said Warbird Consulting’s Bitler. “Many times, the owner brings in someone like us late in the game and, because we need to do a lot of things very quickly, it becomes a distraction to the staff. They take their eye off the ball of the business and revenue starts declining in the middle of the process. It can end up costing the owner a lot of money on the purchase price.”
Investment bankers and financial consultants stressed the importance of sites preparing for the acquisition process with good financial reporting based on an accrual accounting method in conformity to generally accepted accounting principles (GAAP). Most small physician-owned sites operate on a cash basis, but almost all buyers will want to see financials on an accrual accounting basis. Conversion to an accrual-based accounting system can be a lengthy, expensive and complex task.
“Many times, we will get involved and the company has to bring in outside parties to convert their cash basis financial statements to accrual. Sometimes that process is so lengthy that the buyers get frustrated and move on. Accurate financial results on an accrual basis greatly enhances the ability to get a deal done and, beyond just being a threshold consideration, adds value to the site in a sale,” said Edgemont’s Blume.
Other factors buyers typically want to see in the diligence process include a 12-month or more projection of pipeline and backlog, backlog analysis and new potential study awards. In addition, most buyers request a 36-month trailing average, which is a measurement of the company’s health based on income statements, and financial statements that reflect not just profit and margin, but also earnings before interest, taxes, depreciation and amortization (EBITDA). Key performance indicators, such as actual enrollment versus targeted enrollment on trials over time, along with the expected revenue from that enrollment, will be required. In addition, standard operating procedures, hiring practices, FDA audits, employment expectations and guidelines, to name just a few areas, must be well-documented.
“You need to be methodical and try to do things the right way right out of the gate. Make the appropriate investment in the financial reporting aspect as you are start to undertake going to market and have qualified people involved that understand the due diligence process,” said Chad M. Zoretic, managing director, Advisory, Warbird Consulting Partners.
What are some of the biggest challenges for sites in the current marketplace?
Edgemont’s Blume said one of the challenges for site companies as they explore this path is the “size issue” because it’s difficult below a certain threshold size to run a process and get a premium value. Buyers, if they are going to invest the time and energy in a transaction, want to be able to make a significant difference in the business.
“If you have a $100 million organization and are buying a $1 million revenue site business, it’s a lot of effort for not a lot of gain. I encourage small site companies to think about trying to team up, partner or form alliances with other smaller sites to try to gain some critical mass on their own. It’s very difficult to merge these companies because nobody has the capital to do that, but they can at least aggregate themselves in some way and gain a little bit of stature. It’s very difficult when you have these very small sites. In the current environment, that is one of the biggest challenges for these small site owners,” Blume said.
Specifically, Lacy said most private equity and big buyers in the market want a minimum $3.5 million EBITDA before they will even look at a business, and their interest in a transaction grows when a company’s operating performance reaches $10 million EBITDA and higher.
“The larger you are, the more attractive you become. The other side of the equation is someone worth $500,000. There are groups out there buying companies that have $500,00 or $1 million EBITDA, but they are much smaller players in the industry and are not paying nearly as high a multiple,” he said.
In addition, independent physician-owned sites that have sold their medical practice to a hospital or healthcare organization may find it difficult to sell the clinical research side of the business separately. Although it won’t be impossible for these owners to sell, they will likely find fewer buyers at a more discounted price.
Is there any final advice from potential buyers?
Synexus’ Berthoux said his most important advice for owners who want to sell is understanding both how they want to grow their business and their vision for the future. Where do you want the business to be two years from now? Also, business owners need to ensure they have the time and investment to support those plans and be sure they align with the buyer’s long-term strategy before the acquisition.
“We will not buy your business for the sake of fixing a business. That doesn’t work. It takes too much time. We have plenty of choices and we are looking to buy or to integrate the best business with the most solid reputations,” he said. “There will be more consolidation of the market and its exciting times when you own a good site business.”
Karyn Korieth has been covering the clinical trials industry for CenterWatch since 2003. Her 30-year journalism career includes work in local news, the healthcare industry and national magazines. Karyn holds a Master of Science degree from the Columbia University Graduate School of Journalism. Email email@example.com.
This article was reprinted from Volume 24, Issue 07, of The CenterWatch Monthly, an industry leading publication providing hard-hitting, authoritative business and financial coverage of the clinical research space. Subscribe >>