As pace of PE, M&A activity expected to continue in 2015, longer-held CRO investments may be poised for sales, IPOs
Last year’s healthy pace of CROs filing IPOs, the best in 10 years, is expected to continue in 2015, along with private equity (PE) investments in pharmaceutical outsourcing companies.
That positive outlook comes from investment banking firm Fairmount Partners’ annual preview of the pharma and outsourcing industries, published in its Pharmaceutical Outsourcing Monitor newsletter.
“Big CRO companies continue to focus mostly on firms with a specialty technology, while mid-sized firms look to expand geographically, try to serve more clients in new territories or provide new services or possibly merge with smaller sized companies,” said Michael A. Martorelli, the Fairmount director who wrote the report. “Small firms are looking to sell rather than buy, typically to another company owned by a private equity investor group.”
Fairmount’s report identified seven outsourcing companies whose PE firm financers could be planning an exit strategy in 2015, either through an IPO or sale to other investors. The companies—Aptuit, WIL Research, Worldwide Clinical Trials, Premier Research, Synteract, MPI Research and inVentiv Health—all were acquired by PE firms between April 2005 and May 2010. For some, the report noted, that’s already a relatively long holding period. In 2014, the average holding period for PE investments was just over four years before going public.
“We are not predicting any specific PE exit in 2015,” the report stated. “Each of the situations is different. Let’s also remember that several other prominent outsourcing companies have been controlled by PE investors for shorter periods of time.”
Currently, 14 companies that received additional PE investments between 2011 and 2013, including global CRO PPD, could become the next IPO candidates, according to the report. The report is not an exclusive list of all potential IPOs.
The report said the pace of consolidation, which picked up in 2013, continues to come from both public and private sources, along with strategic partnerships that keep evolving and garnering significant attention.
Already in the first month of 2015, half a dozen PE investments have been made, some not yet publicly disclosed. The deals include London-based Vitruvian Partners’ majority ownership stake in CRF Health and PE firm The Riverside Company’s investment in Greenphire.
Martorelli’s report said mid-sized providers will be challenged to expand their businesses without diluting the special nature of their operations.
“They (mid-sized firms) cannot afford to disrupt the practices that have enabled them to separate themselves from a range of capable competitors,” the report stated.
In 2014, PE firms also made significant investments in other kinds of outsourcing companies—IRBs, drug consulting firms, biopharmaceutical contract manufacturing, specialized clinical laboratories and nonclinical analytical drug development services. They also funded acquisitions by their existing portfolio companies, such as Chiltern’s acquisitions of Ockham and Pacific Clinical Research, and Clinipace Worldwide’s purchase of Choice Pharma, a CRO focused on the Asian market.
“The IRB consolidation that began in 2014 is continuing,” said Martorelli. “There is a constant level of conversation among buyers and sellers about what they might want to do, could do, and what’s possible, which makes it difficult to forecast what may happen with a company or an industry.”
PE deals were part of 2014’s IRB consolidation, including WIRB-Copernicus Group’s acquisitions of Aspire IRB, Midlands IRB and New England IRB; and Chesapeake IRB’s purchases of Goodwyn IRB and IRB Services.
Martorelli’s outlook matches that of the Association of Clinical Research Organizations (ACRO). “We are seeing the CRO industry involved in more services than ever before,” said John J. Lewis, ACRO’s vice president of policy and public affairs. “Our members now are involved beyond traditional clinical trials, going from discovery through marketing in many cases. It’s really a full spectrum of services and a real evolution in the CRO industry.”
One illustration of this is last November’s announcement of a Laboratory Corporation of America (LabCorp) and Covance merger, in a $6.1 billion deal. The Fairmount report noted there had been no indication Covance was considering a sale. But LabCorp’s proxy statement said Covance, over the previous two years, had been evaluating whether to buy LabCorp’s central lab business, sell to a larger competitor, buy a smaller competitor or merge with LabCorp.
The report said LabCorp’s acquisition of Covance will help it leverage its role in the development of personalized medicine, as well as add Covance’s important positions in preclinical research, clinical research and market access services. “The final chapter of this acquisition story may not be written for some time,” the report stated. “Investors and clients alike will be closely watching the continuing evolution of LabCorp.”
Beyond CROs specifically, Fairmount gave its forecast for the year ahead:
- Payers will continue to gain more influence over drug companies’ pricing tactics
- The formation of more site networks should bring the benefits of standardization and professionalization to that part of the drug development industry
- Developing alternatives to existing disease animal models is one of the most important and most difficult tasks
- Sponsors and providers alike will continue to respond to patients’ growing demands to be more actively involved in all phases of product development.
“We continue to view the drug development enterprise as a flowing river, not a stagnant lake,” the report concluded. “Underwater obstructions sometimes cause swirls, eddies, pools and even waterfalls. But the river keeps flowing.”
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This article was reprinted from Volume 19, Issue 05, of CWWeekly, a leading clinical research industry newsletter providing expanded analysis on breaking news, study leads, trial results and more. Subscribe »