After months of rumors about Kendle International being on the block, CRO INC Research late last week announced it would buy the mid-tier publicly held CRO in an all-cash transaction. If the deal goes through, Kendle will be taken private.
James Ogle, CEO of Raleigh, N.C.-based INC Research, said what’s driving this purchase is what’s driving the many other recent acquisitions of mid-sized CROs: the hope of getting big enough to garner lucrative strategic partnerships with large pharmaceutical firms.
“With pharmaceutical companies tending to move toward outsourcing to fewer providers, we needed to reinforce our stake and therapeutic expertise to be able to deliver to them,” said Ogle.
INC Research, which acquired the late-stage research division of MDS Pharma Services in 2009, was itself acquired by Avista Capital Partners and the Ontario Teachers’ Pension Plan in August 2010. Its purchase of the MDS unit and now Kendle constitute a roll up, the uniting of several companies under one corporate umbrella to better position the parent company to win big contracts, said John Kreger, a financial analyst with William Blair who has been scrutinizing the clinical research outsourcing space for two decades.
“INC was a good mid-sized player, but it wanted to get into the top tier and knew it wouldn’t be able to just grow its way in organically,” he said. “This is certainly going to give it the scale that will allow it to compete. Now the challenge will be integrating.”
At the end of 2010, Kendle posted annual revenues of $334 million. In 2009, privately held INC said its annual revenues were $250 million and growing. The combined entity, then, would be an approximately $585+ million company, placing it within the ranks of industry leaders Parexel, PPD, ICON, Covance and Quintiles.
If shareholders of Cincinnati-based Kendle approve the deal, INC will pay $15.25 per share in cash for all of the company’s outstanding shares, representing a 60.5% premium over Kendle’s closing share price on May 4, 2011, and a premium of 51.3% over the 30-trading day average of Kendle’s closing price. The news sent Kendle’s shares soaring 58% to $15.01 just after the announcement late last Wednesday.
INC said in a news release the transaction has a total equity value of approximately $232 million, but given Kendle’s net debt of $110 million, in reality it’s closer to a $342 million deal.
INC has 2,200 employees in 40 countries. Kendle has 3,000 workers in 31 countries. Both companies focus primarily on phase II through IV work, though Kendle brings some phase I capabilities to the table. Given the similarity in focus, will there be layoffs? Ogle would say only that, “We’re working through the details of that.”
Neal McCarthy, managing director of Fairmount Partners, an investment banking firm that focuses on the CRO space, said deals like this tend to have inherent redundancies. “INC and Kendle have some significant overlap, and you can’t have two heads of everything,” he said. Kreger added that layoffs shouldn’t be assumed, however, as saving money is not the point. “These deals are not done for cost synergies; these deals are done for scale and to tap into each other’s customer base,” he said.
After months—some say years—of rumors that Kendle wanted to sell, why now? A Kendle spokesperson said she could not comment on the matter, but McCarthy said it might have been the debt picture. At the end of 2010, the CRO had $133 million in debt that comes due in July 2012. In July of this year, that debt converts from long-term debt to a current obligation—not the best position to be in. “That upcoming due date can put a lot of pressure on the stock,” said McCarthy.
And Kendle is not currently profitable. For 2010, it posted a loss of $4.6 million on net service revenue of $334 million. In the years just prior, it had managed to stay profitable while watching its revenue drop, posting income of $23 million on revenue of $475 million in 2008, and $15 million on revenue of $417 million in 2009.
Because of the proposed transaction, Kendle’s annual meeting of shareholders has been postponed from May 19. Though the deal has received the seal of approval from Kendle’s board, it remains to be seen whether the stockholders will approve it. Kendle’s board holds only 6.6% of the company’s stock.
The deal, if approved, is expected to close in the third quarter.
Other recent purchases of mid-tier CROs include Nautic Partners’ purchase of Omnicare Clinical Research last month; InVentiv’s acquisition of i3 in January 2011; the Warburg Pincus purchase of RPS in December 2010; and the August 2010 purchase of United BioSource Corp. (UBC) by Medco Health Solutions.
Consolidation in the space is not expected to slow any time soon, said McCarthy, adding, “There are more deals in the works.”