Nautic purchase of Omnicare Clinical Research part of recent acquisition trend of mid-sized CROs
Omnicare Clinical Research, which had been part of publicly traded long-term care pharmacy company Omnicare Inc. since the late 1990s, was acquired by private equity firm Nautic Partners last week, making it one of several mid-sized CROs to be acquired in the last year.
James Pusey, president and CEO of Omnicare CR, said extricating the 900-employee CRO from the corporate structure of a large public company not focused on research will allow Omnicare CR to be far more agile.
“We have, to some extent, been lost in the size of Omnicare Inc., a $6 billion-a-year company,” said Pusey. Omnicare focuses primarily on providing pharmaceuticals and ancillary services to long-term care institutions.
Pusey was hired in September 2009 to restructure operations at Omnicare CR. According to Neal McCarthy, managing director of Fairmount Partners, an investment banking firm that focuses on the CRO space, Pusey came to be known in the industry as a turnaround man after joining MDS Pharma Services’ global clinical development division as CEO to right its course before its July 2009 merger with INC Research.
Restructuring operations at Omnicare CR was mostly a matter of focus, Pusey said. “When I came in, there was no strategy on what the company wanted to be good at,” he said. “If you focus on phase IIa and small IIb, that means you’re not going to do the $100 million programs. Before, there was no triage process with that in mind, and the team was spending large amounts of time putting strategies together to run trials they were less likely to win.”
Pusey and his team—many of whom came from MDS—spent the last 18 months reorganizing Omnicare CR to focus one-third of its efforts developing technology for clinical trials, another third conducting medical device trials, and another third conducting trials for specialty pharma and biotech, he said. Omnicare CR has a presence in 32 countries.
Pusey added that Omnicare CR is debt-free, brings in $100 million in annual revenue, currently boasts $160 million in backlog and is growing at 20% per year.
Public filings show Omnicare CR’s annual revenue hovered close to the $200 million range in 2008. With the current 20% growth, Pusey should be able to bring revenues back to that level, said McCarthy.
Another possible positive outcome of the deal should be more confidence from clients, said Pusey. Five months ago, Omnicare CR surveyed clients and learned that many wanted to keep working with the company but felt nervous about its future. “If you’re a high-tech company that has a new treatment for cancer and you know that your program is going to last six years, you want to know that your CRO partner will be there and healthy and driving your study for six years’ time,” said Pusey.
The terms of the deal with Nautic were not disclosed. Pusey said Providence, R.I.-based Nautic, one of the early investors in CRO Parexel, is now majority stakeholder in Omnicare CR, but the CRO’s leadership team also acquired a large share of the company. Omnicare CR has been preparing to spin off from its Omnicare parent since last year, when the larger company announced it wanted to reallocate its investment costs, said Pusey.
“CROs goes through cycles, and at the time that Omnicare was thinking about all of this, the CRO industry was in a down part of the cycle,” he said. “But they are focused on their long-term care and concluded that there were no logical synergies, so the best thing to do was spin the asset out.”
The CRO will announce a name change later this year, Pusey said, adding that there will be no layoffs. Instead, the company will now go into hiring mode.
Omnicare CR has founded in 1985 as Biopharm, then merged with a public company, changing its name to IBAH, which was acquired by Covington, Ky.-based Omnicare in the late 1990s. Omnicare CR was recently integrated with Clinimetrics Research Associates, another CRO owned by Omnicare Inc., to create one CRO.
Other mid-tier CROs acquired recently include the August 2010 purchase of United BioSource Corp. (UBC) by Medco Health Solutions; Avista Capital’s acquisition of INC Research that same month; InVentiv’s acquisition of i3, announced in January 2011; and the Warburg Pincus purchase of RPS, announced in December 2010.
John Kreger, a financial analyst with William Blair who has been scrutinizing the clinical research outsourcing space for almost 20 years, said Omnicare Inc.’s sale of Omnicare CR is not a surprise. Rather, it’s part of a trend. What is interesting, he said, is that private equity firms such as Nautic and Avista are eyeing and buying CROs at a time when the public markets are more cautious.
“Private equity firms are bullish on
pharmaceutical outsourcing,” he said. “They appear to be willing to pay higher valuations than those prevailing in the public markets today, illustrated by the trend of private equity-backed deals and go-private transactions, rather than the traditional flow of initial public offerings.”
What’s likely going on is that private equity firms can see beyond the short-term cycles the public market is married to, Kreger said. “Public investors are much more tied to the near term; mostly what they see is pharmaceutical companies cutting costs. But private equity shops can make a five-year bet. They don’t care about short-term downdrafts.”
Another factor driving acquisitions of mid-sized CROs is the strategic partnering taking place among sponsors and top-tier CROs. This has led investors to eye middle-tier CROs, strategizing ways of moving them up into the big leagues to fetch lucrative partnership contracts, which the medium-sized players weren’t able to do on their own, especially after the economic downturn, said McCarthy.
Kreger said one way to compete is to create roll ups, buying mid-size companies and uniting them under one umbrella, thus creating a big company that’s more likely to win big contracts. Only time will tell if this is Nautic’s plan for Omnicare CR.
Now that Omnicare CR can be more agile and has access to more cash, will it be able to make acquisitions? “It’s not inconceivable,” said Pusey, hinting at Europe. “We’re stronger in North America than in Europe, and with no debt, appropriate levels of cash, our strong team and the financial firepower of Nautic, we can do that if we need to.”
The potentially good news for Omnicare CR, said Kreger, is that there’s a robust list of healthcare companies that have benefited from being spun off from their parent companies: CareFusion from Cardinal Health in 2009, Medco from Merck in 2002, Zimmer Holdings from Bristol Myers Squibb in 2001 and Edwards Lifesciences from Baxter International in 2000.
“Many units of conglomerate healthcare companies that underperformed, once divested saw their performance improve,” said Kreger. “It could also work out this way for Omnicare CR.”