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IPOs in the CRO market remain steady

Monday, April 18, 2016

InVentiv Health has filed paperwork for an initial public offering (IPO) worth up to $100 million, following in the footsteps of three other large private equity-backed CROs that have gone public in recent years. Analysts see strong financial activity on the horizon for the CRO industry.

Healthcare investment experts anticipate other private equity firms, specifically those that have purchased CROs in the past six to eight years, will look for a return on those investments in the near term, primarily through M&A activity or public stock options.

“We have seen some pretty successful IPOs in the CRO world lately. There are still many companies that are backed by private equity/venture capital money and we think those investors are or soon will be looking to monetize their investments,” said Andrew Schafer, president of Industry Standard Research (ISR). “From a fundamental standpoint, ISR believes that both clinical development and manufacturing outsourcing is increasing, and this makes for an attractive market.”

In particular, analysts expect PPD, the only other large, privately-owned CRO, to go public in the not-too-distant future. PPD was acquired by the Carlyle Group and Hellman & Friedman for $3.9 billion in 2011. Although there are no rules about when a private equity firm should sell an investment, many plan to exit after a holding period of three to seven years.

“PPD is the obvious candidate for an IPO given how evaluations have appreciated. They have private equity partners who will look for liquidity and there is not an obvious strategic buyer for them. An IPO seems to be the logical route that they will take,” said David K. Blume, co-founder and managing director, Edgemont Capital Partners.

inVentiv, which went private in 2010 through a $1.1 billion acquisition by Thomas H. Lee Partners, has total revenues of nearly $2 billion, split between clinical and commercial services. In the S-1 registration statement, which was filed earlier this month by parent company inVentiv Group Holdings, the company said it wants to more actively market to small and midsized biopharma companies and expand its global offerings.

Three other top-tier CROs—Quintiles, PRA Health Sciences and INC Research—have gone public in the past three years, earning large returns for their owners.

Several midsize CROs with private equity investors also are approaching their timeframe for an exit. Among companies in this category, Worldwide Clinical Trials, Premier Research and SynteractHCR were all acquired by private equity companies in 2008. Yet midsized CROs aren’t generally considered big enough to file IPOs since they generate less than a billion dollars in annual revenue.

“inVentiv and PPD look like the only billion-dollar companies where you could make a legitimate case that they could sustain themselves as a public company. Logically, you could expect these billion-dollar companies to become public,” said Michael A. Martorelli, a director at Fairmount Partners. “Once you are below a billion dollars, there isn’t a good, deep public market, so that will limit IPO activity. You will see few, if any, IPOs for companies any smaller than a billion in revenue.”

Exit strategies for private equity firms that have invested in midsized businesses could include selling to a strategic partner or another private equity firm. eResearch Technology (ERT), for example, which was acquired by affiliates of Genstar Capital in April 2012 at a deal valued at around $400 million, was sold in March to another private equity firm, Nordic Capital Fund VIII.

“We are seeing tremendous M&A activity in the middle-market and lower middle-market. Overall market conditions are highly favorable. Valuations are at or close to all-time highs on a multiple basis,” said Blume. “There are several midsized players with private equity shareholders that have been invested for a reasonable amount of time that by all logic would be looking for liquidity in the near term, particularly given the overall health of the market.”

Martorelli believes there also will be strategic and financial buyers looking at M&A opportunities that don’t involve a private equity firm as business conditions across the pharmaceutical outsourcing industry remain favorable. While he doesn’t expect to see consolidation among the few outsourcing firms with revenue in excess of $500 million, he anticipates that many large and midsize companies will continue to add to their size and scope with tuck-in acquisitions.

“I see that being on the same continuous roll that it has been on for the last decade, or more. There are always blips and temporary stops here and there depending on performance and market conditions, but it is basically a permanent state of affairs that there is M&A all across outsourcing,” Martorelli said.

While R&D spending is projected to remain relatively flat, ISR projects that the CRO market will grow at a 6.6% average annual growth rate through 2020, according to its 2016 CRO Market Size Projections 2015-2020 report. The growth will be driven primarily by increased rates of outsourcing from both pharmaceutical and biotechnology companies.

The sectors expected to see the most M&A activity going forward include technology, as the industry looks for ways to improve the efficiency of clinical trial conduct, and the IRB space, which already has undergone significant consolidation in recent years. Two leading IRB providers—WIRB-Copernicus Group and Chesapeake IRB—have each already made an acquisition this quarter.

Analysts also see more consolidation in the investigative site space going forward. During the past two years, activity has included Icon acquiring PMG Research; Jaguar Holdings, the parent company of PPD, purchasing Radiant Research; Bioclinica owns site network CCBR; and most recently, London-based Synexus entered the U.S. market with the acquisition of Research Across America. Blume said his firm is seeing activity in the lower middle-market with companies that are evolving a new hybrid CRO-site model. Edgemont is currently representing three companies that provide an integrated CRO-site network, and there are two others currently in the market.

“We think that one of the most significant current themes is the professionalization and consolidation of the investigator site market. We expect that there will be a rapid acceleration of investigator site consolidation. There are a handful of companies that have some moderate scale, but we think there is an opportunity for folks to really aggregate a number of smaller sites,” said Blume.  

 

This article was reprinted from Volume 20, Issue 15, of CWWeekly, a leading clinical research industry newsletter providing expanded analysis on breaking news, study leads, trial results and more. Subscribe »

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