Mega CROs still skyrocketing in M&A deals. But is the cycle winding down?

Monday, August 7, 2017

The CRO industry continues to undergo a wave of M&A activity with last week’s announcement by LabCorp that it is acquiring the privately owned CRO Chiltern International for $1.2 billion.

“This acquisition strengthens our position as a leading life sciences company that delivers innovative diagnostics and drug development solutions to improve health and improve lives,” said David P. King, chairman and CEO of LabCorp, in a statement announcing the acquisition. “Our acquisition of Covance has demonstrated the value of combining diagnostic and CRO capabilities, expertise, data and leadership. The addition of Chiltern furthers our strategy and will provide us with enhanced capabilities across a broader client base as we continue to innovate and grow.”

LabCorp acquired Covance for $6.1 billion in 2015. According to LabCorp, once the acquisition is completed Chiltern will become part of Covance’s segment, creating a “market-leading” CRO with a global scale and more than 20,000 employees.

The Chiltern deal is just the latest in a series of acquisitions in the CRO Market. For example, the second quarter of 2017 saw InVentiv Health and INC Research merge to create a company valued at $7.4 billion. In June, Pamplona Capital Management reached an agreement to buy top 10 CRO Parexel in a $5 billion transaction.

Covance CEO John Ratliff said the addition of Chiltern “enhances Covance’s offerings as a major partner service in the top 20 biopharma segment and expands our current offering
to include a dedicated focus on the high-growth emerging and mid-market biopharma segments.”

According to Pivotal Financial Consulting President Jason Monteleone, formerly CFO of Theorem Clinical Research, the acquisition of Chiltern should add an asset with a “good global footprint” that will “really make Covance a full-service CRO.”

Monteleone observed that LabCorp had been interested in acquiring Parexel International and that Chiltern was the next strongest sizable asset on the market. “LabCorp went all in and won it, and I think it will be a good deal for LabCorp,” he said.

“There are reasons why the CRO industry continues to see these kinds of transactions,” Monteleone said. For example, he noted that for LabCorp/Covance, the Chiltern acquisition was strategic in the sense it was looking for a deal to make them more of a full service CRO.

“There are financial reasons why these deals still happen,” he added. “When you put together these CROs you get a lot of synergies,” he said. “It creates a lot more profitability, a lot more scale, which gives you the opportunity to run larger trials, and you add more capabilities.”

Chiltern’s acquisition of Theorem Clinical Research in 2015 is a “perfect example” of that kind of acquisition, Monteleone pointed out.

Theorem had a strong presence in the medical device trial sector, a solid FSP department, as well as a presence in the Asia-Pacific region, Monteleone said. “So Chiltern was able to bolster its strong FSP, pick up the medical device piece of the business, get a foothold into Asia and become a more well-rounded CRO. You create a lot of efficiencies when you take two corporate infrastructures and turn them into one, and improve the bottom line and get higher valuation.”

John Babitt, partner, Transaction Advisory Services, Life Sciences for Ernst and Young, said the CRO market continues to be a favorable one for acquisitions “because of attractive cash flow and the long-term prospects of the space, given the continued outsourcing from biopharma and the funding that has gone into the younger biopharma companies that really rely on CROs for research and development.”

In the press release announcing the acquisition, LabCorp said the addition of Chiltern to Covance would expand the company’s oncology offerings.

Babitt pointed out that the ability to offer this kind of therapeutic expertise—particularly in the area of oncology, which was cited as one of the reasons for the LabCorp/Chiltern deal—“is one of the top two or three characteristics that we hear pharma is looking for when they select a CRO.”

According to Monteleone, the recent M&A activity in the CRO space has resulted in the creation of four “mega” CROs—QuintilesIMS, Covance-LabCorp, InVentiv-INC Research and PPD. At the same time he suggested that despite the focus on these big CROs, this recent merger activity could really benefit mid-sized and small, niche CROs.

“The primary customer base for these bigger CROs includes large pharma and large biotech,” Monteleone said. “The midsize down to the small niche CRO has a customer base that includes small pharma and small biotech. That customer base is going to be a bit wary of taking its $10 million trial and sticking it on top of Quintiles’ $8 billion backlog,” he added. “So I think the small to midsize CROs are nicely positioned to service that end of the market.”

As for whether the CRO industry will continue to see this pace of M&A activity persist, Babitt said he’s followed the industry long enough to know it moves in cycles. “I think there might be a couple of trades left,” he said. “But I think we’re closer to the seventh or eighth inning than we are to the first or second.”


This article was reprinted from Volume 21, Issue 31, 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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