Outsourcing M&A Year In Review
Reviewing 2009’s mergers, acquisitions and buyouts
By Michael A. Martorelli
Several large outsourcing firms made important tuck-in acquisitions, many mid-sized firms expanded their platforms with strategic acquisitions, and one outsourcing firm successfully tapped the equity market for an Initial Public offering (IPO). But the big stories in the pharmaceutical outsourcing industry in 2009 involved seven “going private” transactions and fifteen separate divestitures. During the past few years, both in these annual review articles for Contract Pharma and our own Outsourcing Industry Monitors, we have supported both types of corporate restructurings for publicly owned firms that have struggled to achieve their corporate financial objectives and to satisfy the requirements of their investors. Going-private transactions, divestitures, and selected fund-raisings are all worth further attention in this year’s review of consolidation in outsourcing.
Overall Activity Ebbed and Flowed
Last year at this time, we suggested that the rough economy and the poor health of the markets for debt and equity capital would have a dampening effect on the extent of consolidation in outsourcing, at least through the first half of 2009. We did not anticipate a drastic decline in such activity, however, given the continued presence of large numbers of willing buyers and sellers. Transaction volume declined modestly, from about 120 completed deals in both 2007 and 2008 to about 108 in 2009. We witnessed a slow start to 2009, a very quiet middle of the year, and a strong pace at the finish.
Tracing only the flow of completed deals during the past 12 months does not allow one to appreciate the extent and intensity of conversations about various acquisitions and divestitures that were not completed for one reason or another.From our vantage point as one of the investment banking firms most actively involved in the outsourcing industry, we sense there were as many conversations among interested buyers and sellers as ever. However, for the second year in a row, it seems that many companies had trouble meeting their forecasted results; doing so prevented several acquisitions from being completed.
Despite the constraints on raising capital, private equity investors were again very active in making new investments in outsourcing; they were involved in about 22% of all reported transactions. Financial buyers do not always offer the highest price or the most liquid payment structure to entrepreneurs wanting to sell their businesses. In the outsourcing arena however, they can present an interesting alternative to strategic buyers seeking to bolster existing businesses or expand into new service areas.
Going Private Became a More Viable Option
Let’s back up a bit; at the end of 2006, depending on one’s definition, there were as many as six-dozen publicly held outsourcing providers. They represented several service sectors from preclinical research to post-approval marketing, and included a variety of equipment, consumables, and laboratory companies as well. Not all of those public firms were achieving the financial targets set by their managements and expected by their investors. The smallest among them were finding it increasingly difficult to compete against the largest industry participants. For those with erratic financial performance, a small number of floating shares, limited institutional ownership, minimal trading volume, and no analyst coverage, the supposed advantages of being a publicly owned company no longer seemed relevant.
In February 2007, Vector Capital purchased the unprofitable Tripos Inc. and announced its intention to focus on only one of its core products. The following month, Genstar Capital approached the management of PRA International about purchasing the 87% of the company it did not own; in December 2007, it completed that transaction. And in the same month, Lyceum Capital used cash to acquire Synexus Clinical Research.
As the year 2008 dawned, other firms’ boards of directors demonstrated a new receptivity to the idea of taking their companies private. Not surprisingly, the two that followed that path during the next few quarters were facing difficult competitive issues and were not able to provide the type of financial returns that their shareholders had come to expect. In June, ECI and the senior management of Premier Research took that solidly based but temporarily challenged company private. That CRO had been working diligently to achieve the benefits of a few recent acquisitions. In September, the aforementioned Vector Capital acquired Pharsight Corp., a leading provider of simulation and modeling software that appeared to have some marketing synergies with Tripos.
The going-private trend really blossomed in 2009, as seven more outsourcing firms chose to abandon their public stock listings. Five hitched their wagons to private equity firms willing to invest in their future success, while two simply abandoned their publicly held status without raising new capital.
In March, JLL Partners completed the acquisition of PharmaNet Development Group. That firm had been plagued by delays and cancellations in its Early Stage Development and Late Stage Development segments. The $250 million purchase price included $100 million for the firm’s equity and a commitment to supply an additional $144 million to retire an issue of 2.25% convertible notes expiring in August 2009. PharmaNet reported revenue of $358 million for 2008. The company went public in late 2004, when it merged into SFBC International; that company adopted the PharmaNet corporate name in August 2006.
In June, the shareholders of Entelos, Inc. approved the cancellation of the company’s common stock listing on the Alternative Investment Market (AIM) of the London Stock Exchange. Delisting the shares effectively made this provider of biosimulation models a private company. Management had been seeking new equity financing and trying to restructure the company’s debt. Certain third parties had indicated an interest in making an investment, but only if the company would become private. Entelos raised $17 million when it first listed its shares on the AIM in April 2006. In 2008, the company recorded a net loss of $13.5 million on revenue of $18.1 million.
In August, the shareholders of ReSearch Pharmaceutical Services approved management’s plan to delist the common stock and warrants from London’s AIM, too. The company cancelled its listing in early September. In taking this action, management expressed its disappointment over the limited volume of trading in the company’s shares and the potential limitations on future strategic options that might have been associated with the AIM listing. RPS became publicly held via a reverse merger into the AIM-listed Cross Shore Acquisition Corp. in April 2006.
In September, Averion International was effectively taken private by ComVest Investment Partners, the group that controlled slightly more than 50% of the company’s shares. This process involved a reverse split of 20,500 shares into 1 share and an immediate forward split back into 20,500 shares – effectively forcing anyone with fewer than 20,500 shares to accept 1 penny per share. The splits had the effect of reducing the number of shareholders to fewer than 125, allowing Averion to terminate the registration of its common stock and revert to the status of a private company. Averion had achieved publicly held status in July 2006 when the Nasdaq OTC Bulletin Board-listed IT&E International purchased Millennix Inc. and Boston Biostatistics, then adopted Averion as its new corporate name.
Also in September, the shareholders of Celsis International plc agreed to a takeover offer by Nastor Investments, a unit of NAV Funds that owned 20% of Celsis’ shares. Management had recently expressed caution about the outlook for the current fiscal year, and the likelihood of continued weakness in its customers’ demands for contract laboratory services. The board concluded that a listed company with limited research coverage, minimal stock trading activity, and a small market capitalization would continue to have trouble attaining its full potential value. Celsis had been public since 1993.
In November, the shareholders of Life Sciences Research approved the buyout offer made in July by Lion Holdings Inc., a private entity controlled by chairman and chief executive officer Andrew Baker, owner of 18% of the company’s shares. That offer valued LSR at $118 million; its market capitalization at the time was closer to $95 million. As far back as August 2008, the company’s board had begun considering strategic alternatives, since they believed it would become increasingly difficult to compete against the largest participants in the preclinical toxicology business. Several parties indicated an interest in acquiring the company, but backed away from that idea due to concerns about the difficulties of financing such a transaction and/or concerns about the disruptive tactics of animal rights activists. LSR reported a revenue decline of 25% (to $142 million) for the first nine months of 2009. The company had been public since 1988.
Finally, it’s not a done deal yet, but it’s still worth noting that the board of IMS Health Inc. has agreed to an offer to take the company private.Sometime in the first quarter of 2010, shareholders are expected to approve the bid made by TPG Capital and the CPP Investment Board. IMS has not been posting particularly good results as it has tried to adjust to the consolidation in the pharmaceutical industry and the new realities of its customers’ information needs.
Divestitures Again Made Headlines
In each of our annual review articles, we’ve noted that the boards of many outsourcing companies have discovered the problems associated with managing troubled operating units: they require disproportionate amounts of management time, capital, and other scarce Resources . There are similar challenges involved in managing a profitable business, but one that is not totally compatible with other operations and/or considered critical to a company’s future. Thus, we are rarely surprised by the divestiture activities taken by the outsourcing firms we monitor. The past year was the third in a row in which divestitures made headlines; many should change the scope and direction of the buyer and/or seller in a very meaningful way.
Two Strategic Restructurings Captured Much Attention
No company in our universe has undergone as much change as MDS Inc.:
- In July, it sold the Phase II-IV clinical research business of MDS Pharma Services to INC Research.
- In September, it agreed to sell its Analytical Technologies unit, which includes a 50% interest in AB Sciex, to Danaher Corporation.
- That same month, it announced its intention to sell the Early Stage segment of MDS Pharma Services.
- In November, it completed the sale of its Central Labs operation to the private equity firm Czura Thornton, which also owns the CRO Chiltern International.
Assuming all these transactions are consummated, MDS will have gone from a company with more than $1.2 billion in revenue from three major operating segments in the fiscal year ended October 31, 2008 to one with only the Nordion medical isotopes business and a revenue base of about $200 million in fiscal 2010. MDS might become the classic business school case against having diverse manufacturing and service operations in one organization.
PPD Inc. is another company that has been active in the acquisition and divestiture arenas during the past 12 months:
- In January, it acquired Merck’s 130,000-sq.-ft. vaccine testing laboratory in Wayne, PA.
- In April, it announced three transactions:
- the acquisition of Magen Biosciences, a biotechnology company focused on dermatologic therapies
- the acquisition of AbCRO, a CRO operating in Central and Eastern Europe
- the sale of Piedmont Research Center, a provider of preclinical research services, to Charles River Laboratories
- In October, it announced three significant developments:
- the acquisition of the Chinese CRO Excel PharmaStudies Inc.
- the investment of $100 million in Celtic Therapeutics, an investment partnership organized to invest in a diversified portfolio of mid-stage drug development candidates
- the planned spin-off to shareholders of a company holding its compound partnering business.
- Finally, in November, it acquired Bio Duro, a drug discovery outsourcing company that operates a 110,000-sq.-ft. laboratory in Beijing, China.
Collectively, these transactions suggest that PPD’s management is willing to make meaningful investments in the drug development business while enhancing its contract service business in selected areas and geographic territories.
Other Divestitures Should Also Have an Impact
Life Technologies agreed to sell its 50% interest in AB Sciex to Danaher Corp. The company acquired its interest in Sciex when it purchased Applied Biosystems in November 2008. However, with 80% of its revenue coming from consumables and services, management believes the sale of this interest will not harm the company’s prospects. Meanwhile, adding the combined $650 million in Sciex’s mass spectrometry revenue will enable Danaher to become the leader in that industry.
eResearch Technology sold its electronic data capture (EDC) business to OmniComm Systems, Inc., another provider of EDC services. Those operations had contributed only about 5% of eResearch’s revenue in the recent past. OmniComm boosted its revenue base again later in the year, when it purchased the assets of Logos Technologies.
Covance Inc. sold its interactive voice and web response (IVRS/IWRS) business to Phase Forward. That firm also bought Waban Software, as it continued to broaden its capabilities in the “e” research arena.
Encorium Group sold its U.S. business (2008 revenue of about $8 million) to Pierrel Research USA, a unit of the Italian firm Pierrel SpA. At the same time, it terminated previously announced negotiations to sell its European operations (2008 revenue of about $22 million) to an unnamed U.S.-based buyer.
In addition to selling its vaccine lab to PPD Inc., Merck sold its Rosetta Biosoftware business to Microsoft, and its gene expression lab in Seattle, WA to Covance.
The Australian company Alesco Corporation Ltd. sold its Biolab unit to Thermo Fisher Scientific, enhancing Thermo’s presence in the Australia/New Zealand/South Pacific regions.
Clinical Data sold its Cogenics division to Beckman Coulter. Divesting this genomics services business will enable Clinical Data to focus on its two late stage therapeutic programs.
Many Firms Made Strategic Acquisitions
As was the case in 2008, many contract manufacturers and providers of instruments and/or consumables were quite active. In addition to the transactions already noted, two others gained considerable attention:
- Agilent Technologies acquired Varian Inc. in a cash transaction valued at $1.5 billion.
- Thermo Fisher Scientific paid $470 million for Brahms AG.
There were several acquisitions for which financial terms were not disclosed:
- Asterand acquired BioSeek.
- Life Technologies acquired BioTrove.
- Lonza Group acquired Algonomics NV.
- The Danish drug company Lundbeck acquired the French contract manufacturing firm Eliapharm.
- Millipore acquired BioAnaLab Limited.
The clinical research firms were reasonably active buyers in 2009. In addition to the transactions already noted, other companies made acquisitions that enhanced an important part of their business:
- Chiltern International added to its presence in Latin America with the purchase of Vigiun, a full-service CRO based in Sao Paulo, Brazil.
- ICON plc expanded its bioanalytical capabilities by acquiring Utica, NY-based Prevalere Life Sciences, and added to its Phase I business with the acquisition of Qualia Clinical Services in Omaha, NE.
- In its first transaction since going private in 2008, UK-based Premier Research Group acquired Pivotal Research Centers, thus adding Phase I units in three U.S. states.
- ReSearch Pharmaceutical Services used cash and stock to acquire CROs in China (Paramax International), France (Therapharm Recherches), Germany (IMEREM Institute for Medical Research Management and Biometrics), and Spain (Infociencia, S.L.)
- Manchester, UK-based Synexus used acquisitions to expand the number of dedicated research centers from 13 to 26.
- United BioSource continued to enhance its capabilities in the broad arena of evidence-based medicine by acquiring Cognitive Testing Company and Gigamoto Technology.
- Clinipace acquired Worldwide Clinical Research, doubling its employee base and adding operations in South America.
Other companies completed transactions that resulted in a change in ownership:
- The owners of Lexington KY-based REGISTRAT, Inc. announced sale of a controlling interest in the company to Lyon, France-based MAPI Group.
- The shareholders of eTrials Worldwide accepted an acquisition offer made by Merge Healthcare Inc. In offering a little more than $18 million for the company, Merge topped the $15 million offer made by BioClinica.
- BioClinca continued to expand its range of offerings by acquiring CardioNow and Tourtellote Solutions.
- The German drug distribution and pharmacy firm Celesio bought Alchemy Healthcare, an Irish CSO.
Investors Voted with Their Wallets
In prior review articles, we have not taken notice of some large investments made by private equity firms and public shareholders. Given the difficult state of the capital markets however, we think successful fund-raising efforts should be noted and applauded.
Back in April 2007, JLL Partners acquired a 27% interest in Patheon Inc. via an investment of $150 million in the company’s convertible preferred shares. In late 2008, it offered to purchase the remainder of the shares and take the company private. Management opposed a total takeover, but consented to allowing JLL to increase its interest to the present level of 57%. Throughout the summer, Patheon had been considering a potential business combination with Lonza Group; in October, the companies ended those discussions.
In June, Medidata Solutions completed its IPO, raising more than $76 million by selling 6.3 million new shares and 945,000 existing shares to investors. In December, underwriters sold another 5.5 million shares on behalf of existing venture capital shareholders, primarily Insight Venture Partners.
In July, Water Street Partners acquired AAIPharma Services, the pharmaceutical development division of AAIPharma. The buyer announced its intention to provide as much as $75 million in financing to expand AAIPharma Services’ capabilities (a figure that included the price of the initial acquisition). After that transaction closed, the remaining part of AAIPharma was renamed ZeeCRO; it provides late stage development services.
In September, two members of the Laukien family raised $115 million by selling 13.0 million shares of Bruker Corporation, thus reducing its combined ownership in that company from more than 19% to just over 11%.
That same month, Qiagen NV raised approximately $640 million from the sale of 31.6 million new common shares.
In October, Berkshire Partners invested $125 million in United BioSource. Management intends to use that capital to pursue further acquisitions, including the two noted earlier.
We close this section by noting one more SEC filing; in December, Quintiles Transnational Holdings Inc. filed a registration statement covering the sale of $400 million in senior notes due in 2014. In the filing, the company announced its plans to spin off its PharmaBio subsidiary to shareholders. That unit holds the historical assets used in the NovaQuest business, itself a provider of non-traditional strategic resourcing arrangements. Before that spin-off, Quintiles will transfer the Duloxetine Royalty Sub from PharmaBio to its holding company; following the receipt of certain necessary consents, it plans to spin off the Sub unit to shareholders as well.
With the pending transactions involving IMS Health and Quintiles, we already have the beginnings of consolidation activity in 2010. Recently, several articles in the financial press have speculated that next year will be a good one for IPOs, most of which will involve companies controlled by private equity firms. The funds those firms manage typically have a limited window of existence of only five to seven years. The incredible surge of private equity investments made earlier in the decade suggests that there soon will be a flood of so-called “exits” from those firms’ portfolios.
We will not speculate on the identity of the private equity-controlled outsourcing firms that could be candidates for either an IPO or a sale to a strategic buyer in 2010. Nor will we list the many entrepreneurs we know who might be ready to consider selling their company to a strategic or a financial buyer during the next 12 months. But we’re confident that the coming year will again be a decent one for M&A activity.