Consolidation in Outsourcing

By Michael A. Martorelli, Fairmount Partners | March 9, 2016

Reviewing 2015’s M&A activity

While preparing this annual commentary on the nature and extent of M&A activity across the broad landscape of pharmaceutical outsourcing, we were reminded of the thought allegedly expressed by Elizabeth’s Taylor’s seventh husband, “I know what I’m supposed to do; I just have to find a way to make it interesting.”

Every year we start this article by noting the number of announced and/or completed consolidating transactions. In 2015, we spotted 135 of them, down a bit from the levels of 145 and 140 of the past two years. But we always include the suggestion to not focus too much attention on that precise number. First of all, it may not be as precise as it seems. Those who use any of the databases that track M&A activity undoubtedly understand how the absence of a single “Pharmaceutical Outsourcing” category forces one to examine half a dozen different industry categories in order to get a complete picture of the relevant activity. For instance, in the Capital IQ database, we examine categories such as Medical Research Laboratory Services, Pharmaceutical Contract Manufacturing Services, and at least five others.

Secondly, at the risk of sounding like a broken record, we continue to suggest that focusing solely on the number of transactions announced and/or closed in any particular time period tends to mask the high level of interest we continue to see among a range of buyers and sellers in and around the pharmaceutical outsourcing industry.

Many firms sold facilities and/or operating units
During the past several years, we have tracked the activities of many pharmaceutical companies that have been downsizing their corporate infrastructures by selling a manufacturing facility. In 2015, we again noted several instances of one drug company selling a facility to another. In this article, however, we note only those transactions in which a facility was sold to a contract manufacturer. 
Bakhu Pharma sold a 109,000 square meter pharmaceutical manufacturing facility in Annan, Scotland to the diversified specialty chemicals manufacturer Johnson and Matthey. That firm immediately announced a multimillion-pound refurbishment program to update and enhance the operational and quality standards of that facility, which was constructed by Glaxo in 1980.

Forest Laboratories sold two contract manufacturing facilities with almost 214,000 square feet of space on Long Island, NY to Ropack, Inc. That Canadian contract manufacturer and packager of generic drugs paid Forest $43.6 million after receiving $3.0 million in state and local tax breaks.

Some two years after announcing its intention to seek a buyer for an API manufacturing facility formerly owned by Schering Plough, Merck sold that plant and its 128,000 liters of capacity to the Luxembourg-based contract manufacturer Fareva. That firm announced its intention to invest €25 million to strengthen the capabilities of that plant, which is located in St. Germain-Laprade, France.

More interesting to us than the aforementioned sales of individual facilities were several deals that involved the sale of an entire operating unit. We do not remember a year in which so many companies made the long-term strategic decision to sell not just a facility or a product, but an entire business complete with facilities, products/services, personnel, and customer contracts.
Aptuit sold its product development and drug development businesses in Glasgow, Scotland and West Lafayette, IN to Albany Molecular Research for a total consideration of $60 million.

Array Biopharma sold both its 50,000 square foot facility in Longmont, CO and the related contracts of its chemistry, manufacturing, and controls (CMC) business to the GMP and GLP testing services company Accuratus Lab Services and its principal owner Ampersand Capital Partners. Accuratus was formed in mid-2014 with the merger of ATS Labs and Microtest Labs. It has rebranded the Array CMC business as Avista Pharma Solutions.

In refocusing its operations, the diversified chemistry company BASF sold its custom synthesis business including more than 100 APIs and intermediates and three production sites in Europe to the contract manufacturer Siegfried for a price slightly in excess of $300 million. When combined with three other acquisitions made in 2014, this transaction raised Siegfried’s annualized sales to almost $650 million, and made it one of just a few firms capable of offering a full suite of pharmaceutical manufacturing and development services.
Hangzhou Tigermed Consulting sold a 45% interest in the biostatics and data management specialist BDM Consulting to the diversified CRO Frontage Laboratories, which is also partially owned by Tigermed.

In another example of a large company redefining its chosen areas of interest, the Japanese drug company Eisai sold its pharmaceutical manufacturing and marketing subsidiary Sannova to the pharmaceutical manufacturing and wholesaling company Alfresa Holdings. As is normally the case in such deals, the sale included certain commitments to manufacture Eisai’s products.

The infusion therapy specialist Healix Inc. sold the assets of its 503B Compouding Pharmacy Services Division, which includes a manufacturing facility in Sugarland, TX, to the start-up sterile compounding services company QuVa Pharma. That firm received the initial funding to consummate the deal from Bain Capital Equity Partners.

The diversified outsourcing services company inVentiv Health sold its inVentiv Patient Access Solutions (iPAS) business to Xerox. That company will operate iPAS under its TMS Health unit, a provider of various support activities to the life science industries. It will be part of the new business process outsourcing company Xerox plans to create later in 2016. 

The specialty pharmaceutical company Meda AB sold its Euromed unit, which manufactures herbal extracts and natural active substances, not to a CMO but to the private equity firm The Riverside Company for €82 million.

The Karmal, India-based sterile injectables contract manufacturer Nitin Lifesciences Limited sold a 74% interest to the Swedish contract manufacturer Recipharm for $103 million.

In order to focus on its pharmaceutical business ahead of a planned Initial Public Offering, the contract manufacturer Patheon sold two facilities. It sold its enzyme and protein production plant in Capua, Italy to LIVIA Group, and agreed to a management buyout of its exclusive synthesis, intermediates, and specialties business in Linz, Austria to a group funded by the French investment firm Ardian.

The healthcare communications company PDI, Inc. sold its Commercial Services (i.e. contract sales) business to the broad-based marketing and communications company Publicis Groupe for cash at closing of up to $33 million and potential earnouts of another $5-15 million. PDI then changed its name to Interpace Diagnostics to reflect its exclusive focus on molecular diagnostics.

The University of Florida spun off its Florida Biologix unit. Ampersand Capital Partners provided the financial backing for the separation of this contract development and manufacturing organization.

The University of Kentucky raised $30 million through the sale of its sterile injectable manufacturing company Coldstream Laboratories to Piramal Enterprises Limited.

WuXi PharmaTech sold a 5.5% share in its wholly owned contract manufacturing subsidiary SynTheAll Pharmaceutical (STA) to members of STA’s and WuXi’s management. That unit recently began trading on the New Third Board, the over-the-counter stock exchange in China. Having a separate listing should make it easier for this capital intensive company to raise additional funds.

Private Equity firms made their presence felt
As noted, several of the deals just mentioned involved an investment by a private equity (PE) firm. And Meda actually sold its Euromed unit to a PE firm. We also tracked at least another half a dozen commitments of new capital by such firms.

CITIC M&A Fund and Legend Capital invested $280 million to capitalize the global CRO Pharmaron.

GHO Capital, partially backed by outsourcing icon Dennis Gillings, acquired the UK translational pharmaceutics company Quotient Clinical.

LDC Capital, part of Lloyds Banking Group, provided new capital to help the management team led by CEO Christophe Berthoux acquire Synexus from Lyceum Capital. The Manchester, UK-based Synexus is the largest independent operator of clinical research sites.

Chicago, IL-based Linden Capital Partners acquired Chesapeake IRB from Audax Private Equity. The Linden Operating Partner and CRO industry veteran Pat Donnelly will join Chesapeake as Chairman.

In addition to the aforementioned Euromed business, The Riverside Company acquired Greenphire, a King of Prussia, PA-based provider of software for clinical research payment processing.

SK Capital expanded its portfolio of healthcare companies by making a controlling strategic growth investment in Halo Pharmaceutical, a contract development and manufacturing company organization with operations in Whippany, NJ and Montreal, Canada.

Vitruvian Partners purchased the controlling interest in CRF Health, a leading provider of electronic Clinical Outcomes Assessment (eCOA) solutions for global clinical trials, from Verdane Capital Water Street Healthcare Partners invested in Custopharm, Inc. a generic injectable drug services company.

But don’t let the relatively small number of new capital infusions by PE firms lead you to believe those organizations reduced their activities in outsourcing in 2015. Table 1 shows the unusually high number of transactions that were accomplished with capital provided by a PE firm supporting an existing portfolio company’s acquisition.

As is usually the case, PE firms also sold some their portfolio companies. After all, these firms are not in the business of managing their portfolio companies in perpetuity; instead, after a reasonable investment period, they hope to sell their holdings at a profit. We’ve already noted five such sales in the preceding paragraphs. Table 2 lists several more.

Large firms were active buyers
During the past year, we read several articles in industry newsletters and other investment banking firms’ digests suggesting a dramatic slowdown in the M&A activities of the largest outsourcing firms. We acknowledge the reduced number of acquisitions made by some industry leaders, but dispute the notion that those firms are no longer interested in pursuing this avenue of growth. Indeed, several multi-billion dollar companies used that route to expand their businesses to additional specialty categories last year.

In addition to acquiring Aptuit’s product development business, Albany Molecular Research paid $174 million to purchase the Spanish API maker Gadea Pharmaceutical Group, and $54 million to buy the chemical testing services firm Whitehouse Laboratories.

The broad-based provider of pharmaceutical development services Almac expanded its biocatalysis services business by acquiring Arran Chemical Company. That firm’s manufacturing facility is located in County Roscommon, not far from Almac’s headquarters in Craigavon, Ireland.

Catalent Inc. completed its third acquisition since going public in mid-2014 by buying the Australian pharmaceutical packaging firm PharmaPak to complement its softgel business.

Charles River Laboratories completed two transactions, paying $212 million for the London-based provider of rapid bacterial detection systems Celsis International and $36 million for the German in vivo pharmacology specialist Oncotest GmbH.

Eurofins extended its analytical testing business to the environmental, food, nutraceuticals, and molecular diagnostics arenas with the acquisitions of QC Laboratories, Experchem Laboratories, and Diatherix Laboratories. It also spent $250 to purchase the French diagnostic laboratory company Biomnis.

The largest transaction in the broad outsourcing area involved Greatbatch Inc.’s purchase of competitor Lake Region Medical for $1.7 billion. With annual revenue of about $1.5 billion, the company thus became one of the largest medical device outsource manufacturers in the world.

Lubrizol Corporation acquired the Bethlehem, PA-based Particle Sciences, believing that adding that small firm’s contract development and manufacturing services would enable the larger specialty chemicals company to leverage its polymer chemistry expertise and develop new types of implantable and dermal drug delivery systems.

PAREXEL acquired the Chandigarth, India-based Quantum Solutions India, a leading provider of specialized pharmacovigilance services.

Even while divesting two non-pharmaceutical business units, Patheon acquired two other businesses. Agere Pharmaceuticals is a Bend, OR-based contract development firm specializing in improving the absorption rate of medications. IRIX Pharmaceuticals is a Florence, SC-based specialist in difficult-to-manufacture APIs.

PRA Health Sciences acquired the clinical development software company Value Health Solutions.

Quintiles added to its presence in Japan by buying Clio Sciences, a 70-person full service CRO.

The Goettingen, Germany-based biomanufacturing company Sartorius Stedim Biotech (SSB) extended its service portfolio by acquiring the Glasgow, UK-based biotesting company BioOutsource Ltd. Management stated that adding that company’s €9 million worth of revenue to SSB’s existing base of about €680 million was less important than adding its range of cGMP compliant analytical and biosafety services. Later in the year, SSB also acquired the Laupheim, Germany-based Cellca, thus expanding its service offering to include process development capabilities.

At the end of the year, SGS Life Sciences purchased Quality Compliance Laboratories and its two GMP compliant facilities in Montreal and Toronto.

In one of the largest deals of the year, Thermo Fisher Scientific paid $300 million to increase its single-use biomanufacturing systems business by acquiring Advanced Scientifics, Inc.

WuXi PharmaTech paid $65 million to acquire NextCODE Health to enhance its position as a global leder in genomic medicine.

Smaller firms seek growth through M&A
In 2015, many small and mid-sized providers of outsourcing services also chose to supplement their internal growth prospects by acquiring another firm. The transactions listed below illustrate the diversity of those efforts. Most involved an expansion to a complementary service category or a cross-border coupling. 

The Cambridge, UK-based Abcam agreed to pay the owners of AxioMx $20 million upfront and up to another $25 million in performance-based payments. Abcam is a global supplier of life science research tools such as antibodies, proteins, and lysates. AxioMx, based in Branford, CT, has a proprietary platform to produce recombinant monoclonal antibodies.

Abzena, a Cambridge, UK-based company that provides a range of antibody technologies, expanded geographically by purchasing PacificGMP and its biomanufacturing facility in San Diego, CA for $8 million. It also purchased The Chemistry Research Solution (TCRS), a Philadelphia, PA-based specialist in manufacturing antibody drug conjugates (ADCs) for $15 million.

Through internal growth and acquisition, Princeton, NJ-based Certara has become a global leader in biosimulation technology for drug development. It acquired the consulting firm XenologiQ. That Canterbury, UK-based company specializes in quantitative systems pharmacology.

The London, UK-based Ergomed plc expanded its presence in the post-marketing services business with the acquisition of Sound Opinion. That firm provides information about drug safety to sponsors throughout the UK.

The Dessau, Germany-based contact manufacturer IDT Biologika expanded to Canada with the acquisition of Ontario-based Gallant Custom Laboratories. Separately, IDT and the nonprofit vaccine developer Aeras formed a strategic partnership that included the acquisition by IDT of Aeras’ biopharmaceutical manufacturing facility in Rockville, MD.

Grand Rapids, MI-based Imperial extended its offerings of clinical research support services and made a new commitment to the United Kingdom with the acquisition of Four Point, a Shepperton-based specialty producer of clinical trial regulatory materials. Imperial’s other components are focused on patient recruitment (DAC Patient Recruitment), translation services, (ClinicaLingua Translation Services), and printed materials for investigative sites (Imperial Graphics).

The Montreal, Canada-based JSS Medical Research expanded its international presence with the acquisition of the New Delhi, India-based CRO Max Neeman International.

Porsolt SAS is a 12 year-old preclinical in vivo CRO in Le Genest-Saint-Isle, France. To expand its business base, it acquired the 13 year-old pre-clinical in vitro CRO Fluofarma, which is located in the Bordeaux.

The Slovakian contract manufacturer Saneca Pharmaceuticals acquired Suir Pharma and its API manufacturing facility in Clonmel, Ireland from the German industrial holding company Mutares AG.

The international provider of laboratory services and products Source BioScience plc (based in Nottingham, England) acquired Select Pharma Laboratories Ltd. This Stirling, Scotland-based company provides stability storage and testing services to the pharmaceutical, animal health, and medical device industries.

The Dublin, Ireland-based CRO Venn Life Sciences purchased the Netherlands-based Kinesis Pharma BV. The price for this pharmaceutical and healthcare consulting firm included €1.8 million in cash, €1.5 million in stock, and the potential for another €3 million based on future performance.

M&A themes for 2016
It’s always difficult to predict the make-up of what we’ll eventually call “The Acquisition Class of Last Year”. But it’s clear that the 2016 M&A party started off with a bang in January when Thermo Fisher Scientific agreed to pay $1.3 billion to acquire Affymetrix, and Charles River Laboratories agreed to buy WIL Research for $585 million. BioClinica, Capsugel and Eurofins were just a few of the dozen other firms that also announced an acquisition during the time we’ve been preparing this article. 

As far as we can tell, the strategic and financial imperatives that have been leading both corporate buyers and private equity investors to pursue acquisition opportunities in most sectors of pharmaceutical outsourcing still remain in place. And it’s worth noting that the time clock is ticking on many investments made by private equity firms in the 2008 to 2012 period.

Michael A. Martorelli is a director at the investment banking firm Fairmount Partners. For additional commentary on the topics covered in this article, contact him at michael.martorelli@fairmountpartners.com, or by phone at (610) 260-6232; fax (610) 260-6285.

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