Chad Moore, Robert W. Baird & Co. Inc.01.29.15
2014 was a very active year for mergers and acquisitions (M&A) and equity offerings. This was especially true in healthcare, and more specifically, pharmaceutical services and IT. As we look to 2015, we believe that this robust deal activity will continue, as many of the fundamental drivers remain.
From an M&A perspective, the big announcement for the sector in 2014 is the pending Laboratory Corporation of America (LabCorp) acquisition of Covance that was announced in November. LabCorp stated in its press release that, “the combined company will leverage technologies that improve patient recruitment for Clinical Trials , enhance efficiency in the conduct of clinical trials, and deliver data fast to drug sponsors, physicians, and patients.” While larger sector participants will continue pursuing tactical targets to fill service or technology gaps, the LabCorp-Covance merger doesn’t portend additional transformative transactions in the industry. LabCorp’s competitor, Quest Diagnostics, has said they are not interested in following LabCorp into the contract research organization ( CRO ) space.
Buyer demand for quality pharmaceutical services and IT assets—both on the part of corporates and private equity remains high. Corporates, with available cash on their balance sheets, are still looking to diversify and add targeted, differentiated capabilities. Some of this cash is ‘trapped’ outside the U.S., which we expect will drive interest in targets with ex-U.S. operations. For 2015, as discussed in greater detail below, we believe corporates will have particular interest in targets that (i) expand physician and patient access to clinical trials and (ii) diversify the buyers’ revenue base.
Private equity buyers also are motivated, interested in gaining exposure to (i) the expanding outsourced pharmaceutical services market and (ii) healthcare investment opportunities outside of perceived higher risk areas, such as direct drug/device development and payer reimbursement. As Sarabjeet Singh Sharad, Lead analyst at Beroe, Inc., highlighted in the November/December issue of Contract Pharma, “pharma companies are looking for CROs that provide integrated R&D services throughout drug development.” This demand, along with private equity firms’ need to deploy capital and CROs’ access to capital, has led to an increase in M&A activity over the last 18-24 months.
From an equity capital markets perspective, relatively low volatility and strong investor appetite continue to fuel the new issue market. The initial public offerings (IPO) for INC Research and PRA Health Sciences were received well. Also, private equity sponsors continue to look for the right times to diversify their existing public company holdings. Quintiles’ private equity shareholders sold a portion of their holdings to the market in two transactions—one in March and another in November. Through early December, the average stock value increase for Charles River Labs, Covance, ICON, Parexel and Quintiles was approximately 25% since the beginning of the year. If the equity market for CROs remains favorable, we expect other companies to consider following the IPO path that INC Research and PRA Health Sciences recently traveled.
With this very healthy and active deal backdrop, we expect M&A activity in the sector to continue. Of particular interest to buyers are targets that can (i) provide revenue diversification for larger CROs and (ii) increase trial efficiency and reduce cost and development time.
Given the customer concentration at some of the larger CROs, we expect these companies to use M&A to diversify their revenue streams. We believe smaller CROs that provide differentiated services or cater to medical device sponsors as well as small to mid-sized pharmaceutical and biotech sponsors are increasingly viewed as attractive M&A targets. This interest is partially due to expectation that research and development expenditure growth in this segment will outpace the growth at large pharma. Some larger CROs are actively seeking ways to increase exposure to this faster growing segment.
The question of how to increase trial efficiency while reducing cost and development time is an age-old dilemma. A few trailblazing companies, like the reconstituted Radiant Research, and its sister company Clinical Research Advantage, have set their sights on tackling these issues while simultaneously improving the process of locating and enrolling patients for trials. By working closely with physician groups to qualify investigative sites and managing outsourced research departments integrated with the physician practices, Radiant provides these physicians and more importantly, their patients, with access to the clinical trial marketplace. This benefits not only these physicians and their patients, but also pharmaceutical and medical device sponsors. Sponsors generally see faster and more efficient study start up, patient identification and enrollment when using these new business models.
Chad Moore
Robert W. Baird & Co. Inc.
Chad Moore, CFA, is a Director in the Global Investment Banking business at Robert W. Baird & Co. Inc. He leads the firm’s Pharmaceutical Services & IT Investment Banking effort. He can be reached at cmoore@rwbaird.com or 312.609.5475.
From an M&A perspective, the big announcement for the sector in 2014 is the pending Laboratory Corporation of America (LabCorp) acquisition of Covance that was announced in November. LabCorp stated in its press release that, “the combined company will leverage technologies that improve patient recruitment for Clinical Trials , enhance efficiency in the conduct of clinical trials, and deliver data fast to drug sponsors, physicians, and patients.” While larger sector participants will continue pursuing tactical targets to fill service or technology gaps, the LabCorp-Covance merger doesn’t portend additional transformative transactions in the industry. LabCorp’s competitor, Quest Diagnostics, has said they are not interested in following LabCorp into the contract research organization ( CRO ) space.
Buyer demand for quality pharmaceutical services and IT assets—both on the part of corporates and private equity remains high. Corporates, with available cash on their balance sheets, are still looking to diversify and add targeted, differentiated capabilities. Some of this cash is ‘trapped’ outside the U.S., which we expect will drive interest in targets with ex-U.S. operations. For 2015, as discussed in greater detail below, we believe corporates will have particular interest in targets that (i) expand physician and patient access to clinical trials and (ii) diversify the buyers’ revenue base.
Private equity buyers also are motivated, interested in gaining exposure to (i) the expanding outsourced pharmaceutical services market and (ii) healthcare investment opportunities outside of perceived higher risk areas, such as direct drug/device development and payer reimbursement. As Sarabjeet Singh Sharad, Lead analyst at Beroe, Inc., highlighted in the November/December issue of Contract Pharma, “pharma companies are looking for CROs that provide integrated R&D services throughout drug development.” This demand, along with private equity firms’ need to deploy capital and CROs’ access to capital, has led to an increase in M&A activity over the last 18-24 months.
From an equity capital markets perspective, relatively low volatility and strong investor appetite continue to fuel the new issue market. The initial public offerings (IPO) for INC Research and PRA Health Sciences were received well. Also, private equity sponsors continue to look for the right times to diversify their existing public company holdings. Quintiles’ private equity shareholders sold a portion of their holdings to the market in two transactions—one in March and another in November. Through early December, the average stock value increase for Charles River Labs, Covance, ICON, Parexel and Quintiles was approximately 25% since the beginning of the year. If the equity market for CROs remains favorable, we expect other companies to consider following the IPO path that INC Research and PRA Health Sciences recently traveled.
With this very healthy and active deal backdrop, we expect M&A activity in the sector to continue. Of particular interest to buyers are targets that can (i) provide revenue diversification for larger CROs and (ii) increase trial efficiency and reduce cost and development time.
Given the customer concentration at some of the larger CROs, we expect these companies to use M&A to diversify their revenue streams. We believe smaller CROs that provide differentiated services or cater to medical device sponsors as well as small to mid-sized pharmaceutical and biotech sponsors are increasingly viewed as attractive M&A targets. This interest is partially due to expectation that research and development expenditure growth in this segment will outpace the growth at large pharma. Some larger CROs are actively seeking ways to increase exposure to this faster growing segment.
The question of how to increase trial efficiency while reducing cost and development time is an age-old dilemma. A few trailblazing companies, like the reconstituted Radiant Research, and its sister company Clinical Research Advantage, have set their sights on tackling these issues while simultaneously improving the process of locating and enrolling patients for trials. By working closely with physician groups to qualify investigative sites and managing outsourced research departments integrated with the physician practices, Radiant provides these physicians and more importantly, their patients, with access to the clinical trial marketplace. This benefits not only these physicians and their patients, but also pharmaceutical and medical device sponsors. Sponsors generally see faster and more efficient study start up, patient identification and enrollment when using these new business models.
Chad Moore
Robert W. Baird & Co. Inc.
Chad Moore, CFA, is a Director in the Global Investment Banking business at Robert W. Baird & Co. Inc. He leads the firm’s Pharmaceutical Services & IT Investment Banking effort. He can be reached at cmoore@rwbaird.com or 312.609.5475.
