Clinically-Oriented Companies in 2003
There were no blockbuster mergers involving the large, multi-service CROs. However, two of these companies were involved in meaningful corporate business transactions. Each case served to reinforce management’s commitment not just to maintain growth and profitability in their companies’ traditional fee-for-service businesses, but to extend their business presences further into the area of drug development.

• In late September, the shareholders of Quintiles Transnational voted to take the company private. Actually, it disappeared into a company funded by equity investors who responded to founder Dennis Gillings’ idea. He had long believed that the buyers and sellers who met daily in the marketplace for Quintiles’ stock were not giving enough recognition to the company’s long-term opportunity for value enhancement related to its expanding PharmaBio business unit. Based on projections given by Dr. Gillings and his management team in the proxy statement for shareholders, it appears that the PharmaBio unit of Quintiles will be the most dynamic growth engine within the company during the next several years. Public shareholders had been having a difficult time reconciling that opportunity for growth with the inherent unpredictability of such a revenue flow. As a private company, Quintiles may have another chance to convince outside investors of the intrinsic value of the company’s PharmaBio segment, with its assortment of contracts, partnerships and equity investments in almost two dozen companies developing new drugs.

• Pharmaceutical Product Development (PPD) had been nurturing a smaller effort in the drug development arena, through its Discovery Services unit. In August, the company extended its traditional business by acquiring two small service providers focusing on the medical device industry. More significantly, in November it signed a compound partnering deal with Syrrx, Inc., which will involve the financing of the firm as well as the funding of preclinical and early clinical studies of a particular family of potential drug products. What had been a carefully controlled effort to raise corporate profitability above the levels thought to be inherent in a fee-for-service business is now apparently being massaged into a more significant effort to seek out drug development opportunities. Only time will tell whether PPD’s public shareholders and its drug/biotech industry customers will respond favorably to the expansion of this component of its long-term growth strategy.

Even in the relatively modest year for overall acquisition activity, another big story among the top-tier CROs was the meaningful acquisition burst by a few large- to mid-sized organizations that have been on a rather steady track of growth by acquisition during the past few years.

• ICON PLC ended calendar 2002 with annualized revenues of about $215 million, some of which was related to the October 2002 purchase of Barton Polansky, with its $21 million revenue base. In January, ICON acquired the $15 million Medeval Group, adding a Phase I business segment and expanding its presence in the UK. In July, it acquired Globomax, a product development and regulatory consulting business generating annual revenues of about $11 million. These two acquisitions brought the company’s annualized revenue base closer to $300 million at the end of calendar 2003.

• Inveresk Research Group increased its annualized revenue base by $40 million (or 18%) with the July acquisition of PharmaResearch. That acquisition shifted the company’s preclinical/clinical revenue mix from about 63%/37% to about 55%/45%. It also enabled the company add new customers, particularly in the biotech industry, and gave it some potential for cost cutting through the elimination of duplicate functions with its existing North American Phase II-IV business.

• SFBC International added to its already meaningful presence in the Phase I and bioanalytical segments of the outsourcing business with the July acquisition of the remaining 50% of Danapharm, and the August acquisition of Clinical Pharmacology Associates. The company expects to generate revenues in the neighborhood of $100 million for the year ended December, versus the reported level of $65 million in the prior year.

There was other acquisition activity last year as well, though we don’t believe the following transactions were as meaningful in either financial or non-financial terms as the ones noted above. (Our apologies to all the individuals involved in completing these transactions.)

• PAREXEL International added a provider of clinical trials management software to its Perceptive Informatics unit with the January acquisition of FW Pharma Systems. That IT subsidiary unit now generates about 6% of the company’s annualized revenues.

• MDS, Inc. gained both expansion and geographic diversity for its early clinical research business with the June acquisition of The Clinical Research Center in New Orleans.

• Kendle International, Inc. completed the acquisition of the Mexican CRO Estadisticos y Clinicos Associates (ECA) in August. Kendle had worked with ECA on many drug development programs in Latin America.

There was some merger/acquisition activity among the world’s privately-held CROs, but much less action than in 2002. Two deals involving relatively well-known companies were Cato Research Ltd.’s purchase of a substantial interest in the German CRO Studika Monitoring + Audit, and Resource Solutions Inc.’s acquisition by Constella Group, Inc., a larger provider of various professional health services.

CRO Expectations for 2004
When Quintiles went private in September, management stated its intention to keep the company intact. Yet, many observers seem to believe that management would entertain offers for one or more components of the company’s large and relatively diverse CRO and CSO businesses. As we wrote back in the September issue of Contract Pharma, “Stay tuned.”

• PPD recently increased its commitment to compound partnering as a core component of its growth. It has also continued to acquire provider organizations that enable it to either expand its service offerings or penetrate new customer markets. Given the company’s projected (and expected) growth targets, we would not be surprised to see PPD make additional acquisitions this year. It is conceivable—though we don’t think it likely—that such activity could involve therapeutic compounds with reasonable R&D requirements and substantial financial rewards upon commercialization. Here again, our advice is “Stay tuned.”

It is not our intention to engage in groundless speculation. But we must conclude this portion of our commentary on consolidation within the clinical development business in 2004 with a word on several non-pure-play companies. Firms such as aaiPharma, Inc., Omnicare, Inc., UnitedHealth Group, Inc., and West Pharmaceutical Services, Inc. have clinically-related business units that are generally well-regarded in the industry. However, it’s clear from even a cursory reading of analysts’ reports and company presentations that none of these firms count on the clinical portion of the drug development industry for a large portion of their revenues, profits or growth potential.

We have no specific indications from these managements about the potential divestiture of what can only be called non-core clinical research operations. Nor do we have any specific knowledge about any concerted acquisition programs that would bolster the presence of these firms in the clinical research field and make that business segment a more important financial contributor. However, we think it would be rational to believe that serious conversations about the future of those firms in this business were being held in the board rooms of these organizations, perhaps even as one or more independent directors was reading this issue of Contract Pharma.

Manufacturing and Related Services
There was not much merger/acquisition activity among the largest providers of manufacturing or chemistry services last year. Among smaller companies, a few were acquired by larger drug or biotech companies. In each case, the acquiring company noted the attractiveness of the smaller firm’s intellectual property more so than its business base. Also, some diversified laboratory/preclinical service companies expanded their list of offerings by acquiring small niche providers. We comment briefly on some consolidation activity we think was important—just as much for the trend each deal represented as for the specifics of the companies involved:

• One of the more meaningful corporate combinations last year in this segment involved the sale by Cambrex Corp. of its Rutherford Chemicals Inc. subsidiary. In
late 2001 Cambrex had re-organized its manufacturing operations and grouped its fine and specialty chemical businesses in this new business unit. With the Rutherford sale, the company generates about 70% of its revenues from cGMP production activities, and 30% from research-related products and services.

• In a restructuring move announced in June, but not scheduled to close until the first half of 2004, Abbott Laboratories announced the spin-off of a meaningful portion of the company into a new firm. This new company will consist largely of Abbott’s hospital products businesses, but will also include its contract manufacturing unit, Abbott One 2 One. One of the new company’s core growth strategies will be to expand this unit faster than would have been feasible had it remained part of the larger, more diversified organization.

• BioReliance Corp. was one dedicated contract manufacturing company that did make a meaningful acquisition. In September, it closed on the purchase of Q-One Biotech. That firm is involved in specialized safety testing, process validation services and contract manufacturing. The acquisition added annual revenue of about $21 million to BioReliance’s base of about $90 million, and gave the company a larger presence in the UK.

• Cardinal Health, Inc. cemented an important component of its drug development activity with the October acquisition of the remaining 42% of Gala Biotech that
it did not own. Cardinal initiated a relationship with that firm in September 2002, and helped that start-up company leverage its gene insertion technology for
the manufacturing of biopharmaceuticals. Since then, it has provided additional funding to build capacity for cGMP manufacturing of Phase I and Phase II products.

• Bioanalytical Systems, Inc. expanded its capabilities in the bioanalytical contract services business by completing the second of two acquisitions it first announced in mid 2002. In June, it acquired Pharma-Kinetics Laboratories, Inc., and established a presence in Baltimore, MD. In December 2002, it acquired a
presence in the northwest with the purchase of LC Resources. BAS now has an annualized revenue base of more than $30 million.

• 3 Dimensional Pharmaceuticals was acquired by Johnson & Johnson in March. Its board obviously decided it was no longer feasible to pursue the fee-for-service chemistry business while still trying to use the intellectual property of the company to develop its own therapeutic products. In making that decision, it pursued the same course as the board of MediChem Life Sciences did in January 2002.

• Along those same lines, it is intriguing to us that the board of Ricerca Biosci-ences made a different decision in May. The company changed its senior
management and adjusted its strategic direction, deciding to keep pursuing the chemistry services business but de-emphasizing its compound development activities.

CMO Expectations for 2004
This magazine has been one of the closest watchers of the outsourcing trends in pharmaceutical product manufacturing, especially in the biologicals arena. Indeed in an article in the November/December 2003 issue, editor Gil Roth noted the anticipated increases in capacity scheduled to be completed this year by companies such as Baxter Pharmaceutical Solutions, Hollister-Stier, Abbott One 2 One, Patheon, DSM Pharmaceuticals and the Ben Venue division of Boehringer-Ingelheim. Each of these companies appears to recognize the need to keep adding to its technological capabilities, not just to increasing capacity. Most do not develop such capabilities internally, and should be important buyers of specialized small companies. In addition, it’s our suspicion that a better tone in the economy will result in more acquisition activity by the large chemically-oriented participants in the drug business.