CROs take advantage of M&A madness

The landscape has been changing drastically over the last year or so, with a string of mergers and acquisitions resulting in the formation of new collaborations, new companies and allegiances that have reshaped the market

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In early April, Charles River Laboratories International (CRL) and WuXi PharmaTech announced a definitive agreement under which Charles River and WuXi will combine in a cash-and-stock transaction valued at approximately $1.6 billion (see cover story, "From molecule to market"). CRL says the deal "revolutionizes the contract research landscape by creating the only global CRO to offer fully integrated research and drug development services from molecule creation to first-in-human testing."

That landscape has been changing drastically over the last year or so, with a string of mergers and acquisitions resulting in the formation of new collaborations, new companies and allegiances that have reshaped the market.

According to Barclays Capital, the drug discovery R&D market in 2009 stood at $20.2 billion, with $1.6 billion being outsourced. That number is expected to grow to $5 billion to $10 billion, from 8 percent to 30-50 percent, in the next three to five years.

And if the CRL-WuXi deal is any indication, a hotbed for significant growth is in China.

Made in China
For all intents and purposes, the CRL-WuXi deal seems like a good match, and notably, it also marks one of the largest M&A transactions made in China. Nancy Gillett, executive vice president of global preclinical services at CRL, says the company was moved into action after listening to its client base.

"What we're hearing from our major clients is that they want to buy more products and services from the same vendor, and have more strategic relationships with those partners," she says.

The recent spate of M&A activity also may be changing how people view outsourcing, Gillett points out.

"Traditionally, Big Pharma has always wanted to keep things internal, within their own core competencies," she says. "Then, they began moving services like safety, chemistry and now early discovery work outside of the company. I think the trend we're definitely seeing is that large pharmas and biotech companies want to have a partner they can work with in the same location and get multiple products and services from that partner."

As a result, Gillett believes companies are trying to be more efficient when it comes to cost and time-which is becoming a pervasive theme, as clients want more of a one-stop-shop approach.

Recent deals like CRL's also may not be the last, Gillett notes, as the opportunity for more consolidation could arise going forward.

"Bigger pharma companies are seeking solid niche players out there in the CRO world because they are really trying to decrease the number of companies they are working with," she says. "We definitely feel it's advantageous for us to try to provide a broader portfolio of services and have even deeper strategic relationships with these clients. In turn, many pharmas want to build a deeper partnership with CROs, so they know their preferences in reporting, timelines, protocols, etc. If you continue to build that efficacy over a period of time, it's more like having that expertise within our own shop."

David H. Windley, managing director of Healthcare Equity Research, notes that the WuXi deal seemingly puts other Chinese chemistry companies in play, "though they are much smaller, such as Shang (Chem Explorer) and ChemPartner."

Moreover, Windley says companies seeking a merger or acquisition could have their eyes on a specific emerging market.

"I would expect to see the majority of capabilities added in China, followed by India and Latin America (Brazil, Argentina)," he points out.

In the right place at the right time
This was the case in November 2009, when drug development contractor Pharmaceutical Product Development Inc. (PPD) acquired BioDuro LLC, a U.S.-based global life science outsourcing services company with a team of over 630 in Beijing, China, for approximately $77 million in cash.

"Our acquisition of BioDuro positions us to capitalize on the tremendous growth in Asia Pacific and to become the CRO of choice in China," David Grange, CEO of PPD, said of the deal.

According to Grange, the opportunity to expand into the Asia Pacific region was attractive and an area PPD has targeted for expansion. PPD continued its efforts to gain a foothold in emerging markets with its acquisition of AbCRO, an American-owned contract research organization operating in Central and Eastern Europe, for approximately $30 million.

The trek into Romania, Bulgaria, Serbia and Croatia is expected to enhance PPD's expertise in this high-growth region and strengthen existing operations in Poland, Russia and Ukraine.

The timing was right, says PPD CEO Fred Eshelman.

"Eastern Europe is a high-growth market for clinical trials and a region PPD has targeted for expansion," Eshelman says. "The region offers a relatively low density of clinical trials per population when compared with Western Europe, has a well-developed health care infrastructure and enthusiastic clinical investigators."

Highlight reel
In June 2008, the Interactive Voice Response (IVR) technology expertise of global clinical research services firm ClinPhone PLC attracted the attention of Parexel International Corp., which made a $182 million acquisition offer. The offer merged ClinPhone with Parexel's eClinical solutions subsidiary, Perceptive Informatics Inc.  

Serving the pharmaceutical and biotechnology industries for 15 years, Nottingham, England-based ClinPhone had been intent on staying independent, but CEO Steve Kent said a partnership with Parexel presented growth opportunities the company.   

Parexel Chairman and CEO Josef von Rickenbach says his company, which has served Phase I to Phase IV clinical researchers for 25 years, considered the combination of the two companies to be a "powerful presence in the emerging market."     

Although the two companies compete with each other in the IVR space, they have a lot of   complementary services, he added.

In February 2009, CRO WIL Research Laboratories LLC and its parent company, WIL Research Holding Co., acquired Midwest BioResearch, a company that provides drug disposition and toxicology services to drug developers, for an undisclosed sum. WIL Research, which specializes in toxicology services, said it hopes to benefit from Midwest BioResearch's expertise in immunoanalytical and bioassay techniques and small molecule bioanalysis.

In December 2009, NexMed Inc. announced the closing of its acquisition of Bio-Quant Inc., a privately held leading research organization for in vitro and in vivo contract drug discovery and preclinical development services, for approximately $12 million.

Finally, having worked since September 2009 to focus its business exclusively on medical isotopes, MDS Inc. announced in mid-February the sale of MDS Pharma Services, the company's discovery and preclinical business, to Ricerca Biosciences LLC, a contract research organization (CRO) focused on medicinal chemistry and discovery biology services. The $45 million purchase price included a five-year, $25 million note and $20 million in cash that will be adjusted for working capital and other items. After currently projected adjustments, the $20 million cash payment is estimated to result in net cash proceeds of approximately $7 million.

The sale was finalized March 8 and serves as the completion of MDS' repositioning strategy to focus on building its MDS Nordion business, which has leadership positions in medical imaging, radiotherapeutics and sterilization technologies. Meanwhile, Ricerca, which says it is working to become a global, preferred provider of discovery and development services, added facilities and almost 600 associates in Bothell, Washington; Lyon, France; and Taipei, Taiwan, to its existing headquarters in Concord, Ohio. Ricerca chairman and CEO Ian Lennox said MDS Pharma Services' offerings "further propel our unique approach of taking companies in the biopharmaceutical industry from the point of intellectual property (IP) to the submission of an investigational new drug (IND), with capabilities even reaching into the post-IND phases. With facilities worldwide combining local experience, immense scientific expertise and a strong commitment to excellent client service, this acquisition fits Ricerca's growth strategy well. The expanded Ricerca organization is a research partner clients can rely on to think strategically about projects, anticipate needs and rapidly deliver study results."

Prognosis for outsourcing
But even as the economy struggles to find its footing in the United States and across the world, it doesn't necessarily mean CRO merger and acquisition activity will reach a fever pitch, according to analysts.

"One of the deals was a go-private, which was driven by low valuations," Windley explains. "If the economy improves, valuations likely will too ... eliminating the need to go private. Beyond that, the WuXi/Charles River Laboratories deal was struck to offer more service lines and a geographic presence in China to CRL. There aren't that many more acquisitions that look like WuXi in China."

Windley also notes that the recent merger and acquisition activity isn't necessarily a sign of a robust industry.

"I wouldn't call it robust," he explains. "Recovering is a better word. The industry has been weakened by lack of demand from smaller biotechs, which saw funding dry up during the economic downturn and from some pharma companies that have put projects on hold while evaluating broader pipeline strategies."

Nonetheless, the recent activity will benefit a certain segment of the industry, Windley concludes.

"I think the strongest signal is that the growth in the industry will benefit larger providers with broad services lines," he says.

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