The Health Care Investor : Healthcare Lawyers & Attorneys for Life Science Companies & Investors

In Part II of this blog series we look at recent transactions in the arena of contract research organization, with a particular focus on private equity investing in CROs.

In one recent example, prescription drug data-mining company IMS Health acquired TTC, Philadelphia, a drug trials data-analytics company for drug manufacturers and drug contract research organizations (CROs). IMS will reportedly offer TTC’s services via its clinical trial optimization unit, which is part of its healthcare value solutions business. IMS sources state, “IMS will integrate its evidence-based, anonymized patient and treatment outcomes insights with TTC’s comprehensive cost data drawn from organizations that conduct nearly 80% of all commercial clinical studies.” Linda Drumright, general manager Clinical Trial Optimization Solutions at the New Jersey-based company, said, “There is growing demand for more data and analytics to optimize the clinical trial process. Together [with TTC] we can deliver an end-to-end view of trial planning and execution, increasingly critical at a time when the industry faces significant challenges and requires new approaches.”

IMS also recently acquired PharmaDeals, a Web-based subscription database that gathers information about the pharmaceutical industry. IMS is owned in part by TPG Creative Capital, a leading international private equity investor in healthcare, with $51.5 billion of capital currently under management.

Covance and Pharmaceutical Product Development were once again the biggest top-line gainers during the quarter. Pharmaceutical Product Development was taken private as of December 2011, following a $3.9 billion cash purchase by The Carlyle Group  and Hellman & Friedman, as reported in their December 5, 2011 press release. Covance is one of the world’s largest and most comprehensive drug development services companies with over 11,000 employees in 60 countries; they have assisted pharmaceutical and biotech companies develop one-third of all prescription medicines in the market today.

Likewise, Nautic Partners LLC recently invested in Theorem Clinical Research, which partnered with Gallus BioPharmaceuticals in an endeavor to get pharmaceutical companies in emerging markets to enter the U.S. market.

Frontier Capital, which focuses exclusively on partnering with the management teams of high growth business services companies, led an investment deal merging a pair of CROs, Inclinix Inc. and PMG Research Inc.. Current research modalities include asthma, Type II diabetes, influenza vaccines, hypertension and obesity treatments.

Private equity firm, TPG Star Charisma Limited plans to acquire all of the outstanding shares of ShangPharma that they do not currently own. According to their website, the bid values ShangPharma, with Eli Lilly and GlaxoSmithKline (www.gsk.com) among its clients, at between $157.5 million and $176 million.

As discussed in Part I, the CRO industry involves players employing a variety of partnering models; but no matter the approach and niche need the particular CRO intends to serve, CROs have become increasingly more valued and of interest to private equity investors. Additional news on performance of some additional key players in the contract research organization industry is as follows:

• ICON reported 2nd quarter 2012 revenue up 19% to $277 million; income from operations, excluding restructuring and other non-recurring items, was $16.6 million or 6% of revenue, according to their Consolidated Income Statements.
• Chinese CRO WuXi PharmaTech reported another period of double-digit revenue growth during third quarter led by the firm's burgeoning manufacturing services division. WuXi is responsible for manufacturing hepatitis C therapy INCIVEK® for Vertex and Johnson & Johnson (www.jnj.com); the drug's first full quarter of sales since launch was a driver behind this huge jump in manufacturing services revenue compared to the prior year.
• Charles River Laboratories (www.crai.com) turned in positive top-line growth in the third quarter of 2011, largely due to foreign currency gains. Growth was driven by strong demand in the firm's research models and services segment. From a Charles Rivers Associates press release, revenue for Q2 of fiscal 2012 was $67.8 million, compared with $80.6 million for the Q2 of fiscal 2011, quarter ended July 2, 2011. Non-GAAP revenue for the Q2 of fiscal 2012 was $66.3 million, compared with $79.6 million for the Q2 of fiscal 2011. The firm has announced it has significantly expanded a preferred-provider agreement with a leading global pharmaceutical firm and is in the early stages of similar discussions with other large clients.

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Contract research organizations (CRO) provide research services support for the biotechnology, medical device and pharmaceutical industries on a contractual basis. They offer such services as preclinical and clinical research, clinical trials management, biopharmaceutical development and pharmacovigilance. CROs run the gamut from international full-service organizations to niche specialty businesses. The emergence of the strategic partnership model, with some of the largest global pharma companies pairing with leading CROs in R & D, has stimulated the industry's growth.

A survey by RW Baird analyst Eric Coldwell found that 42% of pharmaceutical companies saw prices increase during the second quarter 2012, up from one-third in the first quarter. The scene is set for a projected 3.6% to 8% growth in R&D budgets among both pharmaceutical and biotech firms. Coldwell speculated, “Looking ahead several years, we have generally concluded that client R&D budgets will be flattish in total, yet the CRO industry secular market move to higher involvement will continue as clients replace less efficient internal functions with more efficient and cost effective external solutions.”

An article in Forbes found that of 388 drugmakers and biotechs that were surveyed reported that CRO clients expect a 9% increase in outsourced R&D budget, with total market penetration by CROs increasing from 35% in 2010 to 38% in 2011. Among large drugmakers, 27% expect to outsource, while 47% of the smallest companies expect to outsource.

The Association of Contract Research Organizations (ACRO) conducted a survey of its own members and examined 11,508 trials carried out by ACRO members; the results showed that each CRO was involved, on average, in over 750 studies. By comparison, ACRO states that approximately nine of its members worked on roughly 400 trials in 2008. They also contributed to 33 of 38 drugs approved in the US and Europe in 2010.

For these reasons, the last 18 months have been a buying spree of CRO’s by private equity funds with the next 12 months looking to be similar.  The ability of CROs to improve performance even when R & D budgets have remained flat has made them a darling of investors.

In Part II of this report we will examine key industry players and the firms that have recognized the growth potential of the segment and invested accordingly.

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