Since being bought by private investors last year INC has plotted an aggressive growth strategy to become a top five contract research organisation (CRO). To try to break into this group INC is to buy Kendle for $232m (€156m) in cash, a 60.5 per cent premium over yesterday’s closing share price.
“We believe that INC’s vision of becoming a global leader would be difficult without this scale and scope event, and Kendle brings geographic and therapeutic expertise diversification and new client relationships”, said Eric Coldwell, equity analyst at RW Baird, in a note to investors.
Speaking to Outsourcing-Pharma last month, John Potthoff, chief operating officer at INC, said the CRO was looking for acquisitions to add geographic reach and scale. Buying Kendle, which operates in 31 countries, meets these goals and seems to make sense for both companies.
“Kendle [has been] too big to focus on niche offerings, not large enough to fully participate in global strategic alliances, and relatively undifferentiated in the market”, said Coldwell. Combining with INC should help overcome some of these problems.
“This combination would move slightly ahead of Covance in Phase II to IV”, said David Windley, equity analyst at Jeffries & Co, in a note to investors. Yesterday, Covance reported late stage net revenues of $278m in its first quarter results.
Kendle’s board of directors unanimously approved the deal and it is expected to close in the third quarter, subject to shareholder and regulatory approval.
“Given both the compelling premium and valuation it appears the bidding process was quite competitive. The likelihood of a higher offer emerging seems low”, said Windley.
Integration and consolidation
The challenge now, assuming the deal is closed, is to integrate Kendle into INC. Kendle has “ample issues” and CRO integration is tricky, said Coldwell, but INC has experience from buying late stage assets from MDS Pharma Services in 2009.
“It has integrated [MDS] effectively, operated on a combined basis in 2010, and now is looking to stair-step into the top five clinical players”, said Windley. Both deals are part of an overall consolidation in the industry that has accelerated in the past 12 months.
As Outsourcing-Pharma reported this week, private equity firms are playing a prominent role in CRO consolidation and will continue to do so.
“We only wish that public investors saw the same opportunity that private equity and strategic buyers do; this is the sixth major CRO deal in [the last 12 months], at robust valuation”, said Coldwell.