M&A motivations differ for CROs and PE investors but deals will continue, says broker
McCarthy made the comments this week after the latest Fairmount brokered deal– Icon’s takeover of Cross Country Healthcare’s trials arm – was announced, telling Outsourcing-pharma.com a CRO's motivations for an acquisition usually differ from those of a private equity investor.
“We have completed 90 transactions in the pharmaceutical services sector and they really come down to four key reasons, plus one more that applies to private equity buyers.”
For CROs, McCarthy said expanding therapeutic or service expertise in response to client demand and extending geographic reach are the key factors, predicting that “virtually every CRO in the US will eventually want to be able to work in Europe, and vice versa.”
Bulking up “to make the short list of CROs for the very largest projects” has also driven a number of CRO acquisitions in recent years McCarthy said, adding that such deals are usually more complicated than other types of purchase.
“These transactions are the most difficult because…there is likely to be a lot of overlap,” he said citing INC Research’s buyout of Kendle and InVentiv’s acquisition of i3 Research AND PharmaNet.
“Unlike Noah’s Ark, having “two of everything” is not good, as you eventually have to get down to “one of everything - CEO, CFO, head of Clinical, head of biostatistics, and that is an adversarial process.”
For first time private equity bidders the motivations are different according to McCathy, who said: “When they buy their first CRO – the first acquisition is their “platform” that will be used to enter the business.
“The private equity (PE) buyer’s goal is to buy low and sell high, and getting a good management team on their first acquisition or platform, will help them to select the “bolt on acquisition."
Strategic deals
The emergence of strategic partnerships has also had an influence on acquisitions in the CRO sector according to McCarthy, who suggested that the additional stability such agreements provide is likely to drive more deals.
“CROs may be more likely to make investments in Therapeutic Expertise, Service Expertise or Bulking up if they feel it will help make their relationship with their partner. This is not markedly different from when they are investing to make their clients happy, but the formality of the partnership gives the CRO a bit more knowledge about the business pipeline and what the partner will need.”
He also suggested that strategic deals may drive deals in another way, namely that sponsors will expect their contractors to make purchases of units they wish to sell.
“Partnering is often a quid pro quo for an acquisition by the CRO of some operations of the sponsor. For instance, when Covance did their $billion deal with Sanofi, it included the acquisition of two pre-clinical operations that Sanofi wanted to shed.
