Last month, I speculated on Outsourcing-Pharma.com that it was possible that we could see a merger between either Parexel, Icon or PRA. Sounds like we came close as several news outlets have reported that Icon was a finalist for Parexel, but Pamplona eventually submitted the highest bid.
The reported deal enterprise value is roughly $4.5bn ($88.10 per share) of enterprise value which translates into a trailing 12 month EBITDA multiple of 12.6 (Parexel’s trailing 12 month EBITDA is $356m per their Q3 2017 earnings presentation).
The Parexel deal multiple is right on par with the price INC Research is paying for inVentiv. INC has reportedly offered $4.6bn, which would be an EBITDA multiple of 12.6 (per a supplemental investor presentation, inVentiv’s trailing 12 month adjusted EBITDA was $364m).
However, the fact that INC is a strategic buyer creates one big difference in that INC-inVentiv believe through their consolidation, $100m of synergies can be realized. The realization of these synergies would reduce the deal multiple to closer 10 times EBITDA or 21% less than what Pamplona paid for Parexel (assuming the INC-inVentiv synergies can be achieved).
Why Pay More?
Why would Pamplona pay a similar multiple to INC when there are no real synergy opportunities available? Here are a few potential reasons:
1) You can see in the chart below that Parexel’s profitability lags many of their peers (ironically it is higher than inVentiv’s) which presents an opportunity to increase profitability via cost reductions and improved operational processes. If EBITDA % were to increase to 20% under Pamplona’s ownership, that would represent a $60M+ improvement in EBITDA or over $750 million of enterprise value at a 12.6 multiple of EBITDA.
2) Parexel could acquire one or multiple CROs and achieve the amount of synergy value that INC-inVentiv hope to achieve. As they say, you have to be in it to win it – so in order to gain the synergies available from CRO consolidation, you have to own a CRO.
3) Lastly, Parexel is a brand name franchise in the CRO industry with numerous hard to get strategic relationships – assets like that don’t come around often.
A summary of the big takeaways today are:
1) Parexel is being acquired by Pamplona Capital and will become a private company
2) CRO valuations continue to remain healthy at greater than 12 times EBITDA
3) Icon showed an interest in doing a transformative deal to jump up to the mega-CRO class
Jason is the president of Pivotal Financial Consulting, LLC, which provides divestiture assistance, acquisition advisory services and strategic planning to the pharmaceutical outsourcing industry. He was previously CFO at Theorem Clinical Research and Omnicare Clinical Research and senior finance director at MDS Pharma Services.