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Biopharma Outsourcing Is Going Through Deal Bonanza in U.S.

  • M&A in the first half already tops annual volumes of 2007-15
  • More deals are likely in coming months: William Blair analyst

For the little-known companies doing the grunt work of drugmakers, it’s deal season.

Contract research organizations -- the science-for-hire firms that handle clinical trials, medical-lab testing and other services for pharmaceutical companies -- are all the talk of the health-care M&A world. The latest transaction was the $4.5 billion takeout of Parexel International Corp. on Tuesday. And analysts say there’s more to come.

After M&A spending quadrupled to $24 billion in 2016 in the U.S., deals so far this year total $13 billion in the contract industry -- more than the annual volumes of the 2007-2015 period, -- according to data combined by Bloomberg.

There are several reasons why companies that work in the background are now in the spotlight, according to KPMG, the audit and consulting company. Drugmakers are developing more treatments, creating demand for contract research organizations, or CROs. The outsourcing firms traditionally conduct clinical studies, find patients and organize the doctors and researchers in trials that can included thousands of patients in hundreds of locations. As the health-care system tries to squeeze efficiency out of a fractured approach, there’s an advantage for the CROs to get bigger.

“Are we done? Not at all,” said Paul Saias, a principal at KPMG who covers the life-sciences industry. “We are at the beginning of this process.”

KPMG estimates that 10 firms account for just over half of the $30 billion contract research industry. That number will narrow to five or six, Saias said. KPMG’s top 10 list already reflects past consolidation. It includes Quintiles IMS Holdings Inc., the product of a 2016 merger; Covance, bought by Laboratory Corp. of America Holdings in 2015; Parexel, which just agreed to be taken private this week; PRA Health Sciences Inc., and closely held WuXi Apptech from China.

Outsourcing firms fighting one another for their big clients’ research money have expanded their offerings. They now not only run trials, but also manage data, provide consulting to sales people and assess how to make treatments cost-effective. More often than not, they’re buying that new expertise.

“All parts of the market are getting more competitive, and these deals -- the real strategic consolidation -- is being sparked by the competition,” said Tim Evans, an industry analyst at Wells Fargo & Co. “If a big pharma company is going to select you for a preferred vendor in their list of three or four providers, then they want you to have a full suite of offerings.”

IMS Health’s purchase of Quintiles a year ago was an example of expanding beyond the standard CRO model, with a focus on access to data and services that allow the combined entity to offer new products. Drugmakers are under pressure to cut expenses, and service providers can help thanks to a wealth of information obtained during drug development.

A more recent deal -- INC Research Holdings Inc.’s purchase of InVentiv Health Inc. for $4.6 billion, announced last month -- underscored the role of private equity firms in the blossoming market. The deal provided a staged exit for InVentiv’s part-owner, Thomas H. Lee Partners LP, giving the PE firm a net return of more than 300 percent on its original investment, according to a person familiar with the matter.

Some of the biggest companies in the contract industry are still looking for sizable deals: Parexel said the bidding process for the company was “very competitive.” According to the Wall Street Journal, both Laboratory Corp. of America and Icon Plc -- which is also in KPMG’s top 10 CROs list -- were involved.

And there are likely more acquisitions on the horizon, according to John Kreger, an analyst with William Blair & Co.

“We would not be surprised to see further deals in the coming months,” Kreger wrote in a note to clients. “The imperative to drive greater efficiency in drug development, which in turn could perhaps lower drug pricing over time, is the primary driver of the added deal volume.”

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