Last week Omnicare CR was added to the list of contract research organisations (CRO) bought by private equity firms in the past year. Despite the recent surge in activity there is evidence buyers and sellers are still hungry for more deals.
“We think there are as many as four to six larger, top-25, CROs on the block today and likely several multiples this amount when considering small, niche vendors”, said Eric Coldwell, managing director, healthcare equity research at RW Baird, in a report published in early April.
Equally, there are plenty of investors interested in these assets. “We believe that roughly half a dozen strategic buyers without a substantial operating history in the CRO space are being shown books with some frequency”, said Coldwell.
Dozens of strategic CRO buyers, mainly private equity owned ventures with existing platforms, are also “more than a bit interested” in making acquisitions. Finally, there is “a larger list of new financial buyers – private equity without a current platform”, said Coldwell.
Buyers are looking for CROs with unique capabilities and growth potential.
Returns and exit strategies
Private equity buyers are attracted by the “outsized returns” CROs have the potential to generate, David Windley, managing director, healthcare equity research at Jeffries & Co, told Outsourcing-Pharma.
Windley said: “I think private equity firms are looking for annualised returns in the 30 per cent range, give or take, and with holding periods of five years or so.
“Exit strategies can include IPOs (initial public offerings) for some, but may also include sales to strategic buyers or perhaps even a consolidation play by a larger private equity firm.”
The timeframe and IPO exit are inline with comments made by Stephen Unger, director and senior analyst at Lazard Capital Markets. “By 2015 several mid-sized CROs currently in the hands of private equity will be public”, said Unger at Partnerships in Clinical Trials last month.