The last financial quarter saw continuing consolidation in the contract research and manufacturing space. More is on the way, believes Justin Crowther, director at Catalyst Corporate Finance in the UK.

Customers in the sector want to work with fewer partners and, ideally, with ‘one-stop shops’, Crowther observes.

That points to further acquisitions, particularly given estimates that only half of research and development is currently outsourced and forecasts that large contract research organisations (CROs) could pick up a “significant portion” of the additional seven to ten percentage points of R&D spend expected to be farmed out over the next few years.

The world’s largest CRO, Quintiles, has led the way in investment, consolidation and growth, reporting its first US$1 billion quarter at the end of the 2013 financial year, Crowther notes.

Quintiles’ recent acquisition of Novella Clinical contributed US$36.5 million towards revenues in that quarter. “A serial acquirer, Quintiles has made clear that it will continue to make acquisitions to expand its services and capabilities,” Crowther comments.

Private-equity appetite

Private equity, a long-term investor in the sector, is “maintaining its appetite for high quality assets”, he adds.

Crowther sites Cinven’s US$915 million acquisition of CRO Medpace, which gave private-equity player CCMP a return of around three times its original investment for a three-year commitment.

Cinven has a strong track record of portfolio-company growth in Europe, which is a recent area of expansion for Medpace, he points out.

But the acquisition will also help the CRO to expand into Asia and beyond its current core therapeutic areas.

“Whilst Cinven has said it plans to do this primarily via organic growth, there is also the likelihood of further acquisitions,” Crowther says. 

Public markets

Companies are also looking to the public markets to raise capital for acquisitions.

For example, Swedish pharmaceutical contract development and manufacturing organisation Recipharm has announced an initial public offering (IPO).

The goal is to raise up to SEK3 billion on an EBITDA (earnings before interest, taxes, depreciation, and amortisation) of SEK283 million in 2013.

Proceeds from the IPO will be used to seek out acquisitions that can fill in Recipharm’s therapeutic capabilities and extend its geographic reach.

“The drivers supporting CRO and CMO [contract manufacturing organisation] growth and consolidation will remain in place for some time to come, which means that there is undoubtedly more M&A ahead this year, particularly as customers push to work with fewer partners and are looking for larger one-stop shops,”  Crowther concludes.