Merger and Acquisition Drivers Remain in Place for 2007

Deals will continue to remake the pharmaceutical services landscape in 2007.
Feb 02, 2007
Volume 31, Issue 2

Jim Miller
2006 was a busy year for merger and acquisition (M&A) activity in the pharmaceutical services industry, and all signs point to 2007 being at least as active. The resulting consolidation and changes in ownership are altering the face of the industry.

PharmSource counted almost 60 deals completed in 2006, with a total value of nearly $2 billion. The deal sizes range from the $2 million that Canadian contract laboratory company Warnex (Montreal, Canada) paid for the Blainville, Quebec analytical operations of MDS Pharma Services (Montreal, Canada) to the $567 million that a consortium of private-equity firms is paying for pharmaceutical chemical manufacturer Groupe Novasep (Pompey, France). The number of deals was almost equally divided between clinical and nonclinical development and manufacturing services.

One deal alone promises to make 2007 an even bigger year than 2006: Cardinal Health's (Dublin, Ohio) Pharmaceutical Technologies and Services (PTS) business, which Cardinal Health announced it intends to divest by mid-year, is expected to bring nearly $2 billion on its own. The industry also is waiting to learn whether the board of directors of dose manufacturer Patheon (Toronto, Canada) decides to sell all or part of its operations. If it does, assets worth hundreds of millions of dollars could change hands. Add to those two events the normal flow of small, tactical deals and the likelihood of a surprise announcement or two, and 2007 should be quite a year for investment bankers representing contract-services clients.

Hot environment

Even if the Cardinal Health and Patheon transactions were not looming over the industry, 2007 would probably be a busy year because the factors that drove contract services M&A activity in 2006 are still very much in place: a set of compelling business rationales and readily available financing.

Private-equity firms that own contract research organizations (CROs) and contract manufacturing organizations (CMOs)
The business rationales for deal-making reflect market trends in the pharmaceutical services industry.

Early-development boom. The number of early-stage candidates in the drug development pipeline has grown markedly this decade—Phase I candidates are up 50% according to data from IMS, Inc.—and service providers want to make sure they have the capacity to serve them. Companies that support the development of early-stage compounds, including Phase I research, formulation, and analytical services, have been in strong demand by acquirers.

Demand for Phase I beds has far outstripped the supply, making Phase I capacity a hot commodity in 2006. Covance (Princeton, NJ) added 11 sites and 500 beds to its network with its acquisition of the Radiant Research Phase I facilities. PRA International (Reston, VA) gained a Phase I foothold in Europe with its acquisition of Pharma Bio-Research, adding to its existing facility in Lenexa, Kansas. SGS (Geneva, Switzerland) bought a major Phase I presence with its acquisition of aster.cephac early in 2006.

lorem ipsum