Market consolidation and the importance of size have been regular themes in the past year. A major deal in the early-development
segment has once again underscored the primacy of these trends in the evolution of the pharmaceutical outsourcing sector.
The big deal is the 10-year services relationship between Covance (Princeton, NJ) and sanofi-aventis (Paris). The arrangement,
which has a potential value of as much as $2.2 billion, has several key components. The key aspects are:
- Covance will acquire the research and development sites (R&D) of sanofi-aventis in Porcheville, France, and Alnwik, United
Kingdom, for $25 million and maintain employment at those sites for 300 employees for at least five years
- Covance will receive a five-year take-or-pay contract from sanofi-aventis worth at least $350 million for services to be provided
from the two acquired facilities
- Covance will receive from sanofi-aventis a 10-year, take-or-pay contract worth at least $850 million for additional services,
including discovery, chemistry, Phase II–IV clinical research and postapproval services
- Covance will be designated as the sole provider of central laboratory services to sanofi-aventis for a 10-year period, with
potential business valued at up to $1 billion during the 10-year period.
The Porcheville and Alnwick sites host a variety of early-development activities, including drug metabolism, toxicology, and
bioanalytical testing. The sites also have capabilities for CMC development, including early-phase small-molecule active pharmaceutical
ingredient (API) development and manufacture, preformulation, formulation, and radiolabeling.
The deal with sanofi-aventis is certainly a big one for Covance. In two to three years, when the deal fully kicks in, Covance
could generate $200 million or more in revenue. That gain represents a sixfold increase in the revenues that Covance will
generate from sanofi in 2010 and is equivalent to 10% of Covance's total revenue for all of 2010.
Moreover, the deal protects Covance's preclinical margins at the two acquired sites by guaranteeing $350 million of billings
for the first five years. That guarantee is extremely important, as there is a glut in preclinical testing capacity, which
has hurt pricing and forced preclinical contract research organizations (CROs) to operate facilities with high fixed costs
at low levels of utilization.
In fact, what has been particularly impressive in both the sanofi-aventis deal and the deal Covance struck two years ago with
Eli Lilly (Indianapolis, IN) has been Covance's apparent ability to negotiate extremely favorable terms for itself. For one,
it has been able to get very large take-or-pay or exclusivity agreements for relatively small initial outlays and very low
risk. In good times, these arrangements often yield greater-than-guaranteed volumes, and in bad times they provide a degree
of revenue certainty.
Covance has also used these deals to leverage the relationship beyond its core strengths in preclinical toxicology and central
laboratory services to other R&D services where it is not necessarily a standout player, including Phase II–IV clinical research
and other analytical services. In addition, the facility acquisitions have enabled Covance to gain valuable new capabilities,
including API development and formulation capabilities in the sanofi-aventis deal.