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Buyers strategically target chemistry, manufacturing, and controls development services.
A battle to consolidate the chemistry, manufacturing and controls (CMC) development sphere is shaping up between Aptuit (Greenwich, CT, www.aptuit.com) and Fisher Clinical Services (Allentown, PA, www.fisherclinicalservices.com), a unit of Fisher Scientific. The companies completed several high-profile acquisitions in 2005 and made announcements in April that indicated that the battle may be heating up.
The most recent volley was fired when Fisher Clinical said that it will acquire Clintrak Pharmaceutical Services (Bohemia, NY, www.clintrak.com) and its wholly owned clinical packaging subsidiary, Acculogix (Bristol, PA, www.acculogix-usa.com). Clintrak is a long-time leader in the production and supply of labels for clinical trial materials, a complex business in which accuracy and innovation are critical operating parameters. Acculogix, which was founded four years ago by several contract-packaging veterans, is a small but growing player in the clinical packaging arena. The company is known for its innovative software for managing and tracking the clinical packaging process. Clintrak's investors, which include Bear Growth Capital Partners, an affiliate of the investment firm Bear Stearns, will receive $125 million in cash for the Clintrak businesses, which had revenues of $31 million in 2005.
The Clintrak acquisition reinforces Fisher Clinical's position as the largest player by far in clinical packaging, with revenues that PharmSource estimates are in the $200–250-million range. Fisher Clinical built on its lead last year when it acquired McKesson BioServices (now Fisher BioServices), the leading clinical supplies and distribution services provider to the National Institutes of Health.
With Fisher Clinical's acquisition of Clintrak and McKesson BioServices, and Aptuit's consolidation of Quintiles Clinical Supplies and Almedica last year, the number of clinical packaging service providers is shrinking. In addition to Fisher Clinical and Aptuit, the four major players in the business include Cardinal Health (Somerset, NJ, www.cardinal.com/pts) and Clinical Trial Services (Audubon, PA, www.cts-almac.com), a unit of Almac Sciences. In addition, several smaller players are located in the United States and Europe, many of which offer just secondary packaging capabilities.
Consolidation in the clinical packaging industry is driven by the same factors that are consolidating the clinical research business: the increasingly global nature of late-stage clinical research (clinical packagers generate the largest share of their revenues from large Phase III clinical trials) and the efforts by Big Pharma companies to consolidate their supply base. To be a first-tier player, a clinical packager must have a global network of distribution points, sophisticated logistics know-how (including systems for tracking inventories and shipments), and global regulatory expertise. Only a few companies have the scale and financial backing to meet those criteria.
Though Fisher Clinical used acquisitions to extend its lead in clinical packaging, the deals also have given it a growing presence in other areas. The McKesson BioServices acquisition enabled it to enter the biological sample-storage business, a rapidly growing sector in this age of genetic medicine. Last years's acquisition of Lancaster Laboratories landed Fisher Clinical a market leader in analytical chemistry and microbiology.
Fisher Clinical executives have not said whether their strategy is to create a "category killer" in the clinical packaging space or to build a full-service development offering. Aptuit, on the other hand, stated its objective of building a one-stop clinical supply chain offering encompassing process development and manufacturing for active pharmaceutical ingredients (APIs) and dosage forms, analytical services, and packaging, tied together with sophisticated project management systems. Backed by the large private equity firm of Welsh, Carson Anderson and Stowe, Aptuit began operations in 2005 by acquiring the nonclinical businesses of Quintiles Transnational Corporation and Almedica. It recently acquired clinical trial software developer InfoPro Solutions.
Now, Aptuit has enlarged its treasure chest with a minority investment from Temasek Holdings Limited (www.temasekholdings.com.sg), a large private investment firm headquartered in Singapore. Temasek's portfolio spans a broad range of industries, but less than 3% of its $63-billion investments are in biotech, pharmaceutical, or related services. In June 2005, it entered into a joint venture with Quintiles and drug distributor Interpharma (Hong Kong, China, www.zuelligpharma.com/ip) to acquire and commercialize drugs for the Asian market.
Aptuit has made only the InfoPro acquisition thus far in 2006, but another one is expected shortly, probably in small molecule API development and manufacturing services. The company's strategy emphasizes API availability as a critical bottleneck that its business model intends to address. It recently announced the appointment of a senior director of API development, even though it does not yet have API manufacturing capabilities.
Acquisition price war?
Recent market activity indicates that we now have several large and willing buyers for CMC development services. Will acquisition prices continue to sky-rocket?
The Temasek investment means that Aptuit has as much as $750 million of capital available for investments, including acquisitions, according to company statements. Fisher Scientific has shown it will take on large amounts of debt to fund acquisitions and that it will pay very aggressive multiples for target companies, as much as 3–4 times revenues. Other companies that recently have shown a willingness to buy-up CMC development services companies include AmerisourceBergen (Wayne, PA, www.amerisourcebergen.com) and the SGS Life Sciences unit of SGS (Geneva, Switzerland, www.sgs.com), the global testing organization.
The last company we saw willing to make large investments in CMC services at high multiples was Cardinal Health, which created its Pharmaceutical Technologies and Services business in the late 1990s and early 2000s with a major buying spree. High prices and integration issues were major challenges for Cardinal Health, a concern of which Fisher and Aptuit managements are undoubtedly aware.
It's not clear to what extent the presence of these well-heeled and willing buyers will benefit investors in CMC development businesses that would be willing to be acquired. The multiples paid by Fisher Clinical, and the multiple paid by AmerisourceBergen in its recent acquisition of clinical packager Brecon Pharmaceuticals Ltd. (Hay-on-Wye, UK, www.breconpharm.com), suggest that there is big money to be made.
In the highly fragmented CMC development services sectors, though, few companies have the size and capabilities to be attractive acquisition candidates. And, the key players' strategies seem to vary sufficiently so they are unlikely to compete for many of their targets. Few acquirers seem interested in the API manufacturing companies that Aptuit is targeting, for instance.
Owners of private CMC services companies shouldn't be pricing private jets quite yet.
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, firstname.lastname@example.org.