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CRO Market Analysis – September 2016

Middle-market CROs continue to consolidate in order to expand their menu of service offerings

Over the past two years, valuations have remained consistently strong in the CRO industry. Since mid-2011 our CRO Index has risen 200% compared to a 79% increase in the S&P 500. Public company multiplies have been tracking at 2.4x revenue and 12.5x EBITDA while recent transactions have been tracking at 2.2x and 11.0x, respectively.

The CRO industry is expected to grow to $45.2 billion by 2020 at a compound annual growth rate of 6%.1 This growth is being driven both by an increase in venture capital investment in small biotech drug discovery firms and greater focus on research and development by larger pharmaceutical companies.

The largest volume of M&A activity in the CRO space has occurred in the middle market as smaller firms look for opportunities to expand their service offerings both locally and internationally. Consolidation has also been a way for firms to address high customer concentration. Through acquisition, companies are able to obtain new customers and offer a new breadth of services. The CRO market has recently become a major target for private equity, such as the acquisition of eResearchTechnology by Nordic Capital in March 2016 for nearly $1.8 billion. Recently there have been announcements by Advent, which is buying inVentiv Health for $3.8 billion, and Cinven, which is acquiring BioClinica for $1.4 billion.

Although smaller firms have dominated M&A activity, larger strategic players have also made significant acquisitions to gain market share and expand their clinical technology applications. The $13.6 billion acquisition of IMS Health Holdings by Quintiles, a provider of biopharmaceutical development and outsourcing, creates the largest global CRO and will enhance Quintiles’ offerings through IMS Health’s global information solutions for clients.

Over the past two years, Charles River Laboratories has completed five acquisitions to strengthen its service offerings and expand its geographical presence both in the United States and internationally. Through its acquisition of Oncotest in November 2015, it was able to reach new markets in Germany expand its reach in preclinical pharmacological services. In June 2016, the acquisition of Blue Stream Laboratories expanded its offerings in the contract analytical, formulations, and development-support laboratory services segments.

Pharmaceutical Product Development has also been active over the last two years with four acquisitions. Most notably, the $257 million of Synexus Clinical Research Topco helps PPD expand its presence in the U.K.

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