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CRO Market Analysis – June 2017

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-2012 our CRO Index has risen 240% compared to an 85% increase in the S&P 500. Public company multiplies have been tracking at 2.6x revenue and 13.5x EBITDA while recent transactions have been tracking at 3.5x and 12.5x, 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 acquisitions, 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, and the purchase of BioClinica by Cinven for $1.4 billion in October 2016. Advent International and Thomas H. Lee bought inVentiv Health for $3.8 billion in November 2016, but just six months later, in May 2017, INC Research and inVentiv announced a merger to form the second largest biopharmaceutical outsourcing provider with an enterprise value of $7.4 billion. Advent and Thomas H. Lee remain shareholders.

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 in October 2016, a provider of biopharmaceutical development and outsourcing, created the largest global CRO and will enhance Quintiles’ offerings through IMS Health’s global information solutions for clients.

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