In a report last week, the Wall Street Journal claimed that top-tier CRO PPD might be putting itself on the block; in a statement, PPD responded that it is not contemplating mergers with other CROs. But what about a probable take over by private equity firms?
Remarkably, the company did not make a statement on that that issue. Private equity firms would be the most probable buyers even if PPD were to sell itself. Financial analyst at William Blair, John Kreger wrote: “Recent deal flow would suggest financial buyers are far more likely than strategic ones to be attracted to this sort of transaction. If PPD does opt to consider a sale, we suspect it would most likely partner with a private equity buyer.”
Kreger also wrote that after Quintiles and Covance, Wilmington-NC based PPD is already the third biggest CRO in the market and only a few other CROs are large enough to buy out a giant CRO like PPD. Buying a hefty CRO like PPD would be pointless because those CROs that are big by definition are already scaled up to compete for strategic partnerships with big pharmas. Kreger added: It would be difficult to integrate PPD’s unique flat management with another large CRO.
An acquisition by a private equity firm would gel in with recent industry activity wherein a number of mid-tier CROs have been taken over by investors. Nevertheless, this CRO is gigantic with 11,000 employees spread across the globe encompassing contracts that made $1.5 billion in revenue last year, which makes PPD far from being a mid-tier CRO.
PPD shares rose 16% the morning after rumors has scaled off, touching levels that were not witnessed in more than two-and-a-half years. The shares closed up 10% last Monday. The rumors were attributed to unnamed sources by the Wall Street Journal story.
PPD could gain about $35 to $39 a share or nearly $4 billion as determined by analysts. The company which mostly provides late-stage drug research services has a market capitalization of $3.15 billion.
The credit crunch caused a terrible hit to the entire research sector with several research-stage biotechs going belly up or halting specific drug programs. But the industry is finally witnessing recovery in bookings.
However, having lost 12% of its share value owing to a weak quarterly profit in April, PPD’s valuation has taken a hit over the past quarter and is hurt by higher cancellations.
While PPD did not comment on its talks to private equity investors or anyone else regarding a sell-off, the company in its statement said that its “board of directors has asked management to review PPD’s strategic plan and capital structure with a focus on unlocking value for shareholders.”
A consultant to the CRO industry and director at investment banking firm Fairmount Partners, Michael Martorelli, said: That statement is a bit perplexing. It’s curious that they talked about unlocking shareholder value; you usually only do that when you’re a multi-division company with multiple revenue lines and Wall Street isn’t giving you what you think is full credit for one of your revenue lines.”
Martorelli pointed to PPD’s spin-off of its compound partnering division Furiex Pharmaceuticals last summer, before which PPD’s language was similar. Could PPD be preparing to spin off a division or two, rather than sell itself?
He said: But the one clear thing is that times are changing rapidly in the healthcare sector, and one must think more expansively when trying to determine who might want to/be able to buy a CRO as large as PPD.
Martorelli suggested looking at large healthcare-focused corporations such as McKesson rather than focusing only on pure-play private equity firms. McKesson is the top 15th ranked Fortune 500 drug-distribution corporation. He said, McKesson recently procured an oncology-focused practice management firm, and it wouldn’t be long before it ventures out to add a clinical research wing to its portfolio. Also consider huge pharmacy benefits manager Medco Health Solutions, which bought United BioSource last year, or one of the many large Indian healthcare companies that combine services such as contract manufacturing with labs and drug development (such as Piramal Healthcare or Jubilant Life Sciences).
Martorelli said: “Look at any list of publicly held healthcare service companies and you might speculate: Does Baxter need to buy a CRO? Does this hospital group need to buy a CRO? I wouldn’t necessarily predict it, but I wouldn’t be surprised by it, either.”
He said, thinking a few years out is the key. “Even if you think it’s a crazy idea, there’s so much that’s going to change in the healthcare sector in the next two to four years,” he said. “There might be all sorts of new partnerships that might not look like they make sense today, but may make