Buying into a Hot Market
Recent deals suggest companies are willing to pay up to get into CMC services.
Demand for drug development services remains intense, and companies are paying up to get into the market. In the first quarter of 2006, three deals were announced: the acquisitions of Northview Biosciences (Northbrook, IL, www.northviewlabs.com) and aster.cephac (Paris, France, www.aster-cephac.com) by SGS (Geneva, Switzerland, www.sgs.com), and the purchase of Brecon Pharmaceuticals, Ltd. (Hay-on-Wye, UK, www.breconpharm.com) by AmerisourceBergen Corporation (Chesterbrook, PA, www.amerisourcebergen.com). The nature of these deals tells us a lot about how badly companies want to get into the sector.
Jim Miller
SGS acquired Northview's analytical chemistry and microbiology testing business in February. Northview has operations in Northbrook, Illinois and Spartanburg, South Carolina, where it employs approximately 100 staff members and generated revenues of more than $10 million this past year. The acquisition price was not disclosed. Northview joined established SGS North American operations in Fairfield, New Jersey, and Mississauga, ON, Canada.
SGS chose not to acquire Northview's preclinical animal testing business, which operates from a facility in Hercules, California. It has been retained by Northview's owners, the Spaulding family, and will continue operations as Pacific BioLabs.
SGS acquired the clinical contract research organization aster.cephac in January. The company operates an 80-bed clinical pharmacology (Phase I) facility in Paris, France and a bioanalytical laboratory in Poitiers, France that SGS claims is the largest independent bioanalytical laboratory in Europe. aster.cephac had revenues of more than 35 million in 2005, and 300 employees. The acquisition price was not disclosed.
Growing life sciences presence
SGS has remained under the radar in the North American pharmaceutical marketplace, but it is a significant global player. SGS's Life Science Services business earned $96 million in revenues in 2005. Revenues were up 18% this past year, largely through organic growth, including a 20% boost in its North American analytical laboratory. Operating income grew 50% to $14.6 million.
In clinical research, SGS has concentrated on the growing Phase I–IIa, proof-of-concept segment. In addition to aster.cephac's Paris facility and Poitiers bioanalytical laboratory, it has two clinical pharmacology facilities in Belgium, for a total of 172 beds.
A global testing powerhouse, SGS generated $2.5 billion in revenues with profits of $285 million in 2005. It operates in a wide range of industry segments, including the automotive, environmental, food, and other consumer segments, and it has actively acquired additional companies.
SGS also is establishing a global footprint in its testing business. In 2005, it opened analytical laboratories in India and Thailand, and new laboratories are set to open in Singapore, Korea, and China in early 2006. This multicontinent laboratory network is unique in the industry, and could give the company a leg up over other major contract laboratories as drug development becomes more global. The company said it signed a master services agreement with a top-five pharmaceutical company in 2005 on the basis of its global capabilities.
AmerisourceBergen adds European outpost
AmerisourceBergen paid $49 million for Brecon—more than twice Brecon's 2005 revenues of $22 million—with the possibility of another $19 million if Brecon reaches certain performance milestones. AmerisourceBergen is a major pharmaceutical distribution services company and a chief rival of Cardinal Health, Inc.
Brecon offers packaging services, and is focused in the clinical trial supplies segment. Its capabilities include blister and bottle packaging, labeling, overencapsulation, analytical services, and storage and distribution. In addition, it provides qualified Person Services for the release of imported drugs into the European Union. It operates in a 90,000-ft2 facility (including a recently-opened 45,000 ft2-addition) near the England–Wales border.
Brecon joins Anderson Packaging (Rockford, IL, www.andersonpackaging.com) in AmerisourceBergen's packaging services line-up. Anderson, acquired by AmerisourceBergen in 2003, is a major contract pharmaceutical packager focused primarily on commercial packaging. It has capabilities for bottle, blister, pouch, and specialty packaging forms, as well as secondary packaging.
Big companies, small deals
Although the deals were small, SGS and AmerisourceBergen clearly expect to gain strategic value from their acquisitions. For SGS, Northview's existing client relationships should help increase its presence in a market in which it has had little visibility. For Amerisource-Bergen, the establishment of a European outpost should open a variety of new business opportunities in a market in which it previously had no presence.
The Northview and Brecon deals illustrate a dilemma facing companies seeking a position in the nonclinical pharmaceutical services sector—few opportunities exist to acquire companies of significant size and market share. Despite recent industry growth, nonclinical services remain a highly fragmented industry, in which a big player is a company with $25 million or more in revenues. As a result, acquirers can end up paying high multiples for companies that make relatively small financial and strategic contributions to their base businesses.
The problem is compounded by the fact that the greatest economies of scale in nonclinical services accrue at the facility level. In other words, companies get the most operating leverage by running as much volume as possible through a single location, in which they can spread GMP-related infrastructure costs and compliance overhead across a large volume of projects. In its Northview acquisition, SGS bought two sites with an average of just $5 million in revenue per site. By contrast, industry leaders such as Lancaster Laboratories (Lancaster, PA, www.lancasterlabs.com) and PPD, Inc. (Wilmington, NC, www.ppdi.com) probably run 10 times that volume through their single sites.
Several large, nonclinical CROs were sold in 2005. Aptuit (Greenwich, CT, www.aptuit.com) bought the nonclinical business of Quintiles Transnational Corp. and clinical packager Almedica; Fisher Clinical Services (Allentown, PA, www.fisherclinicalservices.com) bought Lancaster Laboratories and McKesson BioServices. In a deal that attracted little notice in North America, Group Unither (Amien, France), a contract manufacturer of liquids using blow-fill-seal technology, acquired a 50% interest in Creapharm (Longjumeau, France).
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, info@pharmsource.comwww.pharmsource.com.
