CONTRACT RESEARCH ORGANIZATIONS INDUSTRY OVERVIEW April 2014
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k
Number of Compounds:
5,000 – 10,000 250 5
Discovering and developing safe and effective pharmaceuticals is a challenging undertaking that can take 10 to 15 years and cost $1.0 to $1.5 billion.
The drug development process requires sophisticated technology and a broad array of medical and laboratory expertise, which include:
• Disease target identification
• Preclinical evaluation
• Toxicology and safety testing
• Clinical trial design and implementation
For every 5,000 to 10,000 potential compounds that are evaluated, ultimately only one receives approval from the FDA.
Sources: Equity research and innovation.org.
DRUG DISCOVERY AND DEVELOPMENT PROCESS
DRUG DISCOVERY AND DEVELOPMENT PROCESS
3 - 6 years 6 – 7 years 0.5 – 2 years
Drug Discovery Pre-Clinical Clinical Trials FDA Review Manufacturing
Number of Volunteers
20 - 100 100 - 500 1,000 – 5,000
Inve
stig
atio
na
l N
ew
Dru
g (
IND
)
Ap
plic
atio
n S
ub
mitte
d
Ne
w D
rug
Ap
plic
atio
n (
ND
A)
Su
bm
itte
d
Pre
-Dis
co
ve
ry 1 FDA
Approved
Drug
Indefinite
Post-Approval
Phase I Phase II Phase III Phase IV
Given the cost and time to develop drugs, pharmaceutical manufacturers and biotechnology companies are increasingly outsourcing development activities to remove fixed costs and gain efficiencies.
1
Contract Research Organizations (“CROs”) offer outsourced services to support R&D functions for pharmaceutical, biotechnology, and medical device companies.
CRO services span the range of research and development (“R&D”) activities including: drug discovery, pre-clinical (pre-human in-vitro and in-vivo animal research model), and clinical (in-human) testing.
Growth in the CRO market will be driven by:
• Growth in R&D spend
• Increased outsourcing of R&D activities
Source: Equity research estimates.
CONTRACT RESEARCH ORGANIZATIONS
CRO MARKET GROWTH CRO CORE SERVICES
• Research model production and services
• Discovery services
• Toxicology studies
• Bioanalytical services
• Central laboratory
• Investigator and patient recruitment
• Site monitoring
• Data management services and technology
• Safety and pharmacovigilance
• Study and development program design and consulting
• Regulatory affairs advisory and a variety of post-marketing
surveillance and consulting services
$5.4 $5.8 $6.2 $6.7 $7.2
$19.9 $21.2 $22.5 $24.0
$25.5
$25.3 $27.0
$28.8 $30.6
$32.7
$0
$5
$10
$15
$20
$25
$30
$35
$40
2013 2014E 2015P 2016P 2017P
Pre-clinical Clinical
For the Years Ended and Ending December 31, 2013 to 2017P
($ in billions) '13 - '17P CAGR
Total: 6.6%
Clinical: 6.4%
Pre-clinical: 7.4%
2
1
2
After experiencing a significant loss of branded sales over the last five years, pharmaceutical manufacturers have seen an uptick in new drug approvals.
From 2010 – 2012, approximately $65 billion of branded drugs came off patent protection.
• Pharmaceutical companies looking to stabilize profitability levels and maintain operating margins have introduced cost saving initiatives with R&D being a core target
• In addition, pharmaceutical companies shifted focus to late stage R&D development in an effort to drive drugs to market and replace lost revenue
− Early stage CROs experienced significant pricing pressure that began to stabilize in 2013 as capacity levels stabilized with some larger pre-clinical players closing capacity
39 compounds were approved by the FDA in 2012 that are expected to generate $16 billion in sales in the fifth year after launch.
Sources: Equity research, EvaluatePharma, and FDA.
GROWTH IN R&D SPEND SLOWING PATENT CLIFF AND INCREASED DRUGS APPROVALS…
For the Years Ended and Ending December 31, 2007 to 2022P
($ in billions)
3
1
BRAND SALES AT RISK INCREASE IN APPROVALS
$11.2
$14.7 $13.2
$15.1 $15.3
$34.7
$9.8
$14.5
$22.2
$11.8
$8.2 $9.0
$4.1 $2.1
$6.0 $7.2
$0
$5
$10
$15
$20
$25
$30
$35
$40
For the Years Ended and Ending December 31, 1999 to 2012
($ in billions)
$7 $8
$9
$13
$8
$15
$7
$9
$5 $5
$6
$11 $10
$16
0
5
10
15
20
25
30
35
40
45
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
USA Sales 5 Years After Launch Number of NMEs Approved
Moderate global prescription drug sales growth is driving a 1.4% annual increase in R&D spend from $137 billion in 2012 to $149 billion in 2018P.
Improving FDA approval levels and positive sales outlook are allowing pharmaceutical companies to allocate more capital to R&D spending.
CROs are poised to provide the scientific expertise and infrastructure necessary to drive new drug candidates through the development process as the funding environment for biotechnology companies improves.
• The first half of 2013 yielded 16 biotechnology IPOs that raised $1.2 billion in capital
Source: EvaluatePharma.
GROWTH IN R&D SPEND …DRIVING SALES GROWTH AND MODEST R&D SPEND GROWTH
PRESCRIPTION DRUG SALES GROWTH PHARMACEUTICAL R&D SPEND
$716 $743
$771 $800
$831 $862
$895
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2012 2013 2014E 2015P 2016P 2017P 2018P
$137
$139
$141
$143
$145
$147
$149
$130
$132
$134
$136
$138
$140
$142
$144
$146
$148
$150
2012 2013 2014E 2015P 2016P 2017P 2018P
3.8% CAGR 1.4% CAGR
For the Years Ended and Ending December 31, 2012 to 2018P
($ in billions)
For the Years Ended and Ending December 31, 2012 to 2018P
($ in billions)
4
1
Increasingly complex protocols are driving increases in clinical trial costs, making it more difficult for pharmaceutical companies to recoup R&D investment and driving outsourcing.
Significant increases to drug development costs are driven by:
• Increasing complexity of clinical trials
• Greater number of regulatory hurdles
• Investment in state-of-the-art technology
A growing number of pharmaceutical companies are partnering with CROs who have the required infrastructure and expertise to manage costs and deadlines.
By outsourcing a portion or all of the drug development process to CROs, pharmaceutical companies can more easily manage costs by converting fixed costs into variable costs.
Sources: Equity research and PhRMA.
INCREASED OUTSOURCING NAVIGATING COSTS AND COMPLEXITY
COST PER NEW APPROVED DRUG
$140
$320
$800
$1,200
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
Mid 1970s Mid 1980s Late 1990s Early 2000s
($ in millions)
857% Increase
5
2
Clinical trials are increasingly becoming global, placing a premium on CROs having global capabilities to serve their client’s needs across geographies.
Increased globalization of clinical trials is being driven by numerous factors:
• Increased speed of enrollment
• Faster approval of trials
• Access to global populations
• Cost considerations
• Involving local populations is subjected to local regulatory requirements
• Maximizing the value of R&D spend by receiving regulatory approval from several countries
Note: CRO index includes Albany Molecular Research, Charles River Laboratories, Covance, ICON, PAREXEL, Quintiles, and WuXi PharmaTech. Sources: Public filings and equity research.
INCREASED OUTSOURCING INTERNATIONAL REACH
CRO GEOGRAPHIC REVENUE MIX
For the Years Ended December 31, 2004 to 2013
40%46% 46% 48% 50% 51% 53% 54% 54% 57%
60%54% 54% 52% 50% 49% 47% 46% 46% 43%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
International U.S.
6
2
Pharmaceutical companies will increasingly rely on the robust infrastructure and clinical expertise of CROs as specialty drugs become a larger portion of the market.
Approximately 8% of approved and marketed products today are specialty drugs, but it is estimated that over 42% of drugs in the development pipeline are specialty drugs.
Outsourcing will be more important than ever to pharmaceutical companies as specialty drugs require highly tailored clinical trials and specific scientific expertise which significantly increase costs.
• Experience with biomarkers, genomics, companion diagnostics, and delivery routes will differentiate top-tier CROs
The number of specialty drugs in the market is expected to increase 19% over its 2011 level to 42% in 2016P.
Sources: Equity research and Omnicare, Inc. 2012 analyst day event data.
INCREASED OUTSOURCING GROWTH IN SPECIALTY DRUGS
SPECIALTY DRUGS IN THE MARKET IN 2011 SPECIALTY DRUGS IN THE MARKET IN 2016P
Specialty
Drugs
23%
Traditional
Drugs
77%
Specialty
Drugs
42%
Traditional
Drugs
58%
For the Year Ended December 31, 2011 For the Year Ending December 31, 2016P
7
2
CROs have evolved from being a provider of additional capacity to being an integral element in the drug discovery and development process. CROs arose in the 1970s to provide spill-over capacity for a limited group of services.
• Data management, clinical site monitoring, and biostatistical analysis
• Not viewed as strategic partners due to concerns over quality of work and scientific expertise
In the 1980s, rising development costs forced pharmaceutical companies to partner with CROs to increase efficiency and lower the overall cost of bringing a drug to market.
To further improve profitability levels and reduce margin pressure, pharmaceutical companies began utilizing preferred provider lists in the early 2000s and more recently creating strategic partnerships with CROs.
Source: Equity research.
INDUSTRY EVOLUTION
1980s – 1990s Early 2000s Mid 2000s - Today
Transactional / Functional Service Provider Preferred Vendors Strategic Partnerships
• CROs are mainly used as spill-over
capacity for pharmaceutical
companies
• CROs began expanding their
portfolio of offerings to become a
broader provider of services
• The performance of the CRO
industry suffered due to pharma /
biotech consolidation
• Rise of the pharma / biotech
companies that utilize CROs for
strategic outsourcing
• Consistent demand from clients
and profitability levels allow CROs
to improve scale
• Pressures from the recession,
pharma / biotech consolidation,
and pipeline rationalization
depresses industry growth
• Reduction of internal capacity
levels at pharma companies and
growth in strategic partnerships
drive outsourced penetration
• Numerous CRO IPOs • Glaxo / SmtihKlineBeecham and
Pfizer / Pharmacia mergers
• Quintiles taken private in 2003
• Big Pharma mergers in ’08 and ’09
• Several CROs are taken private
• Rise of the strategic partnership
model
Ev
en
ts
Sy
no
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s M
od
el
8
Strategic partnerships with big pharmaceutical companies are driving market share gains for top-tier CROs.
Large pharmaceutical and biotechnology players have recently moved away from using preferred provider lists and have shifted toward creating strategic partnerships with only one or two CROs.
• Over 50% of biopharmaceutical companies use less than 5 preferred providers
• Approximately 50% of potential partnerships have already been awarded
• Partnership agreements do not include minimum purchase commitments
Given the level of investment needed to transition protocols to CROs, typical strategic partnership relationships are considered to be sticky with contract terms ranging from 3 to 5 years, leading to increased visibility.
Sources: ContractPharma 2013, company data, and equity research.
STRATEGIC PARTNERSHIPS
NUMBER OF PREFERRED PROVIDERS USED KNOWN STRATEGIC PARTNERSHIPS
None
6%
1 - 5
51%
6 - 10
25%
11 - 15
8%
16+
10%
Date Announced CRO Partner
July-13 Quintiles Ascendancy Healthcare
May-13 Quintiles Merck
April-13 Lab Corp / Quintiles Bristol-Myers Squibb
October-12 Charles River Laboratories AstraZeneca
May-12 Covance Bayer Healthcare
April-12 PRA International Amgen
August-11 ICON Bristol-Myers Squibb
May-11 ICON / PAREXEL Pfizer
February-11 Covance / Quintiles Takeda
February-11 Pharmaceutical Product Development Elan
January-11 PAREXEL Merck
September-10 Covance Sanofi-Aventis
September-10 PAREXEL / Pharmaceutical Product Development GlaxoSmith Kline
September-10 PAREXEL Eli Lilly
June-10 ICON / PAREXEL Bristol-Myers Squibb
November-09 Quintiles AstraZeneca
November-09 ICON Eli Lilly
July-09 Covance Merck
June-09 ICON Eli Lilly
August-08 Covance Eli Lilly
Trend towards strategic partnerships will continue to drive strategic M&A as larger CROs attempt to fill out their full spectrum of service offerings.
9
HW&Co. expects continued M&A activity as CROs fill out their service offering across the drug development spectrum and position themselves for strategic partnerships.
Source: Equity research.
CRO SERVICE OFFERING
KEY PLAYERS AND SERVICES OFFERED
Early Stage Late Stage Other
Pre-Clinical Clinical Peri-Approval
Research Models Discovery Services Chemistry Bioanalysis Toxicology Phase I Phase II Phase III Central Lab Imaging Phase IV Consulting CSO / Commercialization
Publically Traded CROs
Charles River P P P P P P
Covance P P P P P P P P P P P P P
ICON P P P P P P P P P P
Lab Corporation P
PAREXEL P P P P P P P P P
Quest Diagnostics P
Quintiles P P P P P P P P
WuXi P P P P P P P P
Private CROs
Celerion P P P P
Harlan Sprague P P P P
INC Research P P P P P P P
inVentiv P P P P P P
MPI Research P P P P P
PPD P P P P P P P P P P
PRA International P P P P P P
Ricera Biosciences P P P P
Taconic P
WIL Research P P P P
10
0%
100%
200%
300%
400%
500%
600%
700%
S&P 500 CRO
Despite encountering several instances of volatility, the CRO industry has trended upward and outperformed the broader market over the last decade.
Sources: Equity research and Capital IQ.
MARKET PERFORMANCE
CRO MARKET PERFORMANCE
For the Years Ended December 31, 1999 to 2013 and Three Months Ended March 31, 2014
Concerns over big pharma
consolidation arise due to Pfizer /
Pharmacia merger
Continued bookings and
revenue growth led to rally
In a limited funding environment with foreign exchange headwinds,
concerns over pharma and biotech consolidation re-appear
Quintiles completes its second IPO since
1982
Significant increase in the number of
CRO strategic partnerships
11
15.5x14.1x 13.9x
12.9x 12.3x 11.6x10.0x
0x
6x
12x
18x
WuXi PharmaTech Quintiles Covance ICON Charles River
Laboratories
PAREXEL Albany Molecular
Research
(1) Market capitalization weighted. Sources: Capital IQ and company filings.
MARKET VALUATION – PUBLIC COMPANIES
TEV / EBITDA – CURRENT TRADING PERFORMANCE
($ in millions)
FIVE-YEAR TRADING STATISTICS (INDEXED TEV / LTM EBITDA)1 COMPARABLE COMPANY TEV / LTM EBITDA1 (’09 – ’14)
Enterprise Value
Revenue
Three-Year Revenue CAGR
EBITDA Margin
$2,196
578
20.1%
25.4%
$7,831
3,808
7.6%
14.6%
$5,040
2,402
7.7%
15.1%
$2,277
1,336
14.1%
13.2%
$3,242
1,166
0.9%
22.1%
$2,837
1,854
15.3%
13.1%
$472
247
7.6%
19.1%
CONTRACT
RESEARCH
ORGANIZATIONS
14.6x 5.9x
5-Year
Min
5-Year
Max
Current
13.4x
5-Year
Median
9.8x
4x
8x
12x
16x
Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14
S&P 500 Index CRO Comparables Index
Median: 12.9x
12
15.9x
12.0x
10.5x
12.0x11.1x
9.0x
13.4x
10.4x
14.3x15.1x
8.7x 8.6x
0x
2x
4x
6x
8x
10x
12x
14x
16x
18x
1 2 3 4 5 6 7 8 9 10 11 12
EV
/ L
TM E
BIT
DA
CRO transactions have traded at a median 11.6x LTM EBITDA multiple.
Sources: Capital IQ, company filings, and press releases.
OVERVIEW OF PRECEDENT COMPARABLE TRANSACTIONS
Median: 11.6x
($ in millions)
Enterprise
Value
Target
Acquirer
Date
Aptiv
Solutions
ICON
Pending
$143.5
Galapagos
Charles
River
Mar-14
$134.0
BioClinica
JLL
Partners
Mar-13
$108.2
Liquent
PAREXEL
Dec-12
Confidential
Caprion
Chicago
Growth
Jul-12
eResearch
Technology
Genstar
Capital
Jul-12
$377.0
SeraCare
Linden
Apr-12
$62.6
PPD
H&F
and
Carlyle
Dec-11
$3,394.5
Kendle
INC
Research
Jul-11
$348.3
ReSearch
Pharma
Warburg
Pincus
Feb-11
$253.9
inVentiv
Health
THL
Partners
Aug-10
$1,189.0
PharmaNet
JLL
Partners
Mar-09
$188.0
HW
&C
o.
Co
nfid
en
tia
l
HW
&C
o.
Co
nfid
en
tia
l
13
Confidential
HW
&C
o.
Co
nfid
en
tia
l
Sources: Capital IQ, company filings, and press releases.
OVERVIEW OF UNDISCLOSED PRECEDENT COMPARABLE TRANSACTIONS
($ in millions)
14
Enterprise
Target Acquirer Date Value
Lifetree Clinical Research PRA International Pending --
Medpace Cinven Limited Pending --
ReSearch Pharmaceutical Services PRA International Sep-13 --
Novella Clinical Quintiles Sep-13 $167.5
PRA International KKR Jun-13 --
HERON Group Limited PAREXEL Apr-13 38.1
ClinStar PRA International Mar-13 --
Vital River Laboratories Charles River Laboratories Jan-13 35.7
Accugenix Charles River Laboratories Aug-12 17.0
BioReliance SAFC Jan-12 353.0
PharmaNet Development Group inVentiv Health Jul-11 600.0
i3 Clinical Development inVentiv Health Jun-11 140.0
Lifetree Clinical Research CRI Worldwide Jan-11 --
INC Research Teachers' Private Capital; Avista Capital Aug-10 --
BioDuro Pharmaceutical Product Development Nov-09 78.5
Excel PharmaStudies Pharmaceutical Product Development Nov-09 21.7
MDS Pharma Services INC Research Jul-09 50.0
Piedmont Research Center Charles River Laboratories International May-09 46.0
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DISCLOSURES
15
