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The lack of biomanufacturer acquisitions seems surprising.
The nonclinical research business is much harder to consolidate than the contract clinical research industry, which is dominated by a few large contract research organizations (CROs). However, the realities of drug development are driving a new wave of consolidation activity among nonclinical CROs.
Thanks to a surge in mergers and acquisitions, two principal business models have emerged for nonclinical services: the "category killer" and the "integrated clinical supply chain." The two models embrace different strategies and target different customers.
Category killers build businesses that dominate specific service segments—like Home Depot's domination of the home improvement segment. Category killers are much larger and have more global capabilities than their smaller competitors, and they seek a competitive advantage from their economies of scale, specialization, and global scope. They appeal to major biopharmaceutical companies, which increasingly integrate vendors into their clinical and commercial supply chains.
Companies adopting the integrated clinical supply chain model offer clients a simplified, accelerated path from benchtop to clinic; they offer a "one-stop shop," providing process development, clinical trial material manufacture (for the drug substance and drug product), analytical testing, clinical packaging, and distribution. These integrated service providers target smaller biopharmaceutical companies focused on demonstrating proof-of-concept in early development as a basis for additional fundraising or out-licensing of a drug candidate.
Industry consolidation is also driven by private equity investors seeking to enter the drug development services business. Private equity investors are particularly attracted by the opportunity to "roll up" smaller companies into larger business units that might eventually be taken public. The fragmented nonclinical services industry appears well suited to that roll up strategy.
The archetype of the nonclinical "category killer" is Fisher Clinical Services (Allentown, PA, www.FisherClinicalServices.com), which dominates the clinical packaging and distribution business. Starting with its 2000 acquisition of Covance's clinical packaging operations, Fisher Clinical has built a business with revenues that PharmSource (Springfield, VA, www.pharmsource.com) estimates to be $250 million+; the company has also added operations in analytical services and biological sample storage.
Fisher Clinical recently acquired Clintrak Pharmaceutical Services (Bohemia, NY, www.clintrak.com), and its wholly owned clinical packaging subsidiary, Acculogix (Bristol, PA, www.acculogix-usa.com). Clintrak has been a long-time leader in production and a supplier of labels for clinical trial materials; Acculogix is recognized for the innovative software it developed to manage and track clinical packaging processes. In 2005, Fisher clinical acquired McKesson BioServices (now Fisher BioServices), a leading provider of clinical supplies distribution and biological specimen storage to the National Institutes of Health; and Lancaster Laboratories, a provider of analytical chemistry and microbiology services.
Fisher Clinical's strategy reflects the increasingly global nature of late-stage clinical research (clinical packagers generate the largest share of their revenues from large Phase 3 clinical trials) and efforts by big pharma companies to consolidate their supply base. To be a first-tier player, a clinical packager must have a global network of distribution points, sophisticated logistics knowledge (including systems for tracking inventories and shipments), and global regulatory expertise. Only a few companies have the scale and financial backing to meet those criteria.
SGS of Geneva, Switzerland, seeks to become a "category killer" in the analytical testing arena. Although the company maintains a low profile in the North American pharmaceutical marketplace, it is a significant player globally. SGS's Life Science Services business had 2005 revenues of CHF 125 million ($96 million). Revenues grew 18% last year, largely through organic growth, including 20% growth in its North American analytical labs.
The organization operates in a wide range of industry segments, including automotive, environmental, oil and gas, food, and other consumer segments.
In 2005, it opened analytical labs in India and Thailand, and new labs have opened this year in Singapore, Korea, and China. This multicontinent lab network is unique to the industry, and could give the company a leg up over other major contract labs as drug development becomes more global. According to SGS, the company signed a master services agreement with a top-5 pharmaceutical company in 2005 on the basis of its global capabilities.
Earlier this year, SGS acquired the analytical chemistry and microbiology testing business of Northview Biosciences (Northview, IL). Northview has operations in Northbrook, IL and Spartanburg, SC, where it employs about 100; last year the comany generated revenues of more than $10 million. The Northview operations joined SGS North American operations in Fairfield, NJ, and Mississauga, Ontario, Canada.
SGS also has a presence in clinical research, concentrating on the rapidly growing Phase 1/2a "proof-of-concept" segment. It owns a clinical pharmacology facility in Paris (through its acquisitions of aster.cephac earlier this year) and two in Belgium, giving it a total of 172 beds. It also has a bioanalytical lab in Poitiers (France).
Aptuit (Greenwich, CT, www.aptuit.com) has a stated objective of building an integrated clinical supply chain encompassing process development and manufacturing for active pharmaceutical ingredients and dosage forms, analytical services, and packaging, combined with sophisticated project management systems. Backed by the private equity firm of Welsh, Carson Anderson, and Stowe (New York, www.welshcarson.com), Aptuit began operations in 2005 by acquiring the nonclinical businesses of Quintiles Transnational Corpor-ation (Research Triangle Park, NC, www.quintiles.com) and clinical packager Almedica. It recently acquired clinical trial software developer InfoPro Solutions (Agoura Hills, CA). PharmSource estimates Aptuit has corporate revenues in the $250–$300 million range.
Aptuit has acquired only InfoPro thus far in 2006, but expects to acquire another company soon—probably one that specializes in the development and manufacture of small molecule active pharmaceutical ingredients (API). The company's strategy emphasizes API availability as a critical bottleneck that its business model intends to address, and it recently announced the appointment of a senior director of API development, despite the fact that it does not yet have API manufacturing capabilities.
Aptuit recently enlarged its treasure chest with a minority investment from Temasek Holdings Limited (www.temasekholdings.com.sg), a private investment company headquartered in Singapore. The Temasek investment may signal Aptuit's intention to build its development network in Asia. Temasek is part of a joint venture with Quintiles and drug distributor Interpharma to acquire and commercialize drugs for the Asian market.
Interestingly, the one development service that has been immune from the consolidation trend has been clinical-scale biomanufacturing. The last significant acquisition of a biomanufacturing operation was Cardinal Health's (Dublin, OH) acquisition of Gala Design in 2001. Most biomanufacturers remain as standalone companies. In fact, biomanufacturing has become even more fragmented as new biomanufacturers continue to enter the market at a fairly rapid clip. Recent entrants include Cytovance (Oklahoma City, OK), and Cook Pharmica (Bloomington, IN), QSV Biologics (Edmonton, Alberta), and Eden Biodesign (Liverpool, UK).
At first blush, the lack of biomanufacturer acquisitions seems surprising. API availability is the critical factor in drug development timing, so managing the API supply seems crucial to delivering other development services.
However, biomanufacturing involves specialized science and technology, which is beyond the scope of what most nonclinical development executives are accustomed to managing. In that respect, CRO executives are hesitant to acquire a business they really don't understand.
Jim Miller is president of PharmSource Information Services, tel. 703.383.4903, Fax 703.383.4905, Jim.Miller@pharmsource.com