PPD‘s (NYSE:PPDI) founder and former CEO Fred Eshelman launched Pharmaceutical Product Development out of his Maryland home in 1985. Twenty six years later, the company Eshelman started as a one-man consultancy is set to be sold for just shy of $4 billion.
Wilmington, North Carolina clinical research organization PPD announced today private equity firms The Carlyle Group and Hellman & Friedman have reached a definitive agreement to acquire the CRO for $3.9 billion. PPD may seek other buyers for the next 30 days and if there is a better offer, the private equity firms have the right to match it. But another suitor is not expected. PPD was already one of the CRO industry’s largest players, making an offer from another CRO unlikely from the start. Going with another buyer would also incur its other costs: If PPD terminates its deal with Carlyle and Hellman & Friedman in favor of a better offer, it’s on the hook for a $58 million termination fee, according to the merger agreement. If the deal is terminated for any other reason, that termination fee doubles.
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Carlyle reportedly emerged as the leading private equity suitor for PPD in August, beating out other private equity firms including Blackstone Group (NYSE:BX), KKR & Co. and Hellman & Friedman. In the end, Carlyle would team with Hellman & Friedman to get the PPD deal done.
The announcement of PPD’s sale follows months of speculation that started in July amid reports that the North Carolina CRO was being shopped around. Eshelman responded to those reports by saying that PPD is “not engaged in any discussions around a combination with other clinical research providers. We remain laser-focused on executing our business and serving our customers with the quality and service they expect and deserve.” But Eshelman’s carefully worded statement said nothing about private equity.
Bloomberg News in August reported that PPD had solicited private equity offers for the company. The bids were between $33 and $38 a share, valuing the company at as much as $4.3 billion. Bloomberg had reported that Carlyle emerged as the leading bidder for the CRO but the deal ultimately fell short of that $4.3 billion price.
“I’m relieved that they got a deal done and were able to come to a conclusion on price,” David Windley, an analyst at Jefferies Group Inc. in Nashville, Tennessee, told Bloomberg News. “That the price was at the lower end of the forecast range is driven by challenges in financing market.”
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Morningstar analyst Lauren Migiliore believes the CRO industry is undervalued. In a report released this morning, she said that market uncertainty has pushed down the values of CRO stocks. But she expresses optimism for CROs’ long term prospects, particularly large CROs that have developed partnerships with the biggest pharmaceutical companies. Morningstar expects drugmakers to outsource an increasing part of their R&D budgets to select CROS.
“We think the industry’s leading players – with their global scale and service breadth – have dug themselves narrow economic moats and will benefit from these trends over the long run,” she wrote.
PPD will become a private company under a new CEO. Ray Hill, formerly of IMS Health, was named PPD’s new CEO late last month bringing to the CRO his international experience and an understanding of emerging markets. After the announcement was made, William Blair analyst John Kreger told MedCity News he did not think an acquisition announcement was expected soon because it’s unlikely that the company would make two major announcements in close together. Many other analysts also took Hill’s appointment as a sign a deal was not imminent. But Kreger also said a new chief executive could be one of the conditions for a sale. As it turns out, the deal was close to consummation than many had expected.
Private equity’s interest in the CRO space has picked up in that last two years. The firms see the growing pharmaceutical outsourcing trends as financial opportunities. They want to make the most of those opportunities by owning and dealing pieces of the CRO sector. The deals likely aren’t over. Many of the small and mid-sized CROs are trying to get bigger; the big CROs are angling for the right pieces to make them attractive to pharma companies.
Perhaps overshadowed by all of the attention given to PPD is a possible deal involving another North Carolina CRO. Raleigh-based PRA International was reportedly being shopped for sale during the summer. Carlyle was involved with PRA having taken a stake in the company in 1996. PRA went public in 2004 before being taken private again by another private equity firm, Genstar, which bought the CRO in 2007 for $797 million.
Another PRA sale could be imminent. The Wall Street Journal, citing unnamed “people familiar with the matter,” reported today that PRA’s auction is drawing to a close. An announcement could be made in coming weeks. The expected price? More than $1 billion.