Thomas H. Lee Partners Ramps Up inVentiv

Who’s the most acquisitive private equity-backed company of all?

Over the last 18 months it may well have been Thomas H. Lee Partners’s inVentiv Health Inc., a provider of marketing, public relations and clinical services to pharmaceutical, biotechnology and medical device companies.

The Boston-based buyout shop—which had sought to buy the company as far back as in 2008 but couldn’t agree on price—took the company private in August 2010 for around $1.1 billion. Thomas H. Lee put up about $396 million equity in a deal that was leveraged at some 5.25x the company’s estimated EBITDA. The investment came out of the 38-year-old firm’s $10.1 billion sixth fund, raised in 2006.

Since then, the Somerset, N.J.-based company has been on a veritable deal spree, completing no less than eight acquisitions in the United States and Europe and greatly expanding its ability to manage clinical trials. And inVentiv isn’t done: Its ongoing expansion strategy includes possible acquisitions in China, Japan, India and South America.

“We are focused on expanding inVentiv’s global footprint,” Todd Abbrecht, a managing director with Thomas H. Lee who leads the investment, told Buyouts.

Thomas H. Lee’s rapid build-up highlights the interest private equity firms have in companies that provide outsourced clinical trials, marketing and other services for to pharmaceutical, biotech and medical device companies. Meantime, inVentiv and other companies, often called contract research organizations, or CROs, are rapidly consolidating to meet the growing desire to outsource these services to fewer companies.

The price for inVentiv’s three major add-ons, all completed in 2011, taken together, alone equals roughly the price that Thomas H. Lee—which contributed an extra $75 million for the add-on campaign—paid for the parent. In February, inVentiv bought Campbell Alliance Group Inc., a consultant to the pharmaceutical and biotech industry, for $140 million; in June, it bought i3, a CRO, for $400 million; and in July, it bought PharmaNet Development Group Inc., a provider of drug development services, for $600 million.

The sector will continue to be fertile ground for private equity deals over the next few years. For one, the market remains ripe for consolidation, with hundreds, if not thousands, of smaller, niche CROs in the market specializing in various stages of product development. For CROs looking to expand and diversify, private equity firms can provide the needed capital to make acquisitions. Also attractive: CRO companies don’t require significant capital to operate and can carry a good amount of debt.

Indeed, shares of Charles River Laboratories, a publicly traded CRO based in Wilmington, Mass., were up in early trading on Jan. 11, just before deadline, after DealReporter said the company is pursuing a sale (though a Robert W. Baird report noted that the company has been apprehensive about selling to private equity firms).

“It doesn’t require much capital to generate the EBITDA that these companies do,” Abbrecht said.

The Rationale

Thomas H. Lee, which has raised more than $22 billion since its founding in 1974, and today has more than 62 investment professionals, has milled around the pharmaceutical services sector for more than a decade. Past investments include Fisher Scientific International Inc., a provider of chemicals, safety products, lab supplies and other products and services. The firm currently owns Warner Chilcott, which markets and manufactures pharmaceutical products used by women.

In recent years, Abbrecht and his colleagues have become increasingly drawn to the CRO space. For one, you have the demographic trends driving just about every investment in health care today: the aging population of baby boomers in the United States, which means more users of pharmaceutical drugs and medical devices.

In a September 2011 report, Citigroup Global Markets said that pharmaceutical and biotech companies globally outsource about 20 percent to 30 percent of their research and development, creating a market for CROs of roughly $20 billion. The top 12 or so companies control about 60 to 65 percent of the market, according to the investment bank Robert W. Baird & Co. Citi said that as much as 60 percent of R&D at these companies could be outsourced in what it deemed a conservative estimate.

“The top-tier CRO market could grow more than 100 percent in the next five years,” the report stated.

To be sure, the industry faces many headwinds as well, said Robert W. Baird’s Coldwell. Large pharmaceutical companies—facing a cliff of expiring drug patents and other pressures—are continually repositioning themselves and merging with other companies, which often results in dropped drug trials, changes in CRO vendors and other disruptions. Abbrecht and his colleagues believe that inVentiv’s size and the wide-ranging services it provides will allow it to nimbly adjust to these changes.

Private equity firms interested in buying smaller CROs should also be wary of them being overly dependent on few customers, although a single client usually generates less than 10 percent of the revenue for larger CROs like Quintiles Transnational Corp. or inVentiv, according to Coldwell.

And competition for deals is fierce. Last year, Warburg Pincus LLC bought ReSearch Pharmaceutical Services Inc., a Fort Washington, Pa.-based CRO, for $230 million. In one of the biggest buyouts of last year, The Carlyle Group and Hellman & Friedman LLC took Pharmaceutical Product Development Inc., a Wilmington, N.C.-based CRO, private for $3.9 billion, a purchase price that represented 10.8x the company’s projected 2011 EBITDA of $312 million. inVentiv reportedly looked into bidding on the company but ultimately did not.

And in 2010, Avista Capital Partners and Teachers’ Private Capital bought INC Research Inc., a Raleigh, N.C.-based CRO in a deal reportedly valued at $600 million; the company has since completed three add-on acquisitions, according to Capital IQ. ReSearch Pharmaceuticals and Pharmaceutical Product Development have not done any add-ons after their respective buyouts, according to Capital IQ.

Said Eric Coldwell, a managing director in equity research who tracks CROs at the investment bank Robert W. Baird & Co: “In the last two years, the activity has really picked up.”

What’s driving the rapid consolidation in the CRO market is the fact that these big pharmaceutical, biotech and medical device companies increasingly want to partner with fewer outsourcers, to simplify their outsourcing relationships. As such, they want companies that can offer a wide range of services, from product development through clinical trials to marketing, sales and public relations.

In the early 2000s, Pfizer Inc. outsourced to more than 160 CROs, said Coldwell of Robert W. Baird. Last year it announced it would steer most of that work to just two, the publicly traded CROs ICON plc and PAREXEL International Corp. “The smaller CROs are aware and concerned that if they don’t get bigger, they will be cut out of the discussion when big pharmaceutical companies come out with their preferred provider deals,” Coldwell said.

Hence inVentiv’s deal spree, which has strengthened its clinical capabilities with the acquisitions of i3 and PharmaNet Development and given it an advisory capability with the consultancy Campbell Alliance.

Meanwhile, the company has greatly expanded its services on the commercialization front: Its smaller acquisitions since Thomas H. Lee took it private include two health care public relations firms in Germany, a health care communications company in France and an advertising firm in Italy. In August, inVentiv launched inVentiv Health Communications/Europe, a new company combining inVentiv’s advertising, public relations, medical education and marketing services, among other services.

“We are building a company that offers integrated end-to-end services for customers,” inVentiv CEO Paul Meister told Buyouts.

For the 12 months ended March 31, 2010—about two months before it agreed to Thomas H. Lee’s buyout—InVentiv reported approximately $937 million in net revenues. With the add-on acquisitions under Thomas H. Lee’s ownership, the company has roughly doubled that number, according to Thomas H. Lee. Today the company employs 13,000 in 40 countries—again, roughly double the figures at the time of the take-private, according to the firm.

Abbrecht believes that, given the suite of services it provides, the company could well go public again.

By Bernard Vaughan


Year founded: 1974

Investment strategy: Buyouts in business and financial services; consumer and health care; and media and information services

Key executives: Co-Presidents Anthony DiNovi, Scott Schoen and Scott Sperling

Office locations: Boston, New York

Capital raised: $22 billion

Fundraising status: Currently investing from $10.1 billion sixth fund, closed 2006

Active portfolio companies: 22

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