Covance and Parexel Merge, Creating Mega-Source for Drug Development and Launch
Introduction
Strategic Fit, Enhanced Scale, and Growth Drive Merger
Terms of the Agreement
The CRO Drug Services Industry
Industry Evolution and Business Drivers
Market Trends
N/Ame=int>Introduction (Back to Top)
<%=company%> (Princeton, NJ) and Parexel (Waltham, MA), the second and third largest companies in the drug development services industry, announced this morning that they have entered into a definitive merger agreement. The transaction is valued for Parexel shareholders at approximately $800 million and results in a combined company with a market value of $2.5 billion. The merger will create Covance Parexel Inc., the world's largest and most comprehensive company dedicated to outsourced drug development and launch services for the pharmaceutical industry.
"In today's competitive healthcare environment, the rewards and challenges of pharmaceutical development have never been greater," said Covance CEO Chris Kuebler, who will become co-chairman and CEO of the new company. "Through this merger, Covance Parexel will have the expertise and worldwide resources to help its pharmaceutical clients develop new medicines faster and more successfully, in more markets, achieving greater return on their R&D investments than ever before."
Drug development outsourcing is increasingly recognized as an effective strategy for pharmaceutical companies to optimize the productivity and value of their R&D investments. Covance Parexel believes it will be uniquely positioned to capitalize on emerging growth opportunities as pharmaceutical companies strive to increase the number, quality, and commercial value of drugs emerging from their pipelines.
"We are combining two companies with complementary strengths to create one company that is a leader in every important area of drug development," said Parexel CEO Josef von Rickenbach, who will become co-chairman and president of the new company. "The merger gives Covance Parexel the scale and financial strength to accelerate the recruitment of the best scientific minds, increase our investment in advanced technologies, and to pursue even stronger strategic relationships with our clients."
Covance Parexel is expected to generate annual revenues approaching $1.3 billion in 1999, which is significantly more than the drug development revenues of its next largest competitor. Management anticipates that the merger will be at least earnings neutral in 2000 and will be accretive in 2001 and thereafter.
Covance Parexel's leadership in the high growth areas of drug development and launch services will position the new company to outpace industry growth rates. In addition, the increased market capitalization of the new company will move it solidly into the mid-cap range, providing enhanced stability and liquidity for investors. The merger will create opportunities to enhance productivity and operating efficiency, and allow for increased investment in new technologies to improve data collection and analysis—the cornerstone of fast and efficient global drug development.
Covance Parexel's board of directors will be comprised of the outside directors from both companies, in addition to Messrs. Kuebler and von Rickenbach as co-chairmen. The new company will be headquartered in Princeton, NJ.
N/Ame=str>Strategic Fit, Enhanced Scale, and Growth Drive Merger (Back to Top)
The world's top pharmaceutical companies account for more than half of all global drug development expenditures. These companies look for strategic relationships with drug development companies that have global capabilities, deep therapeutic expertise, and financial stability. The merger of Covance and Parexel creates a company with the scale of global operations, expertise, and financial resources to effectively serve top-tier pharmaceutical companies and to pursue unique business opportunities in partnership with this key customer group.
Covance's strengths lie in core services such as preclinical testing, Phase I-IV clinical trials management, health economics consulting, biomanufacturing, and clinical support services (central laboratory, centralized ECG, and clinical packaging). These support services can significantly enhance the efficiency of clinical trials and represent a key competitive advantage for Covance. Parexel has a formidable position in Phase I–III clinical trials management and is a recognized leader in advanced data management services. Parexel is especially well positioned in high-growth areas of launch services such as medical marketing, education, and communications. It also has a strong pharmaceutical consulting practice and is a leading provider of training to the industry.
Both companies have groups of medical specialists in the leading areas of pharmaceutical research such as CNS, cardiology, oncology, infectious diseases, HIV, and immunology. Covance Parexel will have strong expertise in both pediatrics and women's health, two important growth areas of pharmaceutical R&D.
Covance Parexel also will benefit from complementary geographic profiles. While both companies have a solid U.S. presence, Covance has a broader presence in Asia/Pacific and Parexel provides more comprehensive coverage in Europe and Japan. Covance Parexel will have expanded capabilities in the world's top three pharmaceutical markets—United States, Europe, and Japan—and will operate with increased scale in 27 countries around the world.
N/Ame=ter>Terms of the Agreement (Back to Top)
Under the agreement, Parexel shareholders would receive 1.184 shares of Covance common stock for each share of Parexel common stock held. The agreement is intended to be accounted for as a pooling of interests and is expected to be tax-free. Completion of the merger is subject to approval by Parexel and Covance shareholders and regulators. In connection with the transaction Covance and Parexel have granted to each other an option to purchase a specified number of common shares upon the occurrence of certain circumstances as specified in the agreement. As of April 29, Parexel had approximately 25.4 million shares of common stock outstanding on a fully diluted basis.
N/Ame=the>The CRO Drug Services Industry (Back to Top)
Contract Research Organizations, or CROs, provide a strategic outsourcing alternative to pharmaceutical, biotechnology, and medical device companies to develop and commercialize new products. Increasingly, pharma and biotech companies are relying on CROs to help translate scientific discoveries into new medicines faster and more cost-effectively than ever, and on a truly global scale.
The top CROs are creating a new class of companies, referred to as drug development service organizations, to reflect their broadening range of services. These industry leaders now offer sophisticated medical expertise and value-added drug development and commercialization knowledge that have allowed these few companies to evolve from providers of a commodity service to more strategic development partners.
N/Ame=ind>Industry Evolution and Business Drivers (Back to Top)
Before the early-1970s, drug development outsourcing was, relatively speaking, a "cottage industry" of independent laboratories and consultants from academia who conducted tests to provide proof of efficacy for new drugs, along with toxicology and pharmacokinetic studies for U.S. pharmaceutical companies. Throughout the 1970s, the industry expanded steadily as outsourcing became more widespread. Growth accelerated greatly in the 1980s when Japanese pharmaceutical companies began using CROs to conduct U.S. research and the U.S. biotechnology industry began to emerge.
Since the early 1990s, the industry has evolved rapidly and grown significantly. In the last five years alone, the outsourcing industry has grown from a $1 billion market to more than $5 billion in 1998. Today, there are hundreds of CROs, and less than 20 are public companies. However, only a very few have the global capability, therapeutic expertise, and the broad range of services and technologies to serve the world's top pharmaceutical companies—a group that accounts for more than half of all drug development spending.
The drug development services industry fundamentals are very strong with a number of factors fueling industry expansion:
- Drug development costs continue to skyrocket—it can take $500 million and 15 years to bring a new drug to market. Pharma companies must develop drugs more cost effectively in order to maintain current growth and profit levels.
- Due to new drug discovery technologies, pharmaceutical companies have more promising compounds in their pipelines today than they have the capacity to develop them. CROs will continue to provide an alternative infrastructure and absorb the overflow as drug development capacity is scarce in the pharmaceutical value chain.
- In today's demanding scientific and regulatory environment, increasingly sophisticated expertise and knowledge is required to successfully develop new compounds. Pharma companies need global resources to conduct worldwide trials and market globally to recoup R&D investments.
- Decreasing development time is critical due to shortened patent exclusivity and greater competition in major therapeutic areas.
The inherent uncertainty of drug development makes it risky for pharma companies to increase R&D overhead and infrastructure costs. By outsourcing drug development activities, pharmaceutical companies can access additional therapeutic and regulatory expertise, extensive preclinical and clinical development experience, and state-of-the-art technology on a variable cost basis.
N/Ame=mar>Market Trends (Back to Top)
Drug development service organizations are poised for continued dramatic growth. Pharmaceutical R&D spending is expected to continue to grow more than 10% per year for the foreseeable future. Analysts predict growth of approximately 20% per year over the next five years as outsourcing levels continue to rise.
Leading drug development service companies are evolving from vendors to strategic partners with major pharmaceutical companies. As the cost of drug development continues to increase significantly, pharma companies must dramatically increase the number, quality, and commercial value of the drugs that they produce. Industry analysts indicate that to meet financial growth expectations, top pharmaceutical companies must launch between 24 and 34 new drugs that earn between $1 billion and $1.45 billion each year over the next seven years. This is more than four times the number of new drugs that they currently produce.
Pharmaceutical companies are investing more in commercialization services to accelerate the acceptance of new therapies in the marketplace. In order to maximize market potential, especially during periods of patent exclusivity, pharmaceutical companies are investing more than 25% of their marketing dollars to increase awareness of a new therapy, and its benefits, before an NDA is filed. There is growing demand by pharma companies for expertise in interpreting and communicating scientific data and medical information to physicians, and increasingly, to consumers.
Trends favor companies that offer broad capabilities, deep functional and therapeutic expertise, global presence, and financial stability. Major drug firms facing the need for expeditious and cost-effective development and global marketing are increasingly turning to the leading drug development service companies, which can add value at every step of the development process. As a result, the top global drug development services organizations are gaining more market share at a faster rate than the midsize and smaller niche players.
For more information: Parag Bhansali, Investor Relations, Covance, 210 Carnegie Center, Princeton, NJ 08540-6233. Tel: 609-452-4440. Fax: 609-452-9375. Email: parag.bhansali@covance.com.