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Pharma's silver lining: despite the market downturn and financial meltdown, private equity investors are lining up for pharmaceutical services businesses.

Article Excerpt
In the business and financial environment we are currently enduring, you wouldn't expect investors to be anxious to buy companies with somewhat uncertain prospects, but this is what is happening in the pharmaceutical services industry. Private equity investors are lining up to own all or a piece of a CRO or CMO business, and the depressed stock market is creating opportunities for them to get in at very attractive valuations.

The hot interest in pharmaceutical services has some features that make it different from what we saw 2 years ago; for one, the acquisition prices are now a lot lower at the top of the leveraged buyout frenzy. Back then, Blackstone Group (NY, USA) acquired what is now Catalent (NJ, USA) for $3 billion ([euro]2.4 billion) and financed it with $2 billion ([euro]1.6 billion) in debt. The price was 1.6 times sales and 10 times pretax cash flow. Premier Research Group (UK) was taken private by ECI Partners (UK) last year for a similar multiple. By contrast today's prices are likely to be less than one times revenue with less than half of the purchase price borrowed.

The lower valuations reflect the restricted availability of debt (when debt was cheap, companies could afford to bid the price up) and the overall uncertain outlook...

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