What looks expensive today might not appear so dear tomorrow. That’s certainly what Thermo Fisher Scientific is betting with its $17.4 billion acquisition of PPD, which runs clinical trials.
The price of the deal, which was announced on Thursday, doesn’t look promising for the buyer over the short run. Thermo Fisher, the world’s largest maker of scientific instruments, thinks it can find $125 million of cost and revenue synergies. The value of these, taxed at the statutory rate and put on a multiple of 10, is nearly $1 billion. That’s about a third of the premium it’s paying.
The return on the $20.9 billion purchase price, including net debt, isn’t much more appealing. Analysts think PPD should produce a bit more than $1 billion of operating profit in 2023, according to Refinitiv figures. Add $125 million of synergies, and tax the result, and the return on investment is under 5%.
But PPD benefits from a powerful tailwind. Discovering drugs is getting harder, research is increasingly done by smaller biotechnology companies that must outsource clinical work, and trials are getting bigger and more complex. In 2020, for example, revenue grew 16% despite many clinical trials being put on hold because of the pandemic. Moreover, plugging PPD into Thermo Fisher might result in more business for the buyer. Thermo also manufacturers drugs for pharmaceutical companies, so running clinical trials for biotechs might help drum up new business.
There’s little reason to think the trend towards outsourcing will reverse. If so, the buyer may end up doing well. Just look at a series of deals involving PPD over the past decade. In 2011, Carlyle and Hellman & Friedman took PPD private for $3.9 billion. In 2017, the company was recapitalized in a complex deal that valued it at about $9 billion. The firm subsequently went public in early 2020 and shares have risen 75% since then.
Thermo Fisher may be paying up today, but it is betting on PPD’s record of steadily making more jam for its owners tomorrow.
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