Syneos Health’s Acquisition of Synteract
By: Stephanie George, Kerim Hassan, Koel Jelfs, Jaideep Kallu
The purpose of this deal was to strengthen Syneos Health’s standing in the market and also to diversify their customer base, allowing greater access to the ‘small- mid size’ market but also the rapidly growing biotechnology sector in healthcare. Founded in 1995, Synteract is a privately held research organisation and provides support in drug testing of all stages- specifically in the oncology, dermatology, infectious diseases, vaccination, neuroscience and pediatrics sectors. Synteract is present in over 62 countries and many drug trials, but remains a small company.
Syneos Health is a much larger company and have a unique, collaborative approach to deliver successful service to customers, coined the biopharmaceutical acceleration model. Syneos health combines contract research organization and contract commercial organization capabilities in their approach. The company will benefit largely from the large outreach of Synteract.
Company Details: SyneosHealth
Founded in: 1984, Princeton, New Jersey
Headquartered in: Morrisville, north Carolina
CEO: Alistair Macdonald
Company Details: Synteract
Founded in: 1995
Headquartered in: Carlsbad, California, United States
Employees: about 700
CEO: Steve Powell
Financial Advisors: Jefferies
Legal Advisors: Arps, Slate, Meager & Flom LLP
This acquisition consolidates Syneos Health’s already leading position in the biopharma segment. Having a primary focus on pre-revenue companies, this acquisition allows for an addition in the SMID sector. This therefore allows for the further diversifying of the Company’s customer base and expanding support to its focus on the high-growth pre-revenue segment. Syneos Health undoubtedly brings a larger scale to Synteract’s unique customer base. It already has a well consolidated track record of delivering cost synergies by leveraging its global infrastructure, and this acquisition will result in Syneos Health being able to make full use of its global infrastructure and integration expertise, to optimise operational efficiencies and improve margins for the merged entity.
In addition to this, Synteract’s customers will also gain access to the Syneos One Platform, which will provide specialised, advisory and deployment services to help companies commercialise and unveil their products to the market. According to Syneos’s third-quarter 2020 financial report, it’s paying $400 million cash to bring Synteract’s services and customers into the fold. “Joining Syneos Health combines our emerging biopharma expertise and expands our differentiated delivery model,” said Steve Powell, chief executive officer of Synteract. “We are excited to join the Syneos Health team, as they provide increased global scale, service breadth and the technology infrastructure that will drive continued growth. “ In regard to the future of Synteract, Upon the transaction closing it will maintain its brand, operating as a Syneos Health Business Unit.
Lastly, taking into consideration Syneos Health’s financial positioning prior and consequentially after the proposed acquisition, Syneos Health recorded a GAAP revenue of $1,099.0 million for the three months ended September 30, 2020. This represents a sequential increase of 8.4% compared to the three months ended June 30, 2020. Furthermore, the adjusted diluted earnings per share was $1.04 for the three months ended September 30, 2020. This represents a further growth of 19.5% compared to the three months ended September 30, 2019.
The short term benefits previously mentioned are expected to have further benefits over a longer time horizon. Since Synteract has built its reputation serving clients in emerging biopharma, SMID sector companies, Syneos can derive a stronger customer base from the SMID pre-revenue biopharma segment. What is strikingly unique about this is the demand it serves is less dependent on the final products but on the process building towards them. For Syneos this diversification may insure their bottom line over the long term and provides a more diverse stream of revenue.
Furthermore, the biotech sector growth remains at an all-time high above 10% and forecasted revenues of $220bn by 2022 with some analyst estimates of the industry being valued above $700bn by 2025. Hence, Syneos’s acquisition of Synteract as well as other biopharma companies serves the purpose of accessing the largest proportion of the market as possible. These transactions could create scales that induce barriers to entry and exit for the firm, effectively moating off a large segment of the market. Synteract can leverage the scale and new capabilities Syneos has available to them to expand the customer base it sells to and enrich the services it currently provides through cross-selling of products. For example, Synteract’s deal with Pfizer to provide drug development services for the next 3 years, with the possibility to be extended for an additional 2. This combined with Syneos Health’s other acquisitions such as Clindata’s human biometrics division, gives both companies in this deal an opportunity to expand geographically and cross-sell their services. Clearly, the revenue synergies of this deal look beneficial to both companies, albeit Syneos looks to benefit more from the diversification Synteract brings to its customer base.
A caveat to be considered is what Synteract loses as a result of this deal. The acquisition will result in the loss of Amulet Capital, the private equity group who invested in the company in 2016. They were responsible for management structural changes and Synterest’s EBITDA doubling the following years. Despite Amulet expressing delight with the transaction, and both agreeing this is the right time for Synterest to change hands, it is difficult to ignore the potential loss from a neutral investor’s perspective, especially one whose expertise was fruitful for Synterest. Nonetheless, there is definitely upside potential with a company integrated into the biopharma industry guiding this firm. With Syneos having acquired multiple other companies it looks to have a strong comprehension for helping build mid-market biopharma.
Risks and uncertainties
Two years ago Syneos Health was created from the merger of INC Research and inVentiv in a $7.4 billion deal, yet recent rumours came out about the selloff of the services company before the pandemic. A major merger integration from 2 years ago is likely ongoing and so to bring another company into the fold adds further complexity to the ongoing operations. Not to mention the possible uncertainty at the top should the rumours of a takeout sale have been true and that supposed lack of direction. Financials of the deal were not disclosed thus liquidity or solvency concerns for Syneos Health will have to wait until the next 10-Q/K when the terms of the agreement will be expounded on.
However, a possible concern to note is that Synterest was sold by Amulet Capital Partners a Private Equity company so we could reasonably expect that the cost lever to drive higher earnings has been pushed to the max so cost-cutting synergies for Syneos will be limited to redundancies. Revenue synergies is likely of greater importance in proving whether the deal turns out to be accretive. More run of the mill uncertainties are the integration of 700 staff across four continents and the subsequent redundancies involved.