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Potentially 'transformative' merger in pharma research space faces skepticism

A merger between the largest pharmaceutical data provider andone of the most prolific clinical trial firms could set a new standard for drugdevelopment in the U.S.

and Quintiles Transnational Holdings' proposed combination, with an announced deal value of $9.00 billion,would create a company with an enterprise value of $23 billion. The transactionwill be conducted as a merger of equals and use all stock, according to the May3 announcement.

The combinedcompany would be capable of testing, marketing and tracking the efficacy of newdrugs under one roof — an end-to-end business model that analysts say does not currentlyexist.

"Nobodyelse has done this," Topeka Capital Markets analyst Eugene Mannheimer saidin an interview. "This is a transformational type of acquisition, and QuintilesIMS is really the pioneer in merging these two approaches to the pharmaceuticalindustry."

Quintilesis the world's largest contract research organization, or CRO, for clinical drugtrials, whereas IMS is a globally known provider of anonymous patient and drug claimsdata. Quintiles' business focuses on drug development until approval by the Foodand Drug Administration, Mannheimer explained, while IMS collects data about themedicine's patients, usage and success rates once the drug is released. Linkingthose two sides of the development process would shake up the pharmaceutical researchspace, the deal's supporters say.

Improvingclinical trial management with IMS' data could shave months off the time it takesto conduct trials, Quintiles CEO Thomas Pike said during a May 6 CNBC interview,according to a transcript filed with the SEC.

As drug development becomes a more crowded space and CROs facea need for clinical investigators, meeting deadlines has become more important,he said. IMS data could automate much of what is conducted manually in a trial.

"A couple of months of bringing those [timelines] forwardfor a drug company could be [worth] $10 million, $50 million," Pike said.

But shareholdersappear to have met the merger with skepticism. Both companies' stocks sold off followingthe announcement, with IMS Health falling from $26.87 at the close of May 2 to $24.13on May 5, and Quintiles declining from $69.10 to $64.52 over the same period.

"Themarket clearly isn't in favor of the transaction," given the stocks' movement,Mannheimer said.

"Webelieve this is a transformative combination that will benefit society as a wholein the long run — we're measuring its success in those terms right now rather thanshort-term market fluctuations," Tor Constantino, IMS' director of global PRand external affairs, said in an email. A Quintiles spokesman declined to commentbeyond other public statements the company's management has made.

The companies'expected financial benefits from the merger have underwhelmed some analysts as well.The combined entity is expected to find about $100 million in cost synergies duringintegration, and the deal is expected to tack on 1 to 2 percentage points of revenuegrowth to the business. In a research note following a merger conference call conductedby the companies' management teams, Stifel analyst Shlomo Rosenbaum asked whethera 1% to 2% bump to growth justifies a transaction of this size.

"Ifthe combination is as game changing as management asserts, is there upside to thismetric?" he wrote.

In aMay 3 update, Morningstar equity analyst Stefan Quenneville wrote that the "limitedsynergies" create uncertainty around the logic of the merger. He also expressedcaution about the near-term revenue benefits "given the potential disruptionin operations and integration risks inherent in a deal of this magnitude."

IMS Chairman,President and CEO Ari Bousbib and Quintiles' Pike during their call emphasizedthat the companies would still primarily conduct their legacy businesses. Each companyis maintaining its current headquarters, according to a slide deck accompanyingthe call.

The mergeris more about aligning with trends in the pharma research space than cost savingsand incremental revenue growth, Richard Prest, a senior principal at health careconsulting firm Blue Fin Group, said in an interview.

Drugmakers have increasingly gone beyond the Food and Drug Administration-required phase3 trials to conduct post-approval phase 4 trials, where drug performance is trackedamong patients in their daily lives, Prest noted. Phase 4 trials allow researchersto discover side effects that may occur outside a tightly controlled lab environment,or to determine a drug therapy's effectiveness if, for example, a patient forgetsto take the medicine from time to time, he explained.

Quintilesand other CROs are also seeking to collect more real-world evidence of a drug'sefficacy, Prest and Mannheimer said, in the face of public scrutiny over high drugprices. Manufacturers need to justify the up-front prices by repeatedly showingthat a brand-name drug produces better outcomes than the generic version, Mannheimerexplained. If they fail to doso, the price they are able to charge for a drug can fall to the generic drug'sprice, which is often 80% or 90% less.

IMS'data helps pharma companies determine the pricing of a drug and defend that pricelater on in negotiations with insurers and care providers, Mannheimer said.

A focuson real-world evidence was already in the companies' sights prior to the merger'sannouncement. In October 2015, the two signed a strategic alliance specifically to join their respective fields andform a unified structure for gathering real world evidence.

Fullycombining the companies may be a way to distance Quintiles and IMS even furtherfrom competitors in their respective fields, Mannheimer said. IMS' Bousbib duringhis company's first-quarter earnings call said that, while IMS has traditionallypartnered with companies to provide data, selling the data by itself is less lucrativethan the comprehensive final product.

"Our modeling has concluded that it is best to participatein the economic upside of selling the solution powered and differentiated by thedata," he said.

The success of the deal could also force more CROs to pair upwith life sciences data firms in order to compete. The end-to-end offering QuintilesIMS could provide "would set the standard by which clinical development shouldbe viewed going forward," Mannheimer said.

The CRO space had already begun a wave of consolidation, he said,and other technology companies with life sciences data businesses, such as Oracle,Accenture and Medidata Solutions,could look to buy a CRO to offer a similarly comprehensive product.