AVCJ Awards 2018: Exit of the Year - Mid Cap: Novotech

Mercury Capital’s relationship with Australia-headquartered clinical trials provider Novotech began in 2012 when an investment professional called the switchboard and asked to speak to the CEO. Cold-calling is not an unusual practice for the private equity firm. Chris Criddle, a partner at Mercury, notes that most of the 12 investments across the first two funds were sourced in this manner.

“It’s challenging, and it requires persistence,” he says. “You must also be knowledgeable about the business and the sector. It is difficult to influence the owner of a business on the timing of a sale. Sometimes you get lucky – you call, and they are already looking to do something, or the owner is predisposed to talking. But in all circumstances, the onus is to present a cogent case for why we can add value.” 

In the case of Novotech, Mercury’s persistence and persuasion paid off to the tune of a 15.7x return. In September 2017, about four years after the GP invested – acquiring an initial 30% from the founder and subsequently increasing its stake to 50% – TPG Capital bought Novotech outright for an enterprise valuation of A$392 million ($279 million). Having worked with management on professionalizing the business and developing its Asian footprint, Mercury transferred ownership to a global investor that can navigate the next stage of growth.

Rare qualities

Back in 2013, Novotech stood out for two reasons. First, Mercury was looking for attractive companies that generated a sizeable portion of their revenue in US dollars. At the time, the Australian dollar was trading at $1.10, its highest level since flotation. Find a strong exporter at this point in the currency cycle and it will be a superstar once the currency reverts to its 20-year average of $0.75, Mercury concluded. Healthcare, tourism, and education were all targets. 

Second, on digging deeper into the Asian contract research organization (CRO) market, the GP soon realized that Novotech was unique: no other independent player had a pan-regional presence. While independence is important because small biotech players are reluctant to work with global operators, having a toehold in multiple markets changes the value proposition.

“Biotechs want high-quality service and local knowledge, which means understanding the regulations and knowing how to get trials started,” Criddle says. “If you are across several markets in Asia, you can give a trial sponsor multiple options. You also have wider access to patient populations and you can run trials quickly. This is important to biotechs because the faster they get through the phases, the better their chance of getting funding. Asia is the fastest to enroll market globally.”

On making the investment, Mercury sought to bring about improvements in a handful of key areas. Most notably, Novotech’s success in cultivating ties with the US biotech industry that account for three-quarters of revenue meant it hadn’t needed to develop much of a marketing operation. Biotech players looking to launch clinical trials would approach the company directly. 

“There was an opportunity to be more outbound – to assess the market on a structured basis, identify biotechs with which we don’t have existing relationships, and then take a structured approach to contacting those customers,” Criddle explains. “We grew the business development team and then moved it to the US. We improved the sales and marketing engine room.”

The focus on staffing extended across the organization as additional manpower was brought in to perform functions where previously there were gaps. Other hires improved Novotech’s capabilities in terms of existing roles. One of these came at the top of the organization as Asia COO John Moller, who eventually became CEO, enabling founder Alek Safarian to transition out.

A broader business

Mercury also oversaw changes in the way Novotech carried out investor reporting and continued the company’s push into Asia. By the time of exit, there were more than 300 employees in 14 offices across nine Asian jurisdictions. “To represent yourself to clients as a pan-regional player you need a presence in different markets,” Criddle adds. “We established offices in certain places, even if it meant those offices weren’t at scale operationally or economically, in the expectation that it would help win business from clients who would then assist that market growth.”

This scale enabled the company to engage with a wider variety of customers and offer more sophisticated services. Prospective buyers – regional and global CROs as well as larger PE firms – were soon making inquiries. Criddle notes there are up to 3,000 biotech companies in the US and Novotech had relationships with a couple of hundred at most, suggesting there is still plenty of room for business development in North America.

However, the most interesting target client base is arguably closer to home. Novotech was already starting to win business from biotech companies in South Korea, Taiwan, and mainland China. The general view is that Chinese players will have to conduct more clinical trials in other markets because they need genetic diversity in their sample base to win regulatory approval in the US.

In this respect, Novotech is the latest in a string of PE deals in Australian healthcare that gained traction on the back of an Asian expansion angle. Criddle sees it as a great opportunity for local GPs. “You get access to the healthcare sector and businesses that are not of sufficient scale for pan-regional funds,” he says. “You build companies up, begin to establish an Asian presence, and they become attractive to a larger group of buyers than if they were just Australian businesses.”   

Pictured: Chris Criddle of Mercury Capital

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• Topics
• Australasia
• Trade sale
• Healthcare
• Australia
• Mercury Capital
• AVCJ Awards