PAREXEL is a “Flagship Core Company” investment for the BMP team. It represents an example of how the BMP team fully engages with its portfolio company managements and supports them in many different areas to build a meaningful company. Our efforts in strategy development and redirection, market research and segmentation of customers, human resources and organization chart development as well as financial strategy implementation are all evident over the twenty year history as lead investors in the company.
The company was sourced to BMP by a friend of the firm who knew our interest in the pharmaceutical services industry. The BMP partner sponsoring and managing the investment opportunity had had previous experience in the pharmaceutical industry having consulted at the strategy level for three Fortune 50 pharmaceutical companies. As a result, there was receptivity to the sector given the large changes ongoing in that industry and the need to develop and gain approval for new drug candidates more quickly. Several other investors had evaluated the sector and decided not to proceed due to the complexity of the environment, the consulting component required to gain specific clinical trials expertise, and the nature of the FDA and its decision making. The BMP team, however, recognized that having the critical expertise of understanding the FDA and how to work with this unique regulatory agency was in fact required to build out the other aspects of the business including the data management, protocol design work, and identification of and management of clinical investigators in the US. It became the barrier to other smaller entrants to the sector.
The BMP team invested in PAREXEL when there were 5 employees located in Cambridge, Massachusetts. Over the course of the first three years, BMP redirected the company’s strategy after the original business plan to build a database of clinical investigators did not gain traction. BMP’s management was present at the company location two days per week in the early years of the investment. We suggested adding a consulting and advisory service to the offering to assist in house pharmaceutical staff at the major pharma companies to design more effective protocols for their upcoming clinical trials. In addition, adding expertise around the FDA’s ever changing regulations would speed up the process and reduce the time required to meet milestones required by the FDA and thus gain approval in a significantly reduced time period. It was this strategy change that fundamentally changed the business model at PAREXEL into a knowledge and service model and not dependent on a software component. It was originally believed that having a software component would speed up the accrual of patients into the clinical trials however we quickly learned that the most significant clinical investigators were already known to the pharmaceutical company management and that they needed other guidance to assist their development programs. Understanding the bottlenecks of the drug development business was a key component of success. The original business plan also included a food companioned of the company’s services. We determined that that segment was too small to pursue and that the customers did not have the complex needs of the pharmaceutical industry. We recommend ending any effort in that market segment to focus on the highest priority customers.
With the strategy refined, a new business plan was developed and BMP introduced the company to several of its close relationships of investors in the US as well as in Switzerland. A leading Swiss banking group joined in the subsequent financing for the company and allowed the next step of the strategy to develop. The initial “A” management team at PAREXEL was now ready to be augmented with more senior, and more expensive leading clinical trial professionals targeted on the new strategy. For the first five years, BMP met and interviewed every significant management hire at the company. This provided not only credibility around the company to show the potential executive management it also demonstrated our confidence that a large scale company could be built and that the financing for that effort was readably available. Those candidates would not be concerned about the viability of the company but also showed how we felt a large company could be built over the longer term. PAREXEL management showed exceptional maturity and trust in BMP as we met with their management at various levels of the organization over several years. It also showed how closely aligned we were with management on the vision, each of us advancing the vison step by step, sometimes forgetting where the new ideas had originated.
The next step of the business development plan evolved outside the PAREXEL offices when BMP and another co-investor and board member realized that the company had a lead in the industry but had two other significant competitors. With the base phase III business growing well, we determined that our customers had needs for other related products and services. Accordingly, we decided to search for and acquire other smaller companies to expand the product offering and leverage our customer relationships as well as hire new management talent skilled in the earlier phases of drug development. By offering phase II services it was much more likely the company would be hired for the phase III work later on. The BMP team went to work identifying over 100 companies who might be candidates for acquisitions. Several days a week, for an extensive period of time, BMP provided major support to this project. BMP was rewarded with warrants for further investment at favorable values for this work which ultimately led to an active in-house acquisition program that has now completed 43 acquisitions for the company.
As part of its growth and financing plan, becoming a public entity was required, not only for the capital base, but also because our large fortune 500 customers were placing much responsibility in the hands of PAREXEL by outsourcing large portions of their drug development programs. Accordingly they wanted a strong capital base for the company and also wanted to be able to monitor our own progress.
The first attempt to go public was unsuccessful. The s-1 was drafted, the road show preparation was done, our limited partners listened to the story and we agreed that it may be premature for this attempt. Management moved forward and in the middle of the road show a downturn in the public markets occurred. It was a disappointing event as the capital expected was not available. BMP agreed to invest in an additional round of capital with our co-investors where the team regrouped building the business in a more modest manner. Along the way an offer was received to sell the company and we all agreed that would be less than optimum even though it was enticing to consider.
Over the next year the company increased its sales and was able to eventually complete its IPO, unfortunately after our main competitor was also able to become a public vehicle.
With the new capital we expanded the company into international markets acquiring a transformational company in Germany and them expanding into several other European countries with the company’s offering. It was essential to have a large geographic footprint as our customers wanted to run trials all over the world and not just with a US based population of patients.
We continued to raise more capital, complete acquisitions, and deal with many industry events including changes in the regulatory environment which caused many problems particularly in the European marketplace. Economic downturns also had an impact on our customers and thus our own operations as we scaled up staff to support growth only to be surprised periodically by one or more of our large customers own change in strategy.
A skill set of the business is hiring and restructuring as customers and market conditions required. In addition gaining access to significant resource and talent was a challenge. Accordingly, we set up our own training and educational system for new hires who could then join PAREXEL as clinical research associates traveling to the clinical sites around the U.S. and Europe.
A pivotal decision came when we decided to manage costs by offshoring to India and China. This was an important milestones in the company’s development. Not only did we have challenges finding human resources to fulfill the work we had signed, we were also competing with our customers and other competitors in hiring talent. This led to a significant increase in our costs The outsourcing effort began in the major cities in Asia and an infrastructure was built to manage that effort. Significant software development and communications systems were needed to make this cost containment effort succeed.
This offshoring of development and processing talent expanded to having more clinical expertise in Asia as well. Our clients now wanted more clinical trials to be completed in the Asian markets directly. There was access to a large consumer population but also naïve patents who could help accrue the trials faster.
Much of the thinking around PAREXEL business model is based on the traditional experience curve effects of scale. We took that thinking further by challenging the need for various steps in the clinical trials process and finding ways to eliminate some of the steps altogether and by adding automated task and functions which would allow a trial to be competed without as much delay in handling and analyzing the data. Several new acquisitions were completed in the informatics sector which allowed the company to cut costs and deliver a better result for our customers.
This effort to design the clinical trials process is ongoing and will likely continue at PAREXEL and other pharmaceutical companies for years to come.
The initial investment into PAREXEL on an if held basis would have a 23,000% return. Our investors achieved a combined 3,800 times return during the holding period.