Activist Starboard Value recently disclosed a position in Fortrea Holdings. The firm may be able to take a friendly approach to building shareholder value.
is a global contract research organization, or CRO, that provides clinical development and patient access solutions to the life sciences industry. CROs work with drug companies through all stages of the drug development process, from drug discovery and preclinical development to Phase I through IV post-approval work. The company was originally part of Covance from 1997 to 2015, where it had central lab preclinical and Phase I through IV clinical development capabilities.
So, now it is in a position to be run more efficiently with management solely focused on the CRO business. The crucial factor in achieving this is having the right CEO for the job, and Fortrea has that. In January,as president and CEO of its Drug Development Clinical Development business unit and retained his CEO seat at Fortrea, upon completion of the spin-off. Pike has a track record for improving CRO profitability.
With Pike as CEO and margin guidance going in the right direction, we expect Starboard will be an engaged shareholder here and look for a board seat only if things do not progress as planned. In that case, there is no reason why this would not be amicable. Both Starboard and Pike share the same views regarding margin improvement and seem to be rowing in the same direction. With peer margins and peer multiples, Starboard sees this as a $47 to $72 stock.
Finally, there may also be compelling strategic opportunities to create shareholder value. Private equity firms and strategics have been frequent acquirers of CRO assets and recent transactions have been at higher multiples, with a median of 14x EBITDA. Moreover, this is a consolidating industry right now. Elliott Managementwith Patient Square Capital and Veritas Capital to acquire Fortrea peer Syneos Health Inc for $7.1 billion. That acquisition is expected to close in the second half of 2023.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Fortrea Holdings is owned in the fund.Elliott makes inroads at Catalent to build value. Here’s what could happen next
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