Over a decade, NFP clinical trial company Nucleus Network completed a journey into the arms of private equity.
When Robert Nicholson GAICD joined the board of the Baker Heart and Diabetes Institute in 2010, he wondered why the not-for-profit owned a clinical trials business. A partner at Herbert Smith Freehills, he had done his due diligence before accepting the appointment and saw a risk that Nucleus, as the trials business was called, could become a financial drain to the institute. He thought that while Nucleus didn’t necessarily have to turn a profit, it also couldn’t make too much of a loss or it would become a financial black hole.
It was the start of a 10-year journey that saw Nucleus become profitable and then be sold in two tranches to private capital, earning about $170m for the Baker Institute, which now forms an endowment supporting the institute’s ongoing work.
Founded in 1926, the Baker Institute has a revenue of about $60m a year and employs around 200 scientists, plus 50 PhD students, on various research projects. The Nucleus Network came about in 2003, when the Baker Institute needed to do some phase 1 clinical trials (the first time a medicine is put into a human body to test its effects) and there was no phase 1 clinical trial unit in Melbourne. So, with the help of a small state government grant and alongside The Alfred Hospital and Monash University, it established Nucleus as a 20-bed facility that also offered trials to other research bodies and clinical trial training.
Reorganising Nucleus
As it happened, a year after Nicholson joined the institute, he was asked to become chair of the Nucleus Network group to help it become financially viable. As chair, Nicholson agreed with new CEO Craig Rogers’ plan to reorganise the way staff worked, to break down silos and have individuals perform a range of different roles. The plan reduced headcount and Nicholson explained to Nucleus’ 60 staff why redundancies were needed to put the business on a sustainable setting.
“That went a lot better than I thought, because people understood the business wasn’t profitable,” says Nicholson, now a director of Alinta Energy, the Port of Melbourne and Electro Optic Systems, and a senior adviser at Herbert Smith Freehills.
“They knew that couldn’t continue and could see how the restructure might work. The company’s commercial focus is very different to the research institute, because there you’re focused on the things you’re researching and how likely they are to lead to valuable discoveries or publications in the leading journals. Whereas this business was primarily motivated to become profitable.”
Nicholson also wanted a board with diversity of thought and experience. The directors he hired included Dr Anthony Radford AO, who had a strong commercial skill set and understood biotech, Antony Cohen, who had a financial background, and medical academic Professor Susan Charman. They joined Baker Institute CEO and Nucleus founder Professor Garry Jennings AO and chief operating officer David Lloyd.
Following the structural changes, there were several new recruits, including Cameron Johnson, who would build out the US customer base and become a highly successful CEO.
“Cameron supercharged the company’s performance, both before the sale and throughout the period of Crescent ownership,” says Nicholson.
The unit was expanded and a targeted remuneration scheme introduced. Nucleus was turning a profit and paying an annual dividend to the institute. During this time, Nicholson had remained on the Baker Institute board and was regularly reporting to its chair, Peter Scott AM, and the board on how Nucleus was progressing. Protocols were put in place.
By 2017, Nucleus had expanded to 80 beds — which allowed it to take on larger trials — and its revenue had grown to over $30m. The Baker Institute board realised that to keep growing, Nucleus would have to expand interstate or overseas.
However, Nicholson says, they realised it would be hard to explain to Baker’s hard-working scientists why Nucleus should be funded ahead of the institute’s core research. And while such a move would make commercial sense on paper, it would also come with financial risks. Additionally, Nucleus didn’t have the expertise to make acquisitions and there was potential for disquiet that some of the Nucleus commercial staff would earn more than the Baker Institute’s scientists, again raising questions about resource allocation. So they decided to sell it.
Enter private equity
The institute engaged Lazard to sell Nucleus and private equity firm Crescent Capital Partners made the best offer of $100m, including a six-month option for the Baker Institute to buy back an “up to 20 per cent” stake. In the lead-up to the sale, some members of the Baker Institute board raised concerns that Crescent might be a stereotypical slash-and-burn private equity investor, that they might drop quality standards on trials, or that a trial might go badly wrong. Or that the 15 per cent share Baker had decided to buy back from Crescent could be diluted by large capital calls.
However, as part of the deal, Crescent offered Baker a board role — Nicholson would remain on the board to give the Baker Institute a window into the business. “I would say, ‘This issue is coming up and we’re likely to do this. This is how I think we’ll address it’,” says Nicholson. “So people would have a chance to say, ‘Really? Why?’”
He also believed that as a mid-market private equity firm, Crescent would be making only modest bolt-on acquisitions, as it subsequently did when it acquired a Queensland clinical trial business and another trial business in Minnesota, in the US.
Along with fresh capital, Crescent also brought the sort of expertise the Baker Institute didn’t have. Crescent partner Stuart Butterworth joined the Nucleus board and did a three-month deep dive into the profit drivers of the business. “He found a whole lot of other ways in which we could improve profitability,” says Nicholson.
The Nucleus acquisitions were purchased with debt funding, including shareholder loans on attractive terms, which were repaid in full a couple of years later. But there was more good news to come. In 2021, Crescent and the Baker Institute sold the business to Blackstone. Baker received about $75m, on top of the $100m it had made the first time Nucleus was sold (partly reinvested).
Nicholson says there are a couple of lessons from the experience. “Firstly, NFP organisations can deliver significant commercial value from operating businesses with the right approach, the right commercially minded governance structure and, most importantly, strong management. Secondly, private capital can be a good partner for NFP businesses. They can bring capital, skills and expertise and, so long as there is the right alignment, everyone can benefit.”
This article first appeared under the headline 'Spin-Off Doctors’ in the August 2024 issue of Company Director magazine.
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