The latest in pharma services

Pharma services, which provide contract and outsourced services throughout the drug development lifecycle, have become a major area of private equity (PE) healthcare investment over the past decade. This trend has been driven by scientific advancements and increased research & development investment, a shift towards more complex specialty drugs and biologics, and significant integration among major contract organisations. 

While previously focused on the healthcare provider sector, many PE firms have entered the pharma services market or are planning to do so. However, the market's technical nature requires careful strategy and consideration of cross-border opportunities. As a result, firms are diversifying their expertise through various means such as engaging advisors, partnering with experienced executives, and leveraging consultants.

In this article, we are going to review and summarise the latest report from Pitchbook on pharma services to help our audience understand the opportunities in pharma.

PE activity in pharma

According to Pitchbook, PE deal activity within the pharma services sector saw a 19.2% drop in 2023, in line with reductions across healthcare. The slow trend continued into the first quarter of 2024 with around fifty deals closed or announced. Particularly, 2023 saw 12.9% fewer platform deals compared to the average from 2017-2019. 

However, the year did record over 50% more deals than the 2017-2019 period when considering add-ons and minority deals. This is due to sponsors turning to M&A-heavy strategies, like trial site businesses. Q2 2024 also witnessed several platform deal closings of note, such as acquisitions by InTandem Capital Partners, The Riverside Company, and Arsenal Capital Partners.

As the pharmaceutical industry expands into specialised therapeutics, companies increasingly outsource R&D, clinical trials, and manufacturing. Resulting in a blur between CRO and CDMO markets due to combined service offerings. Despite consolidation in the industry, there remain opportunities for smaller CROs specialising in specific therapeutic areas to offer superior services to biotechs and SME pharmaceutical firms.

Additionally, Pitchbook's report details strategies for attracting big pharmaceutical clients, emphasising flexible technology adoption and differentiation through scale, specialization, and client type. It also gives an insight into how CROs and CDMOs are evaluated based on various metrics. Furthermore, it underscores the role of MedTech CROs and CMOs/CDMOs and their heavy reliance on technological innovations. Finally, the document highlights the role of value creation in outsourcing, which focuses on diversification, horizontal M&A, and geographic expansion.

Opportunities in clinical outsourcing 

The clinical services market is buoyed by several factors, including a rise in specialty drugs for specific patient groups, increased FDA requirements for trial data that accurately portrays the target demographic, and a growing need for robust clinical research processes. This includes advanced testing, precision medicine, complex trial designs, and ensuring patient safety.

The clinical trial site market is appealing to PE sponsors due to opportunities for multiple arbitrage and operational improvements. Boosted by the COVID-19 pandemic, interest has grown in trial site consolidation and tech enhancement. However, many sites struggle with consistent study pipelines. This market offers potential for diversification, professionalisation, and international expansion. The industry is highly fragmented, with more PE firms interested than available scaled platforms. This has raised transaction multiples. It is now common to build platforms from multiple trial site businesses. 

Opportunities in consulting services 

Consulting services support pharmaceutical companies in commercial strategy, particularly in the post approval phase. With the industry's increased focus on specialty pharmaceuticals, there is a growing need for outsourced services for more intricate education and engagement strategies. The common investment model for these services includes aggregating specialized capabilities into a single platform for operational scale and cross-selling. However, less well-integrated assets struggled in 2022 and may look to transact after operational improvements in the next 12 to 18 months.

Opportunities in manufacturing and distribution

The manufacturing and distribution segment comprises companies that assist in getting drugs to market post-approval, including full-service outsourced manufacturing companies. Key growth drivers include increasing interest in orphan drugs and personalized medicine, requiring more rapid and specialized manufacturing processes. Additionally, companies selling APIs and intermediates can differentiate themselves via specialisation, product quality, and scale or volume capabilities. Furthermore, the packaging and product distribution & logistics categories are attractive for firms investing in life sciences and industrials firms. 

Packaging companies can specialise in advanced products or differentiate via volume, speed, and cost savings. Despite the US pharmacy wholesaler market being dominated by AmerisourceBergen, Cardinal Health, and McKesson, there are opportunities in other countries. The COVID-19 pandemic emphasized the need for rapid scaling in cold chain distribution, with increasing demand for syringe packaging. Another investment area of interest is reverse distributors.

Are you a fund looking for a heavy weight CFO or finance leader for your pharma business? 

At Marks Sattin Executive Search, we work with a wide range of investor-led and privately owned businesses across all sectors and locations. With over 30 years of experience, we have helped a number of pharma, healthcare and life science organisations find their next CFO.

 If you would like to speak to us about hiring a CFO for your portfolio or your owner-managed business, please don’t hesitate to submit a brief.