Article

UK pharma services are attractive options for M&A

Peter Jennings Peter Jennings

The pharma services industry in the UK has been impacted by the current circumstances as much as any. Yet, but by joining the fight against COVID-19, pharma services will generate greater investment going forwards, explains Peter Jennings.

The pharma services subsector in the UK has always attracted significant interest and investment from both at home and abroad. While the long-term effect of COVID-19 on the sector is uncertain, it has already boosted investment in an effort to find therapeutic solutions and mitigate the impact of the outbreak. I expect this trend to continue.

Investment in UK pharma services

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The underlying conditions fueling decades-long trends in outsourcing by large, multi-national pharmaceutical companies show no signs of abating. Given the increasing complexity across the drug life-cycle and sustained pricing pressure, this will only increase as contract organisations continue to develop greater expertise and efficiency.

Additionally, given the high levels of early-stage biotech investment and investors' preference for asset-light operating models, demand for contract services in the small- and medium-sized enterprise (SME) segment stand to increase as well.

Long-term growth in biotech funding

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Early-stage drug research and development contract organisations have drawn and will continue to draw interest and investment from both private equity firms and trade buyers engaging in strategic M&A.

Despite recent consolidation among large contract research organisations (CRO), the market is still fragmented. I expect to see further consolidation with CROs making acquisitions across the pharma services landscape to broaden their offering, as big pharma transfers greater governance and autonomy to their strategic service partners.

Small and mid-sized contract organisations are also turning to strategic M&A to further develop service offerings and scale. IQVIA’s acquisition of UK based Linguamatics in the large CRO segments and Ergomed’s acquisition of Ashfield’s Primevigilance are two examples of this trend.

Private equity investment

Private equity (PE) firms have been active across the entire pharma services subsector, drawn by sustained high growth, strong financial fundamentals and attractive opportunities to assist management teams in strategic corporate and business development. Increasing complexity in therapeutics, innovative therapies, such as cell and gene therapies, and pricing pressures have all contributed to the sector’s use, building reliance on specialist CRO and subsequently interest from PE.

As pricing and re-imbursement negotiations become increasingly challenging, the appetite for supporting commercialisation and communication agencies in the marketplace has grown. The lockdown has brought a pause to the market, but I expect the commercialisation stage of the drug lifecycle to continue to be fertile ground for investment activity in the latter half of 2020 and 2021.

However, Phoenix Capital’s investment in Sygnature and, more recently, Synova Capital’s investment in Charnwood Molecular demonstrate PE’s willingness to participate in early-stage R&D CROs, in addition to contract manufacturing, commercialisation and communication agencies.

Impact of lockdown

While the full impact of the lockdown on the sector won’t be known for quite some time, and while a re-shuffling of priorities and a pause of some activities is inevitable. This will have a varied impact on service organisations, depending on the nature of their activities.

I expect to see sustained interest in the pharma services subsector from both trade and private equity investors. The strong fundamentals and drivers behind outsourcing will re-emerge and, in some cases, be exacerbated by the pandemic, which will continue to attract investors and promote strategic M&A for the foreseeable future.

Robust funding and M&A environment

The pharma services sub-sector is generating significant interest from both trade and investor groups. Investors are particularly interested in the sector because its past and projected performance consistently outperform GDP growth.

Pharma services will continue to see significant interest from investor groups due to, not only the underlying fundamentals and industry evolution towards greater outsourcing, but also forthcoming therapeutic innovation.

The industry is at the start of a new era. Novel medications along with advancements in bio and information technology hold the promise for delivering new therapies for a range of serious indications with unmet medical needs. This innovation coupled with aging populations and the increasing occurrence of chronic conditions will support investor interest over the longer term.

Interest in pharma services from investor groups

Pricing pressure, along with the high cost of pharma R&D, will continue to fuel outsourcing as big pharma seeks to reduce fixed costs. Additionally, the externalisation of non-core activities across the industry enables CROs to develop enhanced expertise, furthering the reliance by biopharmaceutical companies on contract organisations supporting mid- to long-term pipeline investments. The combination of steady outsourcing and long-term product development timelines is particularly appealing to investor groups.

Financial fundamentals are strong and sustained investment in biotechs will follow through to service companies due to biotech investors’ preference for asset-light organisations. There is also an opportunity to scale owner-managed specialist organisations, both geographically and through breadth or service offering by providing business and commercial expertise to management teams.

Biotech investment has led to many companies with active pipelines

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Life sciences businesses are investing in pharma services for numerous reasons. CROs are turning to M&A to add scale and increase their geographic footprint, while realising synergies to improve operating margins and gain competitive advantage.

They're also seeking to broaden their service offering to become strategic partners, as pharmaceutical companies streamline their supplier eco-system and simplify their vendor management.

As the application of artificial intelligence and other technology becomes more widespread and integral to industry specific operations, pharma services businesses seek to bolster their technical capability and trial sponsors are giving CROs greater autonomy in the management and execution of clinical trials. This is allowing CROs with end-to-end offerings to capture larger shares of trial-related expenditure.

Implications of the COVID-19 lockdown

Current global issues continue to unfold and the true impact won’t be felt or understood for some time. However, in the short term, a re-shuffling of priorities and expenditure is inevitable, which will prompt a wave of restructuring. This will ease access to follow-on funding as investor groups seek to safeguard prized assets in their portfolio.

Pharma services industry implications

COVID-19 solutions will take priority for the next 12-18 months, with an increase in vaccine, diagnostics and anti-viral R&D activity. Resources will continue to be diverted to front-line care, developing, and testing vaccines and anti-virals in the short term.

Advancement of drug candidates will invariably be delayed due to resource constraints and the complications in executing clinical trials due to supply chain disruptions, reluctance to visit medical facilities and so on. While the shuffling of spend will open more opportunities in areas such as antivirals, vaccine and diagnostics, but will have a temporary disruptive impact on other therapeutic areas. This will negatively impact smaller biotechs, and academic and philanthropic organisations.

In the short term, more funding will be available for existing, rather than new ventures, as investor groups seek to mitigate continuity risks to their existing investment portfolio. Expect a transfer of R&D activities to geographic areas or organisations that are less impacted by the pandemic and an increase in near-shoring as companies seek to shorten and simplify supply chains.

What does this mean for M&A and PE?

Expect increased investment in the sector, but in specific areas, as the re-shuffling of priorities takes hold. There will be winners and losers, depending on the nature of activity, but in the immediate term, expect more demand for specialist R&D services in vaccine and anti-virals.

This will cause a surge in demand for point-of-care diagnostics development and testing, and laboratory analysis services. Expect to see increased demand for funding from pharma services businesses to maintain continuity and capitalise on new opportunities.

Increased M&A and restructuring activity, particularly in distressed and non-core assets, due to shifting demand and population health priorities. The pandemic will provide the catalyst to bring forward a percentage of existing divestiture and consolidation plans.

If you would like to discuss any of these points further, contact Peter Jennings.

References

  1. Global and growing - UK biotech financing in 2019, UK BioIndustry Association, 2020
  2. Mid-Size CRO Competitive Landscape, Pivotal Financial Consulting, LLC, 2019

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