Investors have historically considered the life sciences sector attractive in times of rapid change or crisis because of its resilience to upheaval. The COVID-19 pandemic has further focused the spotlight on the life sciences companies working on responses to the crisis. One subsector of life sciences that was already attracting significant investor appetite before the global outbreak was outsourced pharma services.
Patent expiries, diminishing R&D returns, pricing and cost pressures have led pharma and biotech companies to outsource more activities. These businesses have outsourced services across the drug development, commercialisation, manufacturing and distribution spectrum.
Outsourcing has led to significant innovation and helped to manage costs, re-shaping the future of the industry to the benefit of patients and healthcare providers.
Long investment cycles and growing demand
The pharma industry investment cycles are typically 10+ years. This helps underpin the stability of demand for support services, and creates growth and defensibility for investors. Investment in R&D pipelines has grown steadily as has the trend towards ‘personalised medicine’ with speciality medicines and more targeted therapies. This, in turn, has driven growth in clinical trials, requirement for more specialised expertise and an increase in the number of new medicine launches.
Cost reduction and efficiency
Rising healthcare costs have resulted in greater emphasis on the demonstration of value through efficacy and pricing of medicines relative to alternatives. Pharma companies have responded by outsourcing work to specialist providers who can help reduce costs, deliver better solutions and work in commercial partnership. In addition, smaller pharma and biotech companies with limited resources have successfully used outsourcing rather than having to directly employ staff in key functions.
Delivering personalised medicine and real world evidence
Another key trend has seen patients becoming more informed about their conditions and increasingly playing a key role in decision making. Pharma companies recognise the growing need to move beyond simple patient engagement models to adopting a more patient-centric approach. Outsourced providers of patient insights, real world evidence (‘RWE’) and advanced engagement platforms have seen an increased level of opportunity and investment.
The importance of patient engagement and demonstrating the value of new medicines has increased appetite for data and RWE generated outside of clinical settings to support the approval of new medicines. Digital offerings have opened up new ways of engaging with patients and patient communities and generating RWE.
The demand for personalised medicines is expected to deliver ongoing growth in R&D spending.
The dual tailwinds of growth in R&D spend and outsourcing have created significant growth opportunities for outsourced pharma service providers. There has been a notable increase in deal activity across areas including medical communications, market access, regulatory, manufacturing and tech-enabled service companies.
These trends place pharma services companies at the centre of an evolving landscape shaped by pharma companies relying on commercial partners to help deliver their objectives. Outsourced providers are also better positioned to innovate, foster collaboration and overcome the obstacles associated with pharma company divisions operating in silos.
We believe the fundamentals underpinning the pharma services market will continue to drive strong M&A activity into 2021. We will continue to see median EV/EBITDA multiples comfortably into double digits. We also expect companies directly involved in tackling the spread of COVID-19, such as those in diagnostics and vaccine development, medical affairs, patient engagement and digital insights to be the focus of M&A activity.
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Author: Alex Mackay, Corporate Finance Director - M&A, BDO UK LLP.