• Sponsors swipe right on medical communications agencies
• Drug development services more challenged, but “still got it”

“Outsourced pharma services” may not sound very sexy, but private equity (PE) investors get love hearts in their eyes when the topic comes up.

The sector will see strong M&A activity in Europe in 2024, amid a resilient pharma and life sciences sector, and with a number of private equity-owned assets reaching maturity, sector bankers told Mergermarket.

Medical communications agencies, which provide pharma companies with services centred around commercialising new drugs, are looking particularly attractive, two of the bankers said.

A number of PE-owned businesses in this area which were acquired in 2019-2021 are expected to come up for sale, the two bankers and a third banker agreed.

UK-based Avalere Health (until recently named Fishawack Health) is expected to come to market in 2024, Mergermarket reported last week. The company has been owned by Bridgepoint since 2020.

Other UK-based PE-owned medical communications agencies include Lucid Group, owned by ICG since 2021; Prime Global, owned by Levine Leichtman Capital Partners since 2021; Helios Medical Communications, acquired by NorthEdge in 2021; and Inizio (previously Huntsworth), acquired by CD&R in 2020.

According to Mergermarket’s Likely to Exit (LTE) predictive algorithm*, Avalere has an LTE score of 53 out of 100, Lucid has a score of 28, Prime Global has a score of 27, and Helios has a score of 19.

Assets in this space have had fast growth, including via buy-and-build strategies, and some of them could have been exited already in 2023, if the debt markets had been stronger, two of the bankers said.

Medical comms have been an entry point into pharma services for many PEs, and more and more generalist PE houses are wanting to tie the knot, one of the bankers said. A number of big sponsors are “desperate” to get into the space, and could outbid trade buyers, he said.

Cashed-up big pharma companies are the main clients for the medical comms sector, so it is resilient to market downturns, one of the bankers said.

Average multiples for this type of asset are currently somewhere below 15x EBITDA, compared to 15-16x during the pandemic, and around 12x pre-pandemic, another of the bankers said.

European M&A activity in outsourced pharma services has seen a general up trend in the past five years in terms of number of deals. 2019 and 2020 each logged 13 deals, which increased to 17 in 2021, 16 in 2022 and 15 in 2023 to date. 2020 and 2021 recorded the highest deal volumes, of EUR 5.2bn and EUR 3.4bn respectively.

Sponsor-related deals, with a private equity as either buyer or vendor or both, follow the same trend, with number of deals more than doubling between 2019 (four deals) and this year to date (nine deals).

CROs and CDMOs

Aside from medical comms, other outsourcing services to the pharma industry include contract research organisations (CROs), which provide clinical trial services, and contract development and manufacturing organisations (CDMOs), which provide drug development and drug manufacturing services. These have also been darling assets for private equity in the past few years, the bankers said.

As outsourcing became more prevalent as a means of cost-saving, speeding up R&D, optimising timing to market, and maximising commercial success, sponsors fell in love with pharma services. It gives them exposure to the drug development industry without exposing them to the high, binary risks in actual drug development, one of the bankers said.

Among these assets, German biologics CDMO IDT Biologika, owned by the Klocke family, is in the late stages of a sale process, as reported by Mergermarket.

German CDMO Axplora (previously PharmaZell), held by Bridgepoint since 2020, has an LTE score of 32, while UK CDMO NextPharma, held by CapVest since 2017, has an LTE score of 28.

Spanish biologics CDMO 3p Biopharmaceuticals, owned by Keensight Capital since 2019, has an LTE score of 22.

Although M&A in the CRO and CDMO space will continue to be active and of interest to private equity, it is not quite as booming as it has been, two of the bankers said. CRO and CDMO services are used to a large extent by pre-revenue biotech start-ups, which are dependent on equity fundraisings. As the funding environment for these companies has been tough for the past couple of years, M&A among CROs and CDMOs might be a bit quieter, two of the bankers said.

There are hopes, however, that this could improve towards the later part of 2024, one of the bankers said. “A number of CROs and CDMOs are slated to go to market next year”, he added.

The banker noted that the CRO and CDMO market is still growing at high single-digits and remains attractive. “I’m long term bullish on the sector”, he said.

A sector lawyer said that a softening of valuations in the CRO and CDMO space could instead mean that these assets become even more attractive takeover candidates for PE.

Among notable deals this year, US-based Cencora [NYSE:COR] (formerly AmerisourceBergen) completed its EUR 1.28bn acquisition of Germany-based PharmaLex, while UK-based Ergomed was taken private by Permira for GBP 703.1m.

Ireland-headquartered, international CRO ICON plc is looking for smaller acquisitions in an active M&A market, the company told Mergermarket in a recent interview.

*Mergermarket’s LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.