Chad Moore, Leerink Partners01.28.16
A number of key themes and drivers are top of mind as 2016 kicks off. But first, I’ll briefly recap 2015, which was good to the publicly-traded pharma services outsourced providers.
On average the group saw revenue grow, margins expand and, for those that track it, book-to-bill ratios hold steady relative to past performance. Year-to-date, through December 17, 2015, this helped propel the publicly-traded CROs higher by approximately 35%. Over the same period the S&P 500 lost approximately 1%.
M&A and public equity market activity was very strong in 2015. I expect interest in the sector to continue in 2016. Both strategic and private equity buyers will be attracted to acquiring companies with unique, difficult to replicate capabilities and above-sector growth expectations. In addition, the most attractive targets will have a solid and long-tenured customer base, project diversity, strong management talent, and a clearly defined, achievable growth strategy. An example of a company with these characteristics is Theorem Clinical Research. In September 2015 it was acquired by Chiltern International after a competitive sale process.
Some other notable 2015 M&A and equity transactions are: Labcorp’s acquisition of Covance; Quintiles’ and Quest’s JV for global clinical trials laboratory services; INC Research’s private equity owners sold shares in two follow-on offerings; PRA Health Sciences’ private equity owner essentially took a loan against a portion of its PRA shares to provide a return to its limited partners; ICON’s acquisitions of MediMedia Pharma Solutions and PMG Research; Wuxi PharmaTech taken private; PAREXEL’s acquisition of Quantum Solutions India; and Charles River Labs’ acquisition of Celsis International.
2016 Outlook
M&A activity is expected to continue. PwC predicts that 2016 will be ‘the year of merger mania’ in many healthcare sectors including life sciences and biopharma.
Assuming the public equity market is accommodative to new issuances I expect to see additional companies pursue an IPO. New issuances could include companies in the CRO and CDMO sectors.
Scrutiny of drug prices is expected to positively impact demand for medical affairs, comparative effectiveness, Phase IV, HEOR and other post-approval services. These services help validate a drug’s merits, identify the benefits to patients and support prices. Outsourcing of Phase IV/post-approval services is about 30% currently and trails the approximately 50% seen in Phase II/III. Over the coming years I expect Phase IV/post-approval outsourcing to expand faster than the growth of Phase II/III outsourcing.
How will the biotech funding environment impact the sector? No need to sound the alert yet as biotechs have annually raised increasing amounts of capital since 2011. If the funding window does close for a period of time, customer diversification and relative size will become a focus for pharma outsourcing providers. The most fragile biotechs represent a small portion of R&D spending.
Larger pharma outsourcing providers should be able to weather a disruption easily due to customer diversification and the small amount of revenue generated from these sponsors. However, some smaller pharma outsourcing providers with meaningful exposure will find rougher waters if its biotech customers are unable to obtain funding at reasonable terms.
I believe the growth of biologics / biosimilars and particularly the associated complex development, formulation, manufacturing, distribution and administration requirements is creating opportunities for CDMOs and CROs to partner with these sponsors.
Technologies to improve the quality and efficiency of trials should continue gaining traction and the attention of acquirors. Areas of particular interest include patient recruiting and retention, risk-based and remote patient monitoring, comparative effectiveness, patient engagement including the use of social media and disease-specific online communities, protocol adherence, and analytics to aggregate, analyze and clearly communicate in real-time data to improve quality and efficiency.
Given the growth of mobile medical apps, the FDA’s review of them should grow in lockstep. Generally, the FDA deems a medical app a ‘medical device’ if the functionality could pose a risk to a patient’s safety if the mobile app were to not function as intended. The growth in mobile medical apps should benefit CROs that help app developers comply with the FDA’s Level III/premarketing approval (PMA) regulations.
Chad Moore
Leerink Partners
Chad W. Moore, CFA, is a managing director in global investment banking at Leerink Partners. He leads the firm’s outsourced pharmaceutical services and IT investment banking effort. He can be reached at chad.moore@leerink.com or +1-703-216-7120. Note: This article is not a product of Leerink Partners’ Research Department. It represents the opinion of the author and not necessarily that of Leerink Partners.
On average the group saw revenue grow, margins expand and, for those that track it, book-to-bill ratios hold steady relative to past performance. Year-to-date, through December 17, 2015, this helped propel the publicly-traded CROs higher by approximately 35%. Over the same period the S&P 500 lost approximately 1%.
M&A and public equity market activity was very strong in 2015. I expect interest in the sector to continue in 2016. Both strategic and private equity buyers will be attracted to acquiring companies with unique, difficult to replicate capabilities and above-sector growth expectations. In addition, the most attractive targets will have a solid and long-tenured customer base, project diversity, strong management talent, and a clearly defined, achievable growth strategy. An example of a company with these characteristics is Theorem Clinical Research. In September 2015 it was acquired by Chiltern International after a competitive sale process.
Some other notable 2015 M&A and equity transactions are: Labcorp’s acquisition of Covance; Quintiles’ and Quest’s JV for global clinical trials laboratory services; INC Research’s private equity owners sold shares in two follow-on offerings; PRA Health Sciences’ private equity owner essentially took a loan against a portion of its PRA shares to provide a return to its limited partners; ICON’s acquisitions of MediMedia Pharma Solutions and PMG Research; Wuxi PharmaTech taken private; PAREXEL’s acquisition of Quantum Solutions India; and Charles River Labs’ acquisition of Celsis International.
2016 Outlook
M&A activity is expected to continue. PwC predicts that 2016 will be ‘the year of merger mania’ in many healthcare sectors including life sciences and biopharma.
Assuming the public equity market is accommodative to new issuances I expect to see additional companies pursue an IPO. New issuances could include companies in the CRO and CDMO sectors.
Scrutiny of drug prices is expected to positively impact demand for medical affairs, comparative effectiveness, Phase IV, HEOR and other post-approval services. These services help validate a drug’s merits, identify the benefits to patients and support prices. Outsourcing of Phase IV/post-approval services is about 30% currently and trails the approximately 50% seen in Phase II/III. Over the coming years I expect Phase IV/post-approval outsourcing to expand faster than the growth of Phase II/III outsourcing.
How will the biotech funding environment impact the sector? No need to sound the alert yet as biotechs have annually raised increasing amounts of capital since 2011. If the funding window does close for a period of time, customer diversification and relative size will become a focus for pharma outsourcing providers. The most fragile biotechs represent a small portion of R&D spending.
Larger pharma outsourcing providers should be able to weather a disruption easily due to customer diversification and the small amount of revenue generated from these sponsors. However, some smaller pharma outsourcing providers with meaningful exposure will find rougher waters if its biotech customers are unable to obtain funding at reasonable terms.
I believe the growth of biologics / biosimilars and particularly the associated complex development, formulation, manufacturing, distribution and administration requirements is creating opportunities for CDMOs and CROs to partner with these sponsors.
Technologies to improve the quality and efficiency of trials should continue gaining traction and the attention of acquirors. Areas of particular interest include patient recruiting and retention, risk-based and remote patient monitoring, comparative effectiveness, patient engagement including the use of social media and disease-specific online communities, protocol adherence, and analytics to aggregate, analyze and clearly communicate in real-time data to improve quality and efficiency.
Given the growth of mobile medical apps, the FDA’s review of them should grow in lockstep. Generally, the FDA deems a medical app a ‘medical device’ if the functionality could pose a risk to a patient’s safety if the mobile app were to not function as intended. The growth in mobile medical apps should benefit CROs that help app developers comply with the FDA’s Level III/premarketing approval (PMA) regulations.
Chad Moore
Leerink Partners
Chad W. Moore, CFA, is a managing director in global investment banking at Leerink Partners. He leads the firm’s outsourced pharmaceutical services and IT investment banking effort. He can be reached at chad.moore@leerink.com or +1-703-216-7120. Note: This article is not a product of Leerink Partners’ Research Department. It represents the opinion of the author and not necessarily that of Leerink Partners.
