Private equity (PE) investors have long poured money into the healthcare industry, commonly investing in physician practices and hospitals. But in the past couple of years, a new sector is gaining momentum among investors: pharma services.
The sector comprises companies that provide any services to the biopharmaceutical industry, from preclinical development and clinical trials to manufacturing, distribution, and commercialization, according to Rebecca Springer, lead healthcare analyst at global market data company PitchBook, which released a report in June outlining PE interest in pharma services.
“Although PE investment in pharma services reaches back to the 1990s, the past decade has seen industry trends converge to make the space increasingly attractive, and over the past two years, pharma services has become the hottest area of PE healthcare investing,” the report stated. Roughly 432 pharma services PE deals were made from 2017 to 2019, compared to 774 deals made between 2021 and 2023. And so far in 2024, about 50 deals have been made. The life services sector as a whole raised about $14 billion globally from 2012 to 2014, compared to $59.4 billion globally from 2021 to 2023, the report found.
Why are investors interested in pharma services? One reason is because the provider space has become more difficult to successfully invest in, according to Springer.
“It’s become harder to exit large specialty physician group investments; there are regulatory headwinds,” she told Healthcare Brew.
Meanwhile, because the industry is still so fragmented, there’s a lot of opportunity for deal-making, according to Springer.
There are several reasons for the pharma services sector’s rapid growth. One is due to scientific advancements in pharmaceuticals, like cell and gene therapies and mRNA vaccines, which have filled the market with “potentially groundbreaking candidates,” according to the PitchBook report. Those innovations have driven increased interest from investors, as well as more investment in research and development from pharma companies.
Because these more complex pharmaceuticals are harder to develop, manufacture, and commercialize, pharma companies have increasingly outsourced parts of the process, which provides more opportunities for pharma services companies, Springer said.
“By outsourcing either specific functions or even the entire development cycle, a big pharmaceutical company can often realize cost savings, time savings—and that’s the opportunity,” she said.
Notably, more investors who haven’t historically put money into pharma services are getting into the space, according to Springer. For example, InTandem Capital Partners was previously a “pure healthcare services firm” that invested in clinical trial site network Adams Clinical in May, Springer said. The financial terms of the deal weren’t released.
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“It will be interesting to watch who is able to get up to speed quickly on what is a very complex and dynamic market, and make smart bets,” she said. “Investors will have to make bets carefully in order to be successful in the space.”
While it’s too early to gauge how risky investing in the pharma services market is compared to other segments of the healthcare industry, the sector does pose some unique challenges, according to Springer. For example, “an entire line of scientific investigation can sort of dry up in terms of funding very quickly if a couple of trial results come out that are unfavorable,” she said.
Amylyx Pharmaceuticals, a Massachusetts-based biopharma company working to develop a drug to treat amyotrophic lateral sclerosis, closed a Series C funding round in 2021 worth $135 million with investors, including PE firms Bain Capital Life Sciences and Perceptive Advisors.
But the company announced this March that its drug failed its Phase 3 clinical trial. Following the news, the company’s stock fell more than 80%, Stat reported. And in its Q1 2024 earnings results in May, the company reported a $118.8 million net loss compared to a net income of $1.6 million for the same period the year prior.
At the same time, Springer added, there are typically better margins in pharma services compared to other segments, and investors don’t have to worry about the reimbursement and regulatory issues seen in other investment areas.
Yes but…although PE investor interest is growing, according to the PitchBook report, overall PE deal activity in the pharma services sector declined about 19% last year from 275 deals in 2022 to 222 in 2023, which is in line with the rest of the market.
Q1 2024 has also gotten off to a slow start for the sector: around 50 deals have either been announced or closed.
But Springer said analysts expect things to pick up throughout the year, projecting a “sort of gradual recovery” that should speed up once interest rates decrease.
“[Recovery] will probably happen sort of faster and sooner for pharma services because there is a lot more investor enthusiasm and interest in this space in particular,” she said.