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Buying spree: Drug discovery services continue to attract UK and foreign acquirers

According to Catalyst Corporate Finance (“Catalyst”), the UK business of Alantra, a leading adviser to the Healthcare sector, UK service-based pharmaceutical businesses involved in the “smart” parts of the market are experiencing mounting interest from both UK and foreign acquirers despite Brexit and other macro concerns.

In January 2018 alone, three drug discovery businesses have been acquired, most recently with Spectris buying Manchester-based Concept Life Sciences in order to expand its testing services and capitalise on growth opportunities in the pharmaceutical and life sciences sectors.  This deal follows Charles River’s acquisition of UK-based KWS Biotest and Eurofins’ acquisition of UK CRO Selcia.

These acquisitions continue a trend of increasing deal activity in drug discovery services and related businesses, which began last year when Phoenix Private Equity acquired Sygnature Discovery.   Fifteen UK drug discovery service and related businesses have been acquired or raised capital during 2016 and 2017, and this upward trend looks set to continue in 2018.

Catalyst’s Tom Cowap, a Principal in the healthcare sector team, identifies the following drivers behind this trend:

  • “Outsourcing is now a well-documented trend for Big Pharma on account of historically profitable drugs coming out of marketing exclusivity, the lower returns on investment in new drugs and the stricter regulatory requirements, which in turn lead to higher failure rates, making it harder to get molecules to market.

  • Two less publicised shifts have also occurred:

o    “In search of financial returns, Big Pharma has started to move into new areas that it would not have previously tackled, such as rare diseases. This means that Big Pharma companies are operating in areas where they may not have in-house expertise, driving them to look for that expertise externally – including in the preclinical stage.

o    “Big Pharma also reduced its level of investment in its early stage pipeline some 7 years ago to focus on developing and launching molecules in its clinical stage pipeline; and as a result of this, it later had very little in its pipeline which has motivated it to acquire drug candidates through smaller businesses.

  • “External investors have taken note of Big Pharma’s appetite for development businesses, which has in turn attracted early stage investors into the market and increased the availability of funding.  This has also attracted more talent to the market – creating a virtuous circle. These smaller start-ups are generally funded by specialist venture capital funds and we believe that this will continue for the short term at least.  The market fundamentals and recent acquisitions show that there are returns to be made, and as long as that remains the case, investors will put money into the market.

  • “These small drug developers have seen rapid expansion and are becoming increasingly important players in the development of drugs.  As they do not have Big Pharma’s internal capabilities – (in fact they’re often “virtual” businesses) – they frequently depend on outsourcing for the early stage development and testing of their molecules as well as the clinical phase.

  • “Although there are some large well developed outsourcers in the pre-clinical space such as Evotec and Charles River, they are far fewer in number than in the clinical CRO space, which saw an acceleration in outsourcing between 2011 and 2015.  Outsourcing in the discovery services market shares some similarities with the broader CRO market of ten years ago.  As a result Outsourced Integrated Drug Discovery Services (IDDS) is an area that is likely to mature and consolidate; and we expect strong growth in this area going forwards.

  • “These trends are reinforced by a new report released by the BioIndustry Association (BIA) and Informa Pharma Intelligence showing that the UK has the strongest clinical and preclinical pipeline in Europe. It also shows that more UK biotech companies are maturing and moving through the financing life cycle, with UK biotech company IPOs raising more than twice as much money in 2017 than in 2016.”