Insight

Biopharma Services Industry Update - November 2022

Read more about M&A trends and activity in this sector

Jason Moran

Jason Moran

Managing Director, KPMG Corporate Finance LLC

+1 415-963-7353

Public Markets Update and Outlook

Following the outbreak of COVID-19, the Biopharma Services sector continued to outperform the overall market through the end of 2021 with public valuations that reached all-time highs. However, the sector has since followed the broader market trend with a YTD decline of -33.8% (versus the S&P 500 that is down -18.8%). Biopharma Services stocks currently trade at 15.7x LTM EBITDA compared to a 3-year average multiple of 18.4x.

With the growing probability of a recession, investor sentiment is expected to shift favorably for Biopharma Services particularly for stocks with less exposure to current macroeconomic headwinds. Biopharma Services stocks have typically outperformed the S&P 500 in past economic downturns due to favorable end-markets, variable cost structures, balance sheet flexibility, and high FCF conversion.

Emerging biotech represents an important customer segment for Biopharma Services as these companies outsource the majority of their work. Although biotech stocks have entered bear market territory with a YTD decline of -32.1%, these companies still have an average cash runway of ~27.5 months. Furthermore, the venture capital community continues to aggressively finance biotech companies with ~$25.7 billion raised YTD (compared to ~$32.1 billion for the same period last year). Therefore, demand for services from emerging biotech is expected to continue to be strong over the next 12 months and beyond.
 

M&A Performance Snapshot

Deal Volume

Deal Value ($Bn)

Deal Multiples(1)

PE-backed(2)

* as of October 31, 2022

M&A Market Update

The pandemic and huge inflows of capital for biopharma led to a surge of M&A mega mergers in 2021, while 2022 has seen an expected reversal of this trend. Dealmaking, particularly among mega deals, was hindered because of valuation concerns. Depressed public markets, higher borrowing costs and ongoing supply chain issues added to the deal standoff. However, despite lower deal volumes, dealmaking continued at record-high valuations with the average deal multiple up ~7.7% YTD. Many of the notable deals focused on bolstering capacity and capabilities across the drug development pipeline.

Post-COVID, clinical research companies are now focusing more on improving outcomes and reducing clinical trial costs, while utilizing decentralized clinical trials (DCTs) and incorporating digital technologies — New Mountain Capital acquired The Emmes Company for a consideration of $800 million to support the company’s market expansion of its electronic data capture (EDC) software platforms.

CDMOs are collaborating to meet the growing demand for new modalities such as cell and gene therapy (C&GT) — Catalent continued to add to its cell manufacturing capacity through the acquisition of Erytech’s commercial-scale facility in New Jersey, while Aldevron (a Danaher company) continued to address the bottlenecks in plasmid manufacturing through the acquisition of Nature Technology.

Efficient commercialization capabilities are also in demand as developers face complex regulatory requirements and high development costs — Blackstone and CPP Investments offered an estimated $5 billion for Advarra, the largest integrated provider of IRB services, while Novo Holdings acquired leading omnichannel marketing agency Medical Knowledge Group for ~$1.2 billion.
 

Sponsor-Backed M&A Activity

Financial sponsors participated in 65.0% of deals YTD, with the majority of deals focused on consolidating niche capabilities in the form of add-ons. Investors are increasingly seeking CDMOs with large molecule capabilities — Great Point Partners acquired San Diego-based cell manufacturing CDMO Cellipoint Bioservices. PE-backed clinical networks, including Velocity Clinical Research and CenExel, continued to add research sites in order to expand access to diverse populations. Meanwhile, PE-backed companies Pace Analytical and ProPharma Group expanded their regulatory capabilities through a series of acquisitions.

In addition, the PE community continues to keep its sights on carve-out opportunities — Altaris Capital Partners completed the acquisition of Pfizer’s Meridian subsidiary, the manufacturer of EpiPen and other auto-injector products.

We hope you find this information valuable, and as always, feel free to reach out if you would like to discuss in further detail. To read the full report, download the PDF below.

Footnotes

  1. EBITDA multiples exclude clinical trial software and other health IT-focused transactions
  2. Includes add-on deals


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