Picks and shovels for clinical data miners and more…

The ongoing drug development bonanza heads into another bullish year. Record amounts of capital, compounds in development, new drug approvals by the FDA, and valuations afforded promising drug therapies fuel to continue biopharmaceutical company innovation and investment. The pharmaceutical services industry stands to benefit in serving these companies. We observe the following key market dynamics that will influence near-term M&A activity for pharma services companies:

-Record biopharmaceutical industry funding and continued outsourcing trends are powerful tailwinds driving pharmaceutical services market growth

Biopharmaceutical companies have raised unprecedented amounts of capital over the past four years (combined public and private market funding in excess of $100B annually vs less than $40B per year prior to 2015), most of it to fund clinical drug development(1). The biotech company stock market index is the third best performing sector over the last 10 years, supported by premium M&A exits. Capital continues to flow into the sector, stocking the coffers to fund drug development and providing continued momentum for outsourced pharmaceutical services providers. The rate of outsourcing continues to increase, producing outsourced pharma services market CAGR of 7.8% since 2013, which is more than 2.5x the already healthy average annual 3.1% increase in pharma industry R&D spending over the same period.

M&A / INVESTMENT IMPLICATIONS: Pharmaceutical services industry fundamentals make it an attractive sector for investors, given the growth prospects. Outsourced drug development services companies are in high demand by both strategic acquirers and private equity firms.