The outsourced pharmaceutical services sector provides a wide range of opportunities for strategic acquirers and private equity investors. Motivated by the need to become more efficient in drug development and maximize returns on approved therapies, pharmaceutical companies are turning to outsourcers to drive efficiency across their value chains.
In this article, Paul Hepper, a managing director in the Harris Williams Healthcare & Life Sciences (HCLS) Group, discusses a segment within outsourced pharmaceutical services offering robust opportunities for buyers. Hepper draws upon recent experience with WIRB-Copernicus Group (WCG) and Synowledge to identify three traits setting the best assets apart.
- Growing global consumption of pharmaceuticals, increasing regulatory complexity and the appeal of outsourcing are supporting strong growth in safety and risk management.
- Two promising segments within the category are especially promising for buyers: regulatory affairs and pharmacovigilance.
- Three important traits set the best assets apart: customer dynamics, scalability, and breadth of product offerings and geographies.
Across the pharmaceutical value chain, outsourced services are gaining traction, from drug discovery, contract research, and contract manufacturing to commercialization services, safety and risk management, and pharmaceutical IT. (See Return on Innovation, Part 1: Commercialization Services, and Part 2: Contract Research Organizations.)
Where Safety and Innovation Intersect
In an industry dedicated to creating breakthrough medications, innovation and safety go hand-in-hand. The more innovation being generated by the industry, the more the need to ensure safety and risk management are managed effectively.
Hence the growth being experienced by the pharmaceutical safety and risk management segment, which includes two sub-segments: regulatory affairs and pharmacovigilance.
The global regulatory affairs outsourcing market size is forecasted to grow from $5.7 billion in 2018 to $13.9 billion by 2026 for a CAGR of 11.9%.1
Figure 1: Regulatory Affairs Spending Grows to $13.9 Billion
Source: Grand View Research, March 2019
Regulatory affairs outsourcers help pharmaceutical manufacturers manage the complex regulatory process, which involves making regulatory submissions, complying with standards, and communicating with regulatory bodies across jurisdictions. Their services typically include regulatory consulting and support, regulatory submissions, medical and technical writing, publishing and labeling, risk evaluation and mitigation, and audit compliance.
“Strong industry tailwinds are driving growth in regulatory affairs. They include more outsourcing by pharmaceutical companies, greater regulatory complexity, and growing global use of pharmaceuticals,” says Hepper.
To the last point, U.S. pharmaceutical companies report their domestic and global sales exceeded $400 billion in 2018, showing steady growth over the previous decade (Figure 2). That growth in sales is fostering steady increases in spending on research and development (R&D) (Figure 3).
Figure 2: Pharmaceutical Revenue Shows Steady Growth
Source: PhRMA, 2019 Annual Membership Survey
Figure 3: R&D Spending Continue to Climb
“With more revenue, and more projects going through R&D, there’s a greater need for regulatory affairs services,” says Hepper. “Pharmaceutical companies are also trying to offload fixed costs and become nimbler. That’s increasingly important as they grapple with the loss of exclusivity on blockbuster drugs, the rising costs of drug development, growing pressure from payors on pricing, and smaller patient populations.”
For its part, the global pharmacovigilance market is expected to reach $6.7 billion by 2023 from $3.2 billion in 2017, growing at a CAGR of 13%.2
Figure 4: Global Pharmacovigilance Market Growing at 13%
Source: Knowledge Sourcing Intelligence LLP, November 2018
Companies in the segment help pharmaceutical companies meet complex regulatory requirements by receiving, analyzing and reporting adverse drug events (ADEs), product quality complaints and medical inquiries across the drug development lifecycle. They typically offer a range of drug safety services, including ADE and medical information call centers, case processing, submissions, aggregate reporting, signal detection, and literature search.
The segment’s growth is fueled by growing consumption of pharmaceutical products, itself driven by an aging population and increased access to healthcare in emerging markets. Greater regulatory scrutiny resulting from a steady climb in ADEs is an additional growth contributor.
“ADEs can require pharmaceutical companies to pay fines and pull products from the market,” says Paul Hepper, a managing director in the Healthcare & Life Sciences Group. “The cost of failure massively outweighs the cost of pharmacovigilance services.”
“In particular, outsourced pharmacovigilance services are in demand because of the process efficiencies, expertise, and cost savings they enable pharmaceutical companies to achieve,” says Hepper. “Outsourcing pharmacovigilance also allows pharmaceutical manufacturers to handle variable case volumes in a flexible and cost-effective way and tap into new supplies of hard-to-find skilled labor,” he notes.
Three Traits Setting Top Assets Apart
Strategic buyers and private equity investors seeking to share in this growth should consider three key company traits: customer dynamics, scalability, and breadth of capabilities.
Hepper notes that understanding the diversity—and conversely, concentration—of a company’s customer base is essential. It’s also important to have insight into the company’s revenue model and its mix of project-based work versus recurring revenue.
“A diverse customer base reduces concentration risk but also can be less efficient,” says Hepper. “And while project-based work can be lumpier and harder to forecast than recurring revenue, it can also be very profitable.”
Nonetheless, says Hepper, a preponderance of recurring revenue typically catches buyers’ attention. Synowledge, for example, a provider of drug safety, regulatory affairs, and related IT services to pharmaceutical, biotechnology, and medical device companies, garnered strong attention during its sale because almost all of its revenue was recurring, protected by five-year contracts with large pharmaceutical companies.
“Companies don’t need to have 100% recurring revenue to be attractive acquisitions,” points out Hepper. “Buyers just need to understand the mix. If the company specializes in project-based work, how long are those projects? Are they leading to recurring revenue? What’s the history of repeat clients? And who are they serving? Big Pharma, or small pharma and biotech?”
As Hepper explains, small pharmaceutical and biotech companies can be lucrative clients for safety and risk management companies because they have a critical need for a wide range of services and typically lack specialized internal resources. In comparison, larger clients typically have well-developed internal capabilities and are more likely to need individual solutions to fill gaps. Concentration risk is another variable to consider. A broad portfolio of smaller clients may require more work to service, but it also provides some insurance against revenue loss.
“It's not that one is better than the other,” says Hepper. “When we were working with Synowledge, we had to get buyers comfortable with the fact that the top five customers represented 80% of the company’s revenue. That required intensive scrutiny of contract terms and customer relationships. If you’re looking at a safety and risk management company with more, smaller clients in project-based work, you should focus on new customer win rates and sales effectiveness. The company’s ability to feed the funnel will be critical.”
As Hepper explains, effective growth strategies can be severely limited by a company’s inability to scale. For safety and risk management companies, scaling is all about human capital management.
“This is an expertise-driven business, and growth relies upon the ability to recruit and retain specialized talent, including people with advanced degrees and medical training,” says Hepper. “There’s also a limited pool of qualified people, so maximizing their efficiency is critical.”
As such, buyers should evaluate a company’s turnover rates and recruiting systems, as well as the technology and infrastructure it uses to make them more efficient and maximize the application of their expertise. Examples include databases to house institutional knowledge and collaboration software that allows employees to share and apply expertise more broadly.
Location is another important variable, says Hepper. Safety and risk management companies in high-cost areas with strong competition for top talent will face growth headwinds that companies in more favorable locales will not. Companies able to tap into offshore talent can enjoy particular advantages.
“Synowledge was very good at recruiting and retaining experts in India,” says Hepper. “It also had the infrastructure to connect that talent with its clients. That allowed it to tap into a sophisticated labor pool at a lower relative cost than competitors without those capabilities.”
Geographic and Service Offering Breadth
As well as having the ability to use global sources of talent, leading pharmaceutical safety and risk management companies are also able to deploy talent on a global basis.
“Having a global footprint is becoming absolutely necessary,” says Hepper. “If you're serving Pfizer, Pfizer has global footprint. It has offices all over the place, and you have to be able to service all of them.”
Service offering breadth is equally important. “That could mean starting with a pharmacovigilance business and adding regulatory affairs, medical writing, or FDA consulting capabilities,” says Hepper. “The goal is to offer more critical services to the same customer within a pharmaceutical company, who is typically the person in charge of regulatory affairs.”
Hepper cites another Harris Williams client as an example of a company able to achieve significant geographic and service offering breadth. WIRB-Copernicus Group (WCG) specializes in improving the quality and efficiency of clinical trials by offering a more comprehensive solution.
Built via acquisition of smaller platforms, WCG coordinates and tracks clinical trials and institutional review boards on a global basis, from finding sites, investigators, and patients in local geographies to gathering and reporting trial results. That’s typically a disjointed, time-consuming process—but WCG can manage its entirety and shrink its timeline from six months to one.
“That’s incredibly valuable to pharmaceutical companies,” says Hepper. “A drug’s patent life is running off while these trials are happening, so the company is losing money the whole time. Having it be a simpler, faster process is worth a lot to them.”
With mission-critical services linked directly to major global demographic trends, both regulatory affairs and pharmacovigilance companies provide significant upside opportunities for buyers.
As they consider potential targets, buyers should consider customer dynamics, scalability, and breadth. Assets with favorable dynamics in those areas will position their owners to tap into the full growth potential of this promising segment.
For more insights on pharmaceutical outsourcing, see Return on Innovation, Part 1: Commercialization Services, and Part 2: Contract Research Organizations.
Published October 2019
1. Grand View Research, March 2019
2. Knowledge Sourcing Intelligence LLP, November 2018