Outsourced Pharma Services: Three CEOs Talk Trends and M&A

Interview - September 21, 2023

Pharmaceutical companies of all sizes need help with streamlining drug development and maximizing returns on approved therapies. As a result, they're increasingly turning to outsourced technology and services providers to boost speed and efficiency across their value chains. Such service providers will continue to become more integral to successful and effective pharmaceutical R&D, positioning the subsector for long-term growth.

In July 2023, senior professionals from the Harris Williams Healthcare & Life Sciences Group, including managing director Paul Hepper, managing director Julian Feneley, and director Andrey Dvorkin, discussed this dynamic subsector with three noteworthy CEOs:

Dr. Paul Brooks is CEO of CN Bio, an organ-on-a-chip company whose solutions recreate three-dimensional human organs and tissues in the laboratory to better understand human physiology, disease, and the effectiveness of new drugs.
Rasmus Bech Hansen is founder and CEO of Airfinity, a data analytics company focused on tracking and predicting population-level infectious disease outcomes for pharma companies, governments, and financial organizations.
Amir Malka is co-founder and CEO of Bioforum, which offers data management services for the efficient collection, standardization, and reporting of clinical data.

Here we share the latest drug development trends impacting their growth strategies, the role of M&A in their growth plans, and what an ideal partner looks like for each of their businesses.

Hepper: What are some of the latest trends in drug development that are influencing your company’s focus and how you address customer challenges?

Malka: We see tremendous investment in AI-based solutions across the clinical research ecosystem, given the critical need to shorten development timelines, reduce trial failure rates, and minimize study costs. There are many examples of big pharma companies partnering with AI players, and the number of technology providers focused on data collection from clinical sites and methods for subsequent analysis is growing.

In the past 10 years, we’ve invested heavily in technology, merging it with our expertise to deliver solutions that bring automation to clinical trials and address critical gaps in data management operations. One example is JetConvert, a tool Bioforum developed to help clinical trial sponsors convert clinical data into the FDA-required format. This tool ensures compliance with regulatory standards while maintaining the efficiency and speed necessary to meet trial timelines, reach key milestones, and reduce costs.

Hansen: Looking at the macro environment, there’s a significant opportunity to help those facing challenges from obesity. This segment is growing fast and quickly becoming a new, highly appealing therapeutic area, featuring a large patient population in need of medical support and demand driven more from patients than prescribers. It’s an impactful and interesting market for the industry, and that’s reflected in company valuations. Earlier this year, Eli Lilly overtook J&J as the world’s most valuable pharmaceutical company, while Novo Nordisk is approaching a $400 billion market cap.¹ These are significant changes to the landscape driven by obesity’s growth.

Brooks: At the end of 2022, the U.S. government approved the FDA Modernization Act 2.0, which removed the mandate that new drugs must be tested on animals before humans. Pharma and biotech in the U.S. are now free to use non-animal alternative models for drug development. Since that point, we've had many inquiries about our technology. This reflects a growing interest in the use of organ-on-a-chip to improve the efficiency of drug discovery workflows, while reducing costs and the number of animals used within the sector, with a longer-term view toward their eventual replacement.

Feneley: What are your company’s key differentiators related to winning market share from larger, more established contract research organizations (CROs) or technology companies?

Brooks: At CN Bio, our core competency is combining precision bioengineering with a deep-seated understanding of human physiology. This has enabled us to commercialize a suite of easy-to-use hardware, consumables, and assay protocols that faithfully recreate human organ mimics in the laboratory to accelerate scientific research.

As a whole, the organ-on-a-chip market has taken a step back in the past few years as companies have come into the market with underperforming platforms. We've been in business 10 years and built a platform that’s reliable, robust, and pressure tested, which has established strong customer trust.

Malka: What drives Bioforum’s success is our purpose-built technology, our expertise, and most importantly, our people. Our team has deep clinical research, regulatory, and technology experience.

We work together with clients to develop and execute their data collection and management strategies from start to finish, beginning with database design and taking them all the way through to FDA submission. And we don’t believe in generic solutions; Bioforum offers a boutique approach that is tailored to each clinical trial sponsor’s needs. Our interdisciplinary teams of experts can scale up and down to fill in gaps and provide flexibility for life sciences organizations of all sizes, from established pharma companies to emerging biotechs to medical device start-ups.

While Bioforum has experience across therapeutic areas and as a partner to a diverse range of clients, our specialty is working with small biotechs, medical device start-ups, and other emerging life sciences companies. Today, however, we’re seeing more interest from big pharma companies. These companies are starting to understand that they need more specialized CROs that know exactly how to deliver a niche need, such as clinical trial data management. We also see a trend toward large CROs approaching boutique CROs as subcontractors.

Hansen: It’s always more challenging for a company to replace an incumbent service than to offer a new service it cannot easily access. Therefore, if you want to compete for pharma budgets, it is always better if you can focus on a niche where you provide a unique solution.

The data space has grown substantially, especially around predictive analytics. Many incumbent data providers have been focused on monetizing existing data assets and are typically less focused on how to integrate data sets with others and build real-time, predictive models. That’s where Airfinity can deliver standout value.

In addition, pharma customers, while not the most price sensitive compared to customers in other industries, do look for value. This is especially true in today’s environment when budgets are tight. In a situation where incumbent providers do not offer enough value for the money and continue to increase prices every year, there is an opportunity for disruptors to replace them.

Dvorkin: What differences do you see in working with various types of pharma customers in today’s funding environment? In your expansion efforts, do you focus more on small and mid-sized biotech or big pharma customers?

Hansen: Smaller biotechs are often under budget pressure and don’t have capital or willingness to invest in data on a large scale. For this type of customer, there is no allocated budget for data, and we will essentially need to “create a budget” within their organizations for our solutions. Therefore, we generally find it easier to work with bigger customers in today’s environment.

Brooks: We haven’t avoided large pharma customers; this is where roughly 50% of our product business comes from. However, we often find that biotech customers are more receptive to trying something new to gain a competitive advantage. We're able to get a lot of traction with these biotech companies for our innovative solutions. Having a business that provides both products and contract research services enables us to cast a wide net and work with companies of varying sizes, from big pharma to those that operate virtually to smaller organizations that do not have the resources to bring niche expertise in house.

Malka: We work with companies of all sizes, but the biotech market is where we focus and continue to see much of the innovation in the life sciences industry. Some biotech companies require significant assistance with a broad range of clinical trial activities, and others need CROs purely for operational support. Bioforum offers a flexible service model geared to the data management needs or gaps of emerging companies, a model that takes biotech’s cash flow profiles into account. We understand the serious impact of missteps that could cost small biotechs time and money, and we are always there to support our clients and guide them as much as possible with our services and solutions. Approaching a big pharma customer can be like working with 10 to 20 small biotech customers because of the complex silos within big pharma.

Hepper: Is M&A part of your growth strategy going forward? What would you be looking for in an ideal partner to grow your business?

Hansen: We believe our company can play a significant role in improving global health and the company we envision becoming doesn't currently exist in the market. We also don't think our company would fit well as a division of a larger company. Based on those two assumptions, our goal is to continue to invest in growing as aggressively as possible. There are significant benefits of scale for a data company, as well as advantages to having a local presence combined with a global proposition. For those reasons, the right path forward for a company like ours is to find ambitious growth investors that are not looking for a quick exit, but instead looking to deploy capital toward a longer-term goal. It’s important that an investor has deep life sciences, technology, and innovation experience as well as M&A strength. An organization that could bridge these capabilities would be an ideal partner.

Regarding M&A as a growth strategy for Airfinity, I believe a company needs a certain scale and robust internal processes and structures before undertaking an M&A strategy. We could incorporate a small group but could not do a major acquisition in our current state. With a few more years of continued investment, we will get to a place where M&A is part of our growth playbook. Ultimately, I haven’t seen a large data company that has grown successfully without employing a combination of organic and inorganic growth.

Brooks: The organ-on-a-chip market is growing between 20% and 40% a year, so there is real potential. There are also many small companies coming into the market, which will lead to consolidation to create clear leaders offering complete solutions that work across multiple organs and applications to become the go-to organ-on-a-chip company in a particular area and beyond. As we scale the business, we are looking for partners that know our market's landscape, understand where we are taking our business, and can make introductions. Our company doesn’t yet have the sales and marketing scale to reach every biotech and pharma company, so a big channel to market for us is through CROs. Some CROs have their own venture capital investment departments, which are an interesting opportunity for us going forward.

Malka: With our people, expertise, and technology, we believe Bioforum can play an important role in paving the way for the next generation of clinical trials. As it relates to our technology, bringing the right partner on—who deeply understands the clinical trials ecosystem and its specific needs, and has experience scaling similar technologies—would help us navigate opportunities and challenges as we grow the business. An ideal partner would share our mission to accelerate the development of new therapies and our commitment to fulfilling it by leveraging new technologies, while helping to open doors so that we can achieve our goals. In addition, sharing our dedication to a strong, authentic, empathetic company culture is critical. As Peter Drucker once said, “Culture eats strategy for breakfast.”

The Road Ahead

Pharmaceutical and biotech companies increasingly rely on technology and service providers to accelerate research and development and time to market, while optimizing the commercial success of therapies. This, in turn, creates exciting opportunities for M&A investors in the outsourced services segment.

Harris Williams has strong relationships with many of the most innovative companies in this subsector across commercialization services, contract research, safety and risk management, CDMOs, real-world evidence, clinical trial sites, and data intelligence. To discuss opportunities in these areas, please contact our senior bankers.