McGuireWoods recently held its 16th annual Healthcare Finance & Growth Conference, during which speakers and industry leaders examined various subtopics in the healthcare space.
During the conference, Jeremy Johnson, Senior Managing Director, Head of Investment Banking at Bourne Partners, and Jeff Edwards, a partner at QHP Capital, participated in an afternoon panel discussion of current trends in the pharma services industry, hosted by McGuireWoods’ Bart Walker and Allyson Maur. Consistent with sentiments expressed in other sector breakout sessions, despite some macroeconomic headwinds, deal volume remains steady in several niches and investors continue to be cautiously optimistic moving into the fourth quarter of 2023.
Panelists noted that they have seen an increase in sell-side family- or founder-owned businesses coming to market, but economic uncertainty has kept many of the larger institutional investors on the sidelines in a wait-and-see position. Hesitancy on the part of private equity investors is not attributed to problems with access to capital. There is a considerable amount of capital to be deployed, which may result in increased deal volume in 2024. Access to capital is qualitatively different in the current economic environment than it was in prior recessionary periods. Panelists unanimously agreed that the capital (specifically debt) is there, but it is more expensive to access. Capital-intensive businesses, like certain types of pharma services companies such as manufacturing and sterile fill finish, are often the first to feel the impact of these financial constraints.
When asked to comment on current sector valuations and their impact on deal volume, the panelists agreed that it’s all about perspective. Until recently, it was not unusual to see assets in pharma services selling at historic multiples. Despite some depression on these valuations over the past two years, they are still performing very well — consistent with what was observed in the preceding years.
Acting in tandem, increased interest rates and somewhat lower valuations have made buyers more selective in choosing “quality assets” with strategic partners. From a financing standpoint, panelists observed increased prevalence of direct/specialty lenders stepping in and filling the void where traditional lenders have been less active.
Panelists echoed that they remain optimistic the pharma services sector will see increased deal volume in the coming months. Specifically, they predicted strong performance in the contract research organization (CRO) and contract development and manufacturing organization (CDMO) space, as well as “services-to-services,” sterile fill finish, and other specialty and tertiary service companies. Panelists also predicted that personalized medicine will continue to drive the demand for small batch manufacturing, and that CROs will leverage tech-enabled services to increase patient engagement and compliance in clinical trials.
The panelists agreed that, despite economic challenges, the pharma services segment will continue to be active, and they believe 2024 will see robust deal volume as investors seek out strategic partners and develop creative ways to deploy reserves of existing capital.