PE Actively Hunting Investment Opportunities in CROs

26 Mar

By Alejandro Zamorano, VP of Business Development, LSN 

As of late, LSN has seen a dramatic uptick in the number of investors focusing on allocations to service providers. It is evident that the appeal stems from two fundamental factors: first, service providers provide less investment risk to investors relative to companies developing therapeutics, diagnostics and medical devices, as they can generate cash flow quickly by avoiding exposure to regulatory approval. Second, service providers’ growth is boosted by taking advantage of big pharma’s appetite to outsource non-core competencies, such as assay development, toxicology, clinical development, and manufacturing service providers. As a result, service providers are in a golden age of opportunity.

As evidence, for the past two years, some of the industry’s largest service players have been on a hiring spree in order to support their increasing workflow. Forbes reported recently that, in a poll of 388 drug makers and biotechs, CRO clients saw a 9% increase in outsourced R&D budget, with total market penetration by CROs increasing from 35% to 38%. Among large drug makers, 27% expect to outsource, while 47% of emerging biotechs are expecting to outsource. This growth trend bodes well for an industry that is largely insulated from the risk that plagues the rest of the industry, and allows investors to take some advantage of macro trends without the downside of exposure on a therapeutic asset level.

All service providers, however, are not created equal. Service providers focused on preclinical development are projected to have the lowest growth prospects in the short term as they suffer from the declining R&D budgets. Clinical service providers like Parexel and Icon are projected to have the strongest growth with revenues projected to grow by over 12% for next three years. Despite the apparent abundance of service providers, the industry is currently just barely keeping up with demand.

Private equity has the most appetite for service providers in the life science, as their large capital investment can significantly expand the marketing and sales efforts of small operations leading to substantial returns. By using the added capital, service providers can also expand their service portfolio, adding to new revenue opportunities.

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