Houlihan Lokey - Spring 2024 Pharma Services

Last month, the Healthcare Group at Houlihan Lokey published their Spring Pharma Services sector spotlight.

Amongst other things, the report provided a thorough assessment, with a US lens, of the current state of the sector, key trends, factors influencing the market and future development.

Here are my key takeaways from the report:

The sector

The spotlight shows the pharma services sector continues to grow, with outsourced services seen as an efficient way to maximise return on investment (ROI) when dealing with long and expensive development processes. Key drivers leading to the adoption of outsourced partners include:

·      Limited infrastructure and capabilities

·      Lack of knowledge / expertise

·      Reduce time to market

·      Need to reduce cost

Growth

Pharma services growth (CAGR) is outperforming other healthcare segments at 8.4%.

59% of the businesses in the space are PE owned, with 32% privately held and 9% public. As complexity around drug development continues, outsourcing will remain attractive and Houlihan Lokey believe we can expect to see continued investment and M&A in the space.

Macro tailwinds

The report shows there are strong macro factors at play driving healthcare demand, and with that, the volume and complexity of new drug development.

Globally we have an aging population, increased rates of chronic disease and climbing healthcare costs. In the US over 70% of adults have 2 or more chronic illnesses, which in general terms is consistent with the global rise of comorbidities. Life expectancy has also increased.

These factors show no sign of slowing and are supporting the continued demand for outsourced service providers who assist in the drug development and production process.

Complexity and Cost

Demand for increasingly complex drugs is continuing to grow. For small to mid-cap biotech firms, with great pressure on limited resources and cost, the outsourcing sector will play a vitally important role in their ultimate success.

As new generation molecules, advanced therapies, and modalities to tackle chronic and difficult-to-treat diseases increase, so complexity and cost will grow.

📈 Biologics, orphan drugs, mRNA therapeutics, and cell and gene therapies are forecasted to experience double-digit growth in the coming years.

✅ With greater complexity embedded throughout development and manufacturing, these processes are ripe for outsourcing.

💨 Expedited approval processes are becoming more prevalent, which require greater efficiency and expertise.

✅ Quicker approval processes are often more complex to navigate and need a level of technical input that outsourcing expertise can offer.

📉 Returns on R&D are declining.

✅ CROs, CDMOs, and commercialization organizations providing cost effective, efficient, and technically advanced outsourcing options are obvious route forward.

Summary

Houlihan Lokey’s report offers evidence to support sustained, durable tailwinds that will continue to drive long term demand for the outsourced services sector.

Sustained demand for innovative medical technologies and advanced therapies has created optimism across the Biotech funding environment. I will caveat this to say such optimism won’t be evidenced in the outsourcing space for 12-18 months yet.

Increasing investment in R&D will sustain demand for outsourcing partners, as will growing complexity in drug development.  And as novel drug approvals continue to grow, so will the need for manufacturing and supply chain capability to meet capacity and demand.

You can read the full report via the link in the comments, which also goes into more detail around M&A activity, but I hope my summary offers you a useful overview of how the report views the pharma services market.