After a muted first half for M&A in the pharma commercialization sector, investment banks are looking forward to a busier one next year.
Those who specialize in the middle market say several recent signs support the notion that a long-awaited upturn in deal activity is afoot.
For one, macroeconomic uncertainty is dialing back.
Two, recent deals have tended to be larger ones versus those of the “tuck-in” variety.
The third is a desire among private equity backers, who have been holding onto their biopharma commercialization businesses through the downturn, to get liquidity from transactions executed in 2020 and 2021.
“We’ve had a lot of conversations,” said Tom O’Connor, managing director and co-head of healthcare investment banking for Canaccord Genuity. “We think the story is that a lot of [pharma services/commercialization] companies are looking to go out to market once they sense a better macro environment.”
High interest rates were one factor that chilled dealmaking. Since March 2022, the Federal Reserve has raised rates 11 times to tame inflation. However, policymakers held interest rates steady at their early November meeting and many experts think no more hikes are coming.
“We think the Fed has stopped raising rates and there’s potential for them to lower the rates as you get into 2024,” added O’Connor. “The IPO market has been closed; hopefully that starts to change.”
In addition, said Mark Martin, managing director at investment bank Houlihan Lokey, pharma commercialization budgets look poised to pick up a bit more next year. “That’s going to converge with those other dynamics,” he noted.
Evolving dealmaking approach
Among other encouraging developments are the quality of deals that have transpired. Through June, deal activity across the pharma commercialization services sector remained flat versus the same period last year.
According to an accounting by Canaccord, the tally of 36 first-half deals fell far below last year’s first-half peak of 51.
Many of these — between 65% to 70%, by O’Connor’s count — involved strategic acquirers of smaller, founder-owned add-ons taking on their first institutional capital. That dynamic continued into the second half, with Spectrum Science, which is newly-backed by PE firm Knox Lane, acquiring CrowdPharm and Hot Iron Health (HIH) last week.
Those may be starting to give way to larger deals.
Last month, life science software firm Prendio traded to PE firm Primus Capital for what bankers say was a hefty investment. Ditto for continuing education company Therapeutic Research Center (TRC), which last week changed hands, from PE firm Levine Leichtman Capital Partners (LLCP) to Colibri Group’s Gridiron Capital.
Add to that OptimizeRx’s $95 million acquisition of Medicx Health, which closed last month, as well as Nordic Capital acquiring a majority stake in commercialization/market access platform IntegriChain from Accel-KKR in early November.
“You’re starting to see deals print,” said O’Connor. “These are big deals getting done, whereas most of the deals in 2023 have been smaller.”
Experts view the larger deals as good signs in the marketplace as well as catalysts for more.
“The pipeline for deals greater than $500 million in enterprise value for the next 18 months is easily double what it’s been the last 12 to 18 months,” said Martin. “That’s a stat that’s impossible to nullify.”
PE sees opportunities abound
What type of deals may be on the horizon? Higher cost of debt and falling macroeconomic confidence led to fewer PE deals in the first half. Just 26% of those that transpired were classified by Canaccord as PE deals (as opposed to those relating to PE-backed businesses), versus 29% and 32% during the first six months of 2022 and 2021, respectively.
Strategic buyers who closed deals included M3 Global, which bought several healthcare research businesses from Kantar; IQVIA, which sought to acquire pharma digital ads specialist Propel Media before running into an FTC roadblock; and Accenture, which secured a 2023 MM+M Agency 100 honoree, ConcentricLife.
That said, PE firms are feeling the deal itch.
“Their limited partners are screaming for distributions. They can only wait so long,” said O’Connor. “There’s still $3 billion in private equity money out there looking for deals.”
The pressure exists irregardless of the aforementioned factors. Let’s say interest rates don’t come down but go up — which people say is unlikely — and the macro environment worsens. At some point, PE firms won’t be able to raise additional funds if they don’t return investor capital.
“That’s going to keep everyone honest,” Martin observed. “It’s a check and balance on these other components.”
It also means a few PE shops may need to start launch processes whether or not macro indicators improve to the point where everyone achieves peak comfort level.
The more likely scenario is that a more favorable macro environment, combined with larger deals starting to transact and the backlog of PE funds, kicks off a fresh wave of agency recapitalizations. As for timing, experts say it likely won’t materialize until late in the first quarter of next year.
“We think the first half of 2024 will see a marked pickup in deals,” O’Connor predicted.
Martin, on the other hand, foresees a back-weighted surge.
“People are expecting a big year next year and that’s going to dictate launch timing for some of these deals,” he said. “As you can imagine, they always want to sell off of the best financial figures that they can. That’s going to drive them more into the second half of the year.”
Best is yet to come
Indeed, numerous deals that were proposed the last two years ended up getting pulled because the target companies missed their revenue numbers, leading to disconnected valuations, the bankers said.
The typical PE “hold cycle” seems to suggest a later timeframe, as well. With three-to-four years being the average hold time for investments, firms that bought something in late 2020 likely will be looking to exit by the end of 2024 or early 2025.
“If you bought in 2021, when a lot of these guys did, that puts you squarely in 2025,” said Martin. “My sense is, deals will start to flow next year, in Q1 or Q2, but a bit slower. Then the second half of the year and the following year will be really robust.”
More important than the precise timing of a deal rebound, perhaps, is the sentiment that the market has achieved a certain equilibrium, where company valuations are becoming clearer. That increases the likelihood for a few sponsor-to-sponsor deals to trickle out.
Once they do, experts say, the dam will break.
“In general,” said O’Connor, “we think ‘24 will be better than ‘23.”
For a December 2023 article on the pharma commercialization year in review, click here.
For a January 2024 article on pharma M&A rebounding and set to grow in 2024, click here.