A new cadre of healthcare marketing firms sprang up several years ago with a vision to reshape the pharma commercialization landscape.
Leveraging infusions from private equity (PE) to buy up smaller agencies, they built out all the components for launch success. These ranged from market access, med-comms and med-ed to advertising, patient engagement and data/analytics.
As such, they’ve earned the “strategics” label, right alongside their counterparts at traditional agency holding companies. Now, this burgeoning group itself is due for a refresh, as their backers seek to cash out on those bets.
Some investment bankers say so-called recapitalizations could accelerate in coming months as several of the recently formed commercialization platforms look for new partners with ever larger tranches of capital.
“PE investors are just waiting for a bit more of a normalized macro environment,” said Mark Martin, managing director at investment bank Houlihan Lokey. “If you don’t have to sell a business, and it’s an A-quality asset where leverage will be an important component of that process, waiting until there’s more of a normalization at the macro and leverage level only adds to the upside for some of these transactions.”
A familiar process takes hold
They’re also awaiting a more normal cadence of deals.
“It’s been a slow year for scaled transactions,” added Martin. “Just the presence of other large deals beginning to happen will encourage some others to come out.”
Another factor is that the average “hold period” for PE is about three to five years, and thereafter it’s a familiar story. Once the first fund takes the platform to a certain size, the second PE firm comes in to handle the next tranche of development and so on.
Each one of those steps is known as a recapitalization, whereby current limited partners get an opportunity to exit the investment and collect returns. As such, they’re a fairly common strategy.
Examples include the recapitalization of Trinity Life Sciences, which had been partnered with Pantheon Capital since early 2018 before joining with new capital partner Kohlberg & Co. in late 2021.
Amulet Capital followed that timeline as well, holding onto Open Health for three-and-a-half years before selling it to fellow PE fund Astorg in mid-2022. Fishawack Health, a 2023 MM+M Agency 100 honoree and another buy-and-build commercialization platform, is on its third PE sponsor.
Macroeconomic conditions have made these “sponsor-to-sponsor exits” more attractive, according to a 2023 report from Bain & Co. focused on global healthcare PE and M&A. Think Russia’s ongoing invasion of Ukraine, high inflation levels and rising interest rates restricting credit access.
Amid those concerns – not to mention the Securities and Exchange Commission’s proposed rules for IPOs via special purpose acquisition company (SPAC) – sponsor-to-public exits “all but vanished” from the exit landscape last year, the consultancy found.
Given the prolonged economic downturn, there is a possibility that sponsors may look to hold onto their biopharma commercialization businesses for longer, Bain reckons.
Capital remains king
That said, PE funds are sitting on vast stores of “dry powder” and the consultancy predicts that the opportunity to remonetize on future growth potential will remain strong. That’s especially true within the life sciences commercialization market which, according to Bain, is an area less subject to inflation and recessionary concerns than other healthcare subsectors.
Typifying the trend was W2O Group’s 2019 transaction with PE firm New Mountain Capital, which acquired an interest in the group from previous PE partner Mountaingate, owner of the agency since 2016. According to several sources, it served as the starting gun for what has been an increasingly active period over the last five years for investment in outsourced pharma solutions.
The deal also spurred a change in the playbook for healthcare marketing and communications agencies, a group which to that point had depended mostly on organic growth over time in sectors in which founders and their teams possessed strong domain expertise.
Today, “We don’t usually see entrepreneur businesses doing deals without some PE backing,” observed Tom O’Connor, managing director and co-head of healthcare investment banking for Canaccord Genuity.
W2O, now Real Chemistry, may also be on the vanguard of the coming wave of realignments.
“Just looking at timing, it looks like Real Chemistry,” which has rolled up several data-enabled and creative shops, “may be ready for its next PE player,” speculated Elaine Riddell, managing director at boutique investment bank Oaklins Desilva+Phillips.
Indeed, with its last acquisition – doctor-focused ad-tech firm TI Health – coming this past March, the company probably wants to continue to fill in particular gaps in its commercialization platform. Additionally, that cycle is poised to repeat itself, en masse, across the ecosystem.
Industry scuttlebut has it that another firm that could come to market soon is Fingerpaint Group. Since gaining investment from PE firm Knox Lane in late 2020, the 2023 MM+M Agency 100 honoree, organization has made three acquisitions in the med-comms space and another two in market access, as well as bolting on a branding firm and overseas analytics shop.
In other words, the PE company has done its job in terms of helping Fingerpaint create a platform. The next frontier involves getting those internal agency brands to work seamlessly together in order to provide clients with ease of use and speed.
“What they haven’t done is started to integrate it in a way that is going to generate that seamless client value,” said Riddell. “The next [PE] group’s job will be to work on integrating the expertise and probably on geography – how do they start to extend themselves outside of the U.S.?”
(After this column was published, Fingerpaint CEO/founder Ed Mitzen responded: “The Fingerpaint Group is far ahead of plan in terms of integrating our firms, merging leadership, new business cross-selling, seamless analytics across the entire company, complete financial and operational integration, etc. It’s why our current pitch/win rate is 67%.”)
Fingerpaint could prove attractive to PE firms that either want to continue to bulk up or have yet to be successful in acquiring a platform, Riddell conjectured.
“It will go to the next home, the next investor who’s able to level up the investment so that more can be acquired,” she said.
Successive owners can ratchet up the deal multiples and prep themselves for their own smart exit. That requires creating more streamlined services and value-add products – consider Evoke’s recent platform-wide launch of a suite of audience-intelligence tools.
Vast possibilities available
The recapitalization wave could manifest in other ways, too.
Another scenario is the PE consortium, where multiple funds come together to provide backing. Such was the case with Lumanity, which in 2020 entered a consolidation deal with Arsenal Capital and Svoboda Capital. Along similar lines, PE consortium Norstella has amassed a formidable pharma intelligence platform.
“We’ll start to see more of these consortiums come together to start to fund or continue to fund these groups,” predicted Riddell, as well as more consolidation plays like PE firm Clayton, Dubilier & Rice buying Evoke parent Huntsworth and Ashfield Health’s parent UDG Healthcare.
Still, is there a rule of thumb in terms of the level of scale to trigger an exit?
“There’s not a universal playbook on that,” said Martin. “Each firm underwrites to different metrics, but the key takeaway is substantial growth. A lot of these, if you look at their track record, are doubling or tripling at times before transacting again through some combination of organic growth or M&A.”
However, experts say we may see the average PE hold times fall and the tipping point could come in the next several months.
“So much M&A was done in 2020 and 2021. You do the math,” said Ridell. “It’s probably next year-ish. We’ll start to see activity in 2024, when the market is supposed to be better.”
In the pharma marketing sector, based on historical trends, that figure has skewed toward the shorter end of the spectrum, with “three to four years being the norm,” noted Martin.
That said, Real Chemistry hit its metrics and accomplished its goals with former partner Mountaingate in a little over two-and-a-half years. Similarly, Medical Knowledge Group was held by Court Square Capital for just two years before decamping for Novo Holdings early last year.
“We’ll see some more of that,” Martin predicted. “Yes, the timeframe matters, but it’s also about how quickly you can meet those milestones and objectives in terms of determining the sale time.”
More elite businesses pair with PE
One thing seems certain, that if the pharma CEO’s job is to figure out and set their company’s strategic priorities, then – given the size of the biopharma pipeline – investing in product discovery and development is likely a sounder bet than infrastructure. That industrial logic points to more outsourcing, including of the commercialization piece, and to more combinations.
Speaking of which, one of the more “higher-probability avenues” for new business combinations, Martin pointed out, involves high-science med-comms firms potentially joining forces with high-science consulting and access businesses.
“There’s a real common thread across the employee base of generally advanced degree, sophisticated-type employees,” he explained. “So culturally, there’s more alignment there than you might initially suppose or expect.”
Martin also envisions promotional or AOR-type agencies taking “more of an earnest look at how they can be leaders on the tech and AI front,” especially as the generative AI dynamic continues to evolve in this industry. That, or one of the large platforms making a “transformational” move to purchase a large data business.
The rise of agency strategics is steeped in creating differentiation. In other words, it’s all about who has the better platform. As Martin highlighted, blue-chip biopharma clients don’t want to buy from mediocre providers, but will engage with partners who have best-in-class services across the continuum.
Thus, we can expect to see more elite businesses pair with high-powered PE firms, and combinations aplenty. For the new strategics and their sponsors, it just comes down to creatively finding the right combinations.
“Who knows what conversations are happening around boardroom tables these days,” mused Riddell.
This story has been updated with a response from Fingerpaint Group’s CEO/founder.
