The pharmaceutical services industry has attracted billions of dollars from private equity investors over the years. Now, uncertainty associated with the new presidential administration could shake up some buyout funds’ largest bets.
Investors are concerned about a disruption to the clinical trial process, the possibility of which has been top of mind for many since President-elect Donald Trump revealed plans to nominate Robert F. Kennedy Jr., a vaccine skeptic, to head the Department of Health and Human Services.
At its helm, Kennedy would oversee the nearly $2 trillion department and the agencies that fall under its umbrella, including the National Institutes of Health, the Food and Drug Administration and the Centers for Disease Control and Prevention.
Jeffrey Jay, founder and managing partner at investment manager Great Point Partners and a healthcare investor for the past 30 years, said mounting vaccine scrutiny could raise standards for running clinical trials and eventually decrease trial volume. This poses a risk to fund managers with significant investments in CROs, Jay said.
Contract research organizations
Under mounting regulatory scrutiny and margin compression, PE healthcare investors have largely moved away from the provider roll-up strategy, where PE funds buy and combine private physician offices and hospitals.
Over the past decade, healthcare investors have moved that capital into various areas on the periphery of these providers—including pharma services.
A significant portion of the outsourced pharma services market is comprised of contract research organizations—companies that support the development of new drugs, largely through clinical trials.
Clinical CROs provide an array of services to biotech and pharmaceutical companies, including clinical trial design and administration, bioanalysis, safety monitoring and regulatory affairs. These companies are a niche but relevant play for PE funds, attracted by the sector’s stability, relative lack of competition with only six or seven major players, and global demand for its services.
In 2023, for example, a consortium backed by hedge fund Elliott Investment Management that included Patient Square Capital and Veritas Capital took Syneos Health, a CRO and biopharma solutions provider, private at a $7.1 billion valuation, including debt. The North Carolina-based Syneos had been struggling to take on new clients after many small and mid-sized biotech companies cut spending and faced fundraising challenges in the post-Covid-19 downturn.
In another PE bet, in 2021, Stockholm-based buyout shop EQT and the private equity manager within Goldman Sachs Asset Management bought CRO Parexel from Pamplona Capital Management for $8.5 billion.
A healthcare play at risk
As the nominee for US health secretary, Kennedy said in an NPR interview that Trump has instructed him to remove alleged corruption from health agencies and focus on evidence-based science and medicine. The nominee has argued that there is insufficient data on vaccines and their effects, and vowed to impose additional studies on vaccine efficacy.
Kennedy has denied that he is anti-vaccination, but has repeatedly made claims about the impacts of childhood vaccines that have been refuted by CDC-funded or conducted studies.
The nominee has also been outwardly critical of vaccine roll-outs to address the Covid-19 pandemic, and he could implement more scrutinous requirements like placebo-controlled tests for all new vaccines. Jay said this could increase the cost of trials and upset later-stage drugs on the path to approval.
“I imagine a lot of vaccine trials are going to slow down as people try to figure out what the impact of this [nomination] is going to be,” Jay said. “I could see a situation where a product is in late-stage development and they think they’re on a glide path to approval, but the rules change before they get there.”
CROs’ clients, like pharmaceutical companies, evaluate the performance of the CROs they outsource with metrics like patient retention pre- and post-trial and the overall time to study completion. EQT and Goldman’s Parexel, for example, boasts a 6% shorter time between drug approval to clinical trial report than the industry average, according to its website.
If Kennedy is appointed to the role, Jay said the politician could enhance scrutiny on clinical trials for vaccines, particularly those in late-stage trials, which could slow this process and disrupt businesses for CROs.
Still, most healthcare investors aren’t raising alarm bells.
At most major, PE-backed CROs, vaccines make up a small portion of the services they provide, according to investors. The same is true for the vaccine business within the biotechnology and pharmaceutical industries more broadly, trumped by developments in areas like oncology and therapeutics.
“Vaccines are not a large part of our industry,” said Shahram Seyedin-Noor, founder and managing partner at Civilization Ventures, a venture capital firm that invests in life sciences companies. “We have one to two companies out of 70 that have anything to do with vaccinations. It’s just not a big part of the industry.”
At the same time, Kennedy’s future remains uncertain. The November nomination was met with swift backlash from public health officials and experts, who argue that the nominee spreads medical disinformation and conspiracy theories. He is likely to face a challenging Senate confirmation battle with pushback from Democrats and wary Republicans.
Featured image by Chip Somodevilla/Getty Images
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