Buyout Firms Find Pharmaceutical Opportunities in Outsourcing – Wall Street Journal (blog)

Private equity firms are mostly sitting out the consolidation activities in the pharmaceutical industry, but they are tapping opportunities in drug development and production through outsourcing services.

Data provider Dealogic said there has been a record $ 251.2 billion worth of pharmaceutical deals in the U.S. so far this year, topping the $ 202.8 billion for all of last year. The global figure stood at $ 307.2 billion so far this year, over 2014’s $ 283.9 billion, it said.

Private equity traditionally hasn’t been particularly interested in pharmaceutical deals, except for generic pharmaceuticals, where they can skip the uncertainties surrounding new drugs’ development and commercial launch and go straight to having a stable source of recurring revenue.

But that doesn’t mean they are sitting on the sidelines.

Pharmaceutical outsourcing services and contract manufacturing have been private equity’s inroad, particularly in tapping underserved small and midsize pharmaceutical and biopharmaceutical companies.

Great Point Partners last month made a 7.4-times return from the sale of Cytovance Biologics to Hepalink USA for $ 205.7 million, a person familiar with the situation told LBO Wire. Cytovance, which manufactures proteins and antibodies for use in clinical trials by biotechnology and pharmaceutical companies, not only is the best-performing portfolio from Great Point’s $ 156 million debut pool, but it also returned “nearly half of the fund,” the person said.

And Nautic Partners in September sold clinical services provider Theorem Clinical Research Inc. to U.K.-based contract research organization Chiltern International Inc. Theorem conducts early-phase, Phase II, Phase III, and late-phase clinical trials for pharmaceutical, biotechnology and medical device and diagnostic customers.

One company up for grabs is PCI Pharma Services, which owners Frazier Healthcare Partners, Thomas McNerney & Partners and two other investors are planning to put up for sale in a deal that may value the Philadelphia company at more than $ 1 billion, , people familiar with the situation told LBO Wire. PCI, also backed by Greenspring Associates and Australia’s QIC Global Private Equity, has its roots in pharmaceutical packaging, but has since expanded into pharmaceutical development, clinical trial manufacturing, clinical planning support, commercial manufacturing, and packaging and medication serialization.

Write to Amy Or at amy.or@wsj.com