Wall Street is making huge bets on healthcare companies you've never heard of

  • Wall Street is interested in the companies that help drugmakers research and develop drugs.
  • These companies, called contract research organisations, are becoming increasingly important for the pharmaceutical industry as companies look to save money on R&D.

Wall Street has been piling in to an area in healthcare you’ve likely never heard of.

Contract research organisations, or CROs for short, work with drugmakers to take on some of the science companies have to do to get drugs approved.

That means everything from discovering potential drug targets to running clinical trials on behalf of pharmaceutical companies.

For example, say you need to run a clinical trial for a drug you’re working on, but you don’t want to invest in hiring all the folks to run the clinical trial yourself. So you work with a CRO, which can set that up for you and recruit patients for a certain price. As drug companies continue to look for ways to trim R&D costs, these companies have become more popular.

That activity has made a lot of room for mergers and acquisitions, even at a time when drugmakers themselves are in a bit of a dealmaking lull. According to Bloomberg that M&A spending in the CRO industry was $US24 billion in 2016. So far in 2017, the spending on deals is $US13 billion.

Many of these CROs are getting picked up by private equity, signalling that investors expect the companies to grow over the next decade. Pamplona Capital Management, Carlyle Group and GTCR have all struck big deals in the space recently.

Stocks of the companies that are public are up more than 25% over the past year meanwhile, signalling public market investors are betting on the companies too, potentially in anticipation of activity to come

“We are at the beginning of this process,” KPMG principal Paul Saias told Bloomberg.

Almost every major CRO has been involved with an acquisition, starting back in 2015.

Only two of the top 10 CROs appear to not be part of the dealmaking frenzy: Pharmaceutical Product Development, which is majority owned by the Carlyle Group, which was also behind taking Albany Molecular private. The other is Icon, which might be more open to deals now, according to Jefferies analyst David Windley.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.