In a sector where its customers are usually valued in the billions, a desire by Instem to bulk up is understandable.
The business currently is valued at £150mln (at 680p) which by AIM standards is meaty enough but in a pharma sector dominated by such as Pfizer, Merck and AstraZeneca, having a bit more clout clearly would be no bad thing.
But there’s more to the recent additions than just adding a bit of muscle.
Both look classic ‘buy and build’ bolt-ons, adding to the company’s product spread and in-house expertise as well as boosting earnings.
And deals like this are something it wants to do more of.
Phil Reason, chief executive, says its market is very fragmented and Instem is positioning itself to be a consolidator of smaller, diverse companies.
“Businesses in life sciences have so many suppliers and so many different solutions that it is a huge opportunity.”
Instem’s core business is a technology suite to speed up the drug development process, something that has become even more important with the onset of COVID-19.
Industry estimates suggest taking a drug from an idea to market can cost between US$1bn- US$2bn so pharma companies have plenty of incentive to accelerate and hence reduce development costs.
Instem’s early stage and pre-clinical data collection and processing software is set up to do just this and demand is growing with the business already generating healthy revenues and profits.
In 2020, a year that was disrupted by the impact of the pandemic across the healthcare sector, sales rose by 10% to £28.2mln, with underlying profits before one-off costs rising to £4mln from £3.2mln.
But it is the two buys this year that will be the platform to take the company to a different level, believes Reason.
The Edge, costing an upfront £6mln in March, specialises in early-stage discovery work and will complement Instem’s expertise in pre-clinic and R&D.
d-Wise, bought for up to US$31mln in April, meanwhile, will expand Instem’s late-stage trial expertise and its position in drug regulatory work.
Reason says that had both companies been part of the group in 2020, revenues would have been £48mln rather than £28mln.
As important, he adds, is that the acquisitions now give it a breadth of coverage right from the start of the drug development process through to product marketing at the end.
It also gives Instem and each of its individual component parts a greater scale, something that matters to large pharma groups operating in huge sectors.
And there is no doubt that Instem is operating in a big market.
Estimates from within the industry suggest currently there are 18,500 new drugs in development, which is roughly double the number ten years ago.
Last year, the number of drugs in Phase I trials or pre-clinic rose by 6% even with the impact of the pandemic.
That presents a substantial opportunity but one that Instem’s progress up to this point suggests it can take advantage of.
Indeed, its development now being recognised outside of its traditional areas.
The company recently won its first contract in Korea with a CRO, the groups that carry out clinical trials for pharma groups.
As well as a new territory, Reason says CROs are ideal customers for Instem as they provide a shop window for its services to pharma groups.
AsiaPacific generally is a hot spot currently for drug development, he adds, but traditional areas of strength such as the US and Europe are also going well.
Brokers have pencilled in revenues of £46mln this year rising to £56mln in 2002 as The Edge and d-Wise bed down.
Other deals though are said to be in the pipeline, so in eighteen months the picture is likely to be very different again.
Instem raised £15mln last year to kick start its acquisition programme and might need more cash if the right opportunity does present itself, but the shares have done well recently which also makes its equity a valuable commodity for deals.