Thermo Fisher Scientific sells the laboratory equipment that biopharmaceutical companies use in the research and development of new drugs. Its $20.9 billion acquisition of PPD will give the company the global infrastructure to run the clinical trials that test them.

Waltham, Massachusetts-based Thermo Fisher announced Thursday that it has agreed to pay $17.4 billion cash for PPD, breaking down to $47.50 for each share of the company. That price represents a premium of about 24% to PPD’s closing stock price on Tuesday, before news surfaced about a potential deal. Shares of PPD, a pharmaceutical services business headquartered in Wilmington, North Carolina, closed at $43 per share on Wednesday. Thermo Fisher will also assume PPD’s $3.5 billion net debt.

PPD is a contract research organization (CRO), a company that provides clinical trial services to pharmaceutical and biotechnology companies. For the past 35 years, the company has recruited patients and clinical trial investigators, managed clinical trial sites, and provided various services supporting a drug as it approaches regulatory approval and then after it reaches the market. The firm’s Clinical Development Services segment generated $3.8 billion in revenue last year, according to PPD’s 2020 annual report. Laboratory Services, which includes testing of samples of in clinical trials, is a smaller part of the business, accounting for $867.6 million in revenue.

For much of its history, Thermo Fisher has been a products provider. It sells a wide range of laboratory equipment as well as the chemicals used in labs. Of the company’s $32.1 billion in total 2020 revenue, $25.3 billion was product revenue compared to $6.9 billion that came from providing services. But Thermo Fisher has been delving deeper into providing services to its life sciences industry customers, and CEO Marc Casper said that the PPD acquisition will enable the combined company to offer new ways to reduce the time and the costs required to develop new drugs.

Speaking on a conference call Thursday, Casper acknowledged that he previously said his company was not interested in getting into the CRO business. But customers changed the company’s thinking. Casper said pharmaceutical companies have indicated they want to consolidate their outsourcing, placing that work in the hands of fewer vendors. Some of that change in thinking was driven by Covid-19, he said. Also, a higher percentage of clinical trials are coming from smaller biotech companies, which rely on CROs more heavily because they have limited internal capabilities to run clinical trials.

Casper said that PPD will enable his company to offer a more comprehensive lineup of services to pharma and biotech companies throughout the cycle of a drug’s development. Thermo Fisher already provides equipment used for discovering new medicines. In recent years, it has bolted on manufacturing capabilities via acquisitions.

“PPD will expand our capabilities for the phase in between, assessing safety, efficacy, and health care outcomes, with those potential medicines by providing clinical trial management throughout the drug development process,” Casper said.

Thermo Fisher splits its operations into four segments: Life Science Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services. PPD will become part of Laboratory Products and Services, the largest of the company’s four business units with more than $12.2 billion of the firm’s $32.1 billion in 2020 revenue. Sales in that division were more than 13% higher year over year, due in part to higher revenue from existing businesses, acquisitions, and increased demand as Thermo Fisher’s customers responded to the pandemic.

Laboratory Products and Services is the home to Patheon, a contract manufacturer of drugs that Thermo Fisher purchased in 2017 for $5.2 billion. That division also houses Brammer Bio, a manufacturer of viral vectors used in cell and gene therapies that was acquired in a $1.7 billion deal two years ago.

During the conference call, one analyst asked Casper whether the PPD acquisition would put Thermo Fisher in competition with customers who outsource clinical trial work to other CROs. Casper said Thermo Fisher will continue to support customers who work with PPD’s competitors, and he added that he was asked a similar question about contract manufacturing four year ago after the Patheon acquisition. He said contract manufacturing customers are doing more work with Thermo Fisher today because the company is still serving them well.

Antitrust authorities might take a different view. In late March, the Federal Trade Commission sued to oppose Illumina’s proposed $7.1 billion acquisition of cancer diagnostics developer Grail, calling the deal anti-competitive. Illumina sells the sequencing equipment and reagents that diagnostics companies use to test tissue samples. By acquiring Grail, the FTC said that it would have pricing power over the companies that are Grail’s competitors. A trial is scheduled to begin in late August.

CRO services make up an approximately $50 billion a year global industry. PPD’s $4.7 billion in revenue last year made it the third largest company in the sector, trailing only IQVIA and Covance, a division of LabCorp. Covance was a standalone company until LabCorp acquired it in 2015 for $5.7 billion, giving the laboratory testing services company a prominent place in the CRO market in a way that complements its central laboratory business, which tests samples from clinical trial sites. Consolidation in the CRO industry has continued. More recently, ICON, a CRO based in Ireland, agreed to a $12 billion acquisition of a peer CRO, PRA Health Sciences. That combined company would rank as the second largest CRO, measured by 2020 revenue.

Stephen Williamson, senior vice president and chief financial officer of Thermo Fisher, said that the company will finance the PPD acquisition with a mix of debt financing and cash on hand. The boards of directors of both Thermo Fisher and PPD companies have approved the acquisition. The deal has also been approved by a majority of PPD shareholders. The companies expect to close the transaction by the end of this year.

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