M&A Activity in a Fragmented CDMO Market

NICE INSIGHT OVERVIEW: Enhancing Competitiveness

While there has been a slowdown in M&A in the pharmaceutical industry, and particularly among pharma companies, the contract services market remains highly fragmented and players large and small continue to enhance their competitiveness through inorganic growth. Investment in facilities also continues apace.

The pharmaceutical contract development and manufacturing market is highly divided. According to one recent report by Ernst & Young, there are at least 600 different active CDMOs, including many international organizations and some firms that serve local markets.¹ It has also been reported that the major players in the CDMO market each have just 2%-4% market share.²

Customers purchasing used equipment need complete assurance that the machinery presents no risk of cross contamination. Conducting microbial testing and biological decontamination of used equipment — before it is placed into service — offers peace of mind to customers who are worried about bringing an outside system into existing aseptic or controlled manufacturing conditions.

Several Drivers of Consolidation

With such extensive fragmentation, significant merger and acquisition (M&A) activity would be required to result in any measurable consolidation. Several notable transactions have occurred in recent years, leading to the formation of the current major players, which begs the question: what is driving this desire for consolidation among CDMOs? Outsourcing to CDMOs is increasing as biopharmaceutical companies look to cut costs while accelerating timelines. Sponsor firms are also concerned with rebuilding pipelines as many blockbuster drugs lose patent protection, focusing on drug discovery and relying on CDMOs for development and manufacturing activities.³

Some CDMOs are expanding in order to achieve more financial stability. Increasingly, private equity (PE) is playing a role in M&A activity in the CDMO sector, helping smaller companies to achieve this goal.² Others are looking to improve their global reach or add advanced and specialized technologies that enable them to offer innovative solutions. Of course, vertical integration — or the one-stop-shop strategy, which is evidenced in the conversion of contract manufacturers to CDMOs — continues to be a driver.^{1, 2} CDMOs continue to expand their capabilities across all phases of development and commercialization in order to eliminate the need for technology transfer, which increases both the time and cost of projects.

At the same time, pharmaceutical customers are simplifying their supply chains to reduce costs, forming strategic partnerships with fewer CDMOs.⁴ In addition, more drug developers are looking to receive accelerated approvals from FDA and/or focusing on orphan drugs, which require more flexible, responsive manufacturing capabilities. The advent of antibody-drug conjugates (ADC) and other highly potent APIs (HPAPIs), as well as next-generation medicines such as cell and gene therapies, are also creating the need for contract service providers with specialized expertise. Even small-molecule drugs pose challenges, as the percentage of compounds that are poorly soluble with low bioavailability continues to increase.

Furthermore, it is worth noting that innovative therapies are often initially developed by emerging pharma companies that eventually get acquired by established biopharma firms once their technologies are proven — which requires extensive support from service providers that can offer a breadth of capabilities from discovery through late-stage clinical trials and sometimes beyond.⁴ 

The need to implement serialization solutions may also be driving consolidation in the CDMO space.5 Many smaller service providers do not have the resources to meet track-and-trace regulatory requirements, while larger firms can incorporate these costs across numerous supply agreements. Some smaller CDMOs are expected to look to be acquired in order to achieve compliance.

A Bit of History

These drivers are leading to measurable M&A activity. One report estimates the small-molecule CMO market is consolidating at an annual rate above 10%; the value of transactions in the sector rose from $5.5 billion in 2014 to $12 billion in 2016.² Overall in the CDMO segment, from 2012 to 2016, the number of publicly announced M&A deals increased by approximately 12% per year.¹ At the same time, implied enterprise values of acquisition targets increased 35% per year, resulting in CDMO deal values more than tripling over the period.

More activity has taken place in North America and Asia than in Europe.¹ In North America, over $23 billion worth of deals were completed from 2012-2016, with 43% of buyers domestic and the bulk of the remaining purchases from Europe. Notably, most of the deals in Asia take place between companies in the same country. There appears, however, to be growing interest among Asian buyers in European and North American targets.

Private companies (or their assets) accounted for 56% of all CDMO deals from 2012 to 2016. Sales by PE firms accounted for just 22% of the transactions during this period, but represented 50% of the total value of all CDMO deals. The result of the recent M&A activity has led to a restructuring of the CDMO market.¹ Prior to 2012, 57% of the assets involved in deals were privately held; today 47% of remaining assets are under private ownership. In addition, PE firms now own just 12% of all assets, down from 22%. Overall, there has been a concentration of CDMOs into large, publicly traded strategic players. According to Ernst & Young, only three of 10 top players (Aenova, Amatsigroup and WuXi PharmaTech) are currently privately owned.¹

CDMO M&A Volume and Value

Several Big Deals in 2017

The big deals that took place in 2017 reflect the variety of deal types that have been occurring in the CDMO segment, often resulting in companies with a greater breadth of capabilities. With its $5.5-billion acquisition of Capsugel from PE firm KKR, Lonza, which had capabilities in small-molecule and biologic API manufacturing, gained a position in drug product services. Thermo Fisher Scientific, through its complementary $7.2 billion purchase of Patheon, added drug substance development and manufacturing, formulation development and drug-product manufacturing capabilities to its products and services businesses. On a slightly smaller scale, Catalent acquired CDMO Cook Pharmica for $950 million, gaining capabilities for the development and manufacture of biologic-based drug substances and parenteral drug products. Albany Molecular Research (AMRI), meanwhile, agreed to a buyout by PE firms The Carlyle Group and GTCR for $922 million. AMRI sees the move as offering “a compelling opportunity to accelerate our growth and enhance delivery of world-class solutions to our customers.”⁶

Many More Small- and Mid-sized Transactions

Many of the companies that participate in mega deals do so only after building their organizations through numerous smaller transactions. Patheon, AMRI and Capsugel are all examples. These smaller deals collectively often have a greater impact than the few large deals that take place each year.

In 2017, for instance:

• Lonza acquired cell and gene therapy CDMO PharmaCell B.V and micronization services provider Micro-Macinazione
  
  
• Germany-based drug discovery and development company Evotec finalized the acquisition of US-based CDMO Aptuit to enhance its capabilities as an integrated provider of drug discovery and development services
  
  
• Biopharma testing services company Eurofins Scientific expanded into the CDMO space (multi-step syntheses, development of cytotoxic and high potency APIs) with the acquisition of Alphora Research
  
  
• Ireland-based CDMO Almac Group acquired Ireland-based contract research organization (CRO) BioClin Laboratories to expand its analytical capacity and better serve its global customers needs
  
  
• Catalent completed the acquisition of Canadian softgel manufacturer Accucaps Industries Limited
  
  
• UK-based Quotient Sciences acquired the US-based Charles River Laboratories CDMO unit QS Pharma and UK-based CDMO Pharmaterials
  
  
• Italy-based CDMO Olon S.p.A. gained US operations through the acquisition of the Chemical Division of Ricerca Biosciences
  
  
• China-based CDMO Porton Fine Chemicals acquired US-based J-STAR Research
  
  
• Chinese biopharmaceutical company 3SBio acquired Canadian biologics CDMO Therapure Biopharma
  
  
• CMC Biologics was sold by PE firms Monitor Clipper Partners, European Equity Partners and Innoven Partenaires to Japanese glass, chemicals and high-tech materials manufacturers AGC Asahi Glass
  
  
• Corden Pharma acquired an HPAPI manufacturing plant previously owned by Pfizer
  
  
• Celonic, a specialist in perfusion biomanufacturing, acquired Glycotope’s production facility in Heidelberg, Germany, gaining its complementary GEX human cell line platform
  
  
• CDMO Avara Pharmaceutical Services purchased Pfizer’s sterile manufacturing facility in Liscate, Italy, the fifth plant purchased in the last two years.

Many of the key drivers of consolidation in the CDMO sector are elaborated in these examples. The first four represent deals intended to expand services to implement a vertical integration or one-stop-shop model. Lonza is clearly willing to make large and bolt-on acquisitions to realize its strategy. Eurofins Scientific and Almac are branching out beyond their original sectors to expand capabilities — CRO into the CDMO space and vice versa. Companies like Quotient Sciences and Olon furthered their capabilities in their areas of specialization. Others are building capabilities through the acquisition of sponsor facilities, which does not lead to consolidation but does reduce in-house capacity. The two acquisitions of North American operations by Chinese companies reflect the growing interest of Asian firms in expanding their global presence as their technical capabilities improve.

Targets of CDMO M&A Activity

Lots of Investment Activity

M&A deals are not the only way that CDMOs are looking to increase their competitiveness. Investments in new facilities and technologies are occurring at a rapid pace, regardless of company size, location or areas of specialization. CDMOs are expanding both small-molecule and biologic drug substance (proteins, antibodies, cell therapies, viral vectors, etc.) process development and manufacturing, bioconjugation and highly potent manufacturing, formulation development, drug delivery, analytical testing and drug product manufacturing capabilities and capacities around the world.Examples include Alcami, Almac, Boehringer-Ingelheim Bio-Xcellence™, Brammer Bio, Capsugel, Cambrex, Catalent, Cobra Biologics, Flamma, Fujifilm Diosynth Biotechnologies, Granules India, Grifols, KBI Biopharma, Lubrizol, Novasep, Pfizer CentreOne, Piramal Pharma Solutions, Recipharm, Vetter and WuXi AppTec.⁷

Country League Table – Targets of M&A

Will Vertical Integration or Specialization Dominate the Future CDMO Market?

The one-stop-shop concept has been around for some time, and clearly a number of leading CDMOs have adopted this model. Customers can theoretically benefit from reduced sourcing costs due to simplification of the value chain and accelerated development timelines due to simplified movement through the development cycle with elimination of the need for technology transfers from one partner to another. On the flip side, CDMOs benefit from the need to manage fewer customers with whom stronger relationships are established.

At this point, while many CDMOs have moved to build integrated offerings, evidence for the preference of this model among pharmaceutical industry customers has not yet surfaced. It is too early to draw any conclusions, however. The costs and time involved in switching projects are enormous, so use of integrated services will likely occur over time as new projects are implemented.¹

It is also possible that larger pharmaceutical companies will be more likely to use integrated CDMOs than smaller sponsor firms. Smaller firms may be concerned that their projects will receive low priority compared to larger firms with multiple projects at multiple phases.¹ For smaller North American and European pharma companies, lower-cost options in Asia may also remain attractive. On the other hand, it has been suggested that access to integrated services may provide a competitive advantage to developers of biosimilars.¹

It should be noted that with the increasing pace of innovation in the pharmaceutical industry — consider the rapid advance of ADCs, bispecific antibodies and cell and gene therapies — there will always be a need for third-party services based on the latest state-of-the-art, novel technologies. As a result, CDMOs that have adopted the specialist model will continue to be an important component of the CDMO market.

There is one conclusion that can be drawn: M&A activity in the CDMO sector —by PE firms, large and small privately held strategic buyers and large publicly traded companies — will continue. Each of these types of players seeks to achieve differentiation and gain competitive advantage in the eyes of drug developers looking for partnerships with high-quality, innovative, cost-effective service providers that accelerate the development of novel, safe and efficacious drugs.  

References

1. Jörn Leewe, Matthias Groh. “The Pharmaceutical CDMO Industry Is Consolidating: Opportunities For Current Players And New Entrants.” Ernst & Young. Sep. 2017. Web.
2. Louis Garguilo. “M&A Crucible In Contract Drug Development And Manufacturing.” Outsourced Pharma. 6 March 2017. Web.
3. Catherine Wagner. “CMOs: The New Netflix?” QAD Blog. 2 May 2017. Web.
4. Flora Southey. “Low Budgets Drive Consolidation Trend, Say Serialization Experts.” In-Pharma Technologist. 24 Sep. 2017. Web.
5. Emilie Branch, Cynthia Challener, Carrie Cao. “Building Strategic Sponsor-CRO Partnerships: The International Element Changing Clinical Trials.” Pharma’s Almanac. Sept. 2017. Web.
6. AMRI Bought for $922M. Contract Pharma. 7 Jun. 2017. Web.
7. Patricia Van Arnum. “CDMOs and CMOs: A M&A and Expansion Roundup.” DCAT Value Chain Insights. 12 Jul. 2017. Web.