Pharma Contract Services Consolidation Wave Continues

Contract service providers to the (bio)pharmaceutical industry must help their customers speed the development of new drugs while reducing costs. These new drugs are increasingly based on complex APIs, which can be challenging to formulate and often require global clinical trials. To meet this demand, many CDMOs are gaining access to advanced technologies, expanding their breadth of capabilities and entering new geographic markets through the acquisition of other service providers.

Many Drivers for Consolidation

Deals involving contract service providers — acquisitions of one by the other or by private equity, mergers, the purchase of manufacturing sites from sponsor firms, etc. — continue to take place on a frequent basis. A look at the dynamics of the pharma and biotech industry reveals the underlying forces driving this high level of M&A activity. 

• Consolidation of pharma manufacturers is leading to fewer sponsors; contract service providers need to differentiate themselves with a breadth of capabilities, including unique technologies, efficiency, excellent customer service and the ability to rapidly acquire new knowledge in response to customer needs;¹
  
  
• The contract services market is highly fragmented, with even the biggest players holding < 5% market share;²
  
  
• Pharma customers are looking to eliminate costs from their supply chain through the
  establishment of fewer, more strategic partnerships with efficient, full-service providers;
  
  
• Emphasis on acceleration of the drug development and commercialization processes — exhibited by the growing number of candidates receiving accelerated approval designations (FastTrack, Priority Review, etc.) — is also leading to the need for more efficient, full-service providers;
  
  
• The increasing focus on orphan/niche therapies is creating a need for more flexible, responsive manufacturing capabilities;
  
  
• Next-generation therapies that require small and large molecule production capabilities — and often the ability to handle highly potent compounds — are advancing rapidly and requiring contract service providers with specialized expertise;
  
  
• Many compounds in the pharma industry pipeline are poorly soluble with low bioavailability and require advanced formulation technologies that are not practical
  for sponsor firms to invest in; and
  
  
• A significant portion of innovation in the industry is taking place in emerging pharma companies, who require extensive support from service providers through the
  discovery, development and commercialization of new drug candidates.

To meet these needs, many contract manufacturers have been busy converting themselves into contract development and manufacturing organizations (CDMOs). Others have extended their ability to support the full commercialization process with the addition of final drug product manufacturing capabilities (or drug substance manufacturing in the opposite case). 

Contract research organizations (CROs) have been equally busy building out their capabilities to support the full range of activities associated with clinical trials and/or analytical testing and build value.³ Like contract manufacturers, they are looking to add technical expertise and to support the full range of clinical needs for many different therapeutic categories in phase I through post-marketing studies.⁴

In addition to efforts to build integrated service portfolios, contract service providers are also actively extending their geographic reach in recognition of the global nature of the pharma industry. Larger contract service providers are in a good position to continue making purchases. Private equity firms are also looking to benefit from the healthy growth rate of the contract services market.⁵ They are, in fact, facilitating a portion of the deals taking place.² Medium-sized contract service providers are also very active as they seek to broaden their offerings. 

Big and Mega Deals Keep Coming

Despite the large number of big deals that have taken place in recent years, several more have been announced within the last 6-12 months.

Notable past CDMO deals have included:

• Merck KGaA’s acquisition of Sigma-Aldrich;
  
  
• Pfizer’s acquisition of Hospira, including its contract parenteral drug manufacturing operations;
• The merger of Patheon and DSM; and

• The merger of Cambridge Major Laboratories with AAIPharma to form Alcami. The more recent announcements that may have a significant impact on the CMO and pharma industry in general include:

• The purchase of AMRI by the private equity firms The Carlyle Group and GTCR LLC;
  
  
• The acquisition of Patheon by Thermo Fisher Scientific; and
  
  
• The acquisition of Capsugel by Lonza.

While the AMRI acquisition does not result directly in further consolidation of the CMO/CDMO space, the financial resources of these two PE firms, according to AMRI’s President and CEO William Marth, “offer a compelling opportunity to accelerate our growth and enhance delivery of world-class solutions to our customers.”⁶

Similarly, the acquisition of Patheon by Thermo Fisher Scientific is a complementary one. As Patheon CEO James C. Mullen has stated, he is “confident that our combined offerings and Thermo Fisher’s proven track record of disciplined M&A and successful integrations will take our business to the next level.”⁷ The acquisition of Capsugel provides Lonza access to advanced capsule technology for addressing drug candidates with poor solubility.

There have been several big deals between CROs as well:

• IMS Health acquired Quintiles Transnational;
• LabCorp acquired Covance;
• The Carlyle Group acquired Pharmaceutical Product Development (PPD);
• Huntingdon Life Sciences acquired Harlan Laboratories, now Envigo; and
• The merger of PRA and ReSearch Pharmaceutical Services (RPS) by KKR.

The acquisitions of Quintiles and Covance were of a similar nature. In both cases the purchasers sought to benefit from access to patient data to improve efficiencies.

Activity in the CRO space, at least on the megadeal level, seems to have slowed recently. Only one possible deal was reported in the last several months: LabCorp was possibly negotiating for the purchase of PPD in February, 2017.⁸ No further information has been forthcoming, however.

Don’t Forget the Small and Medium Acquisitions

Megadeals get the headlines, but smaller, bolt-on acquisitions can ultimately have significant impact. For instance, AMRI, Patheon and LabCorp reached their current states only after the completion of multiple acquisitions: Euticals, Gadea Pharmaceuticals (Crystal Parma), Aptuit/SSCI, Cedarburg Hauser, Excelsyn, ComGenex, Hyaluron, OsoBio and Whitehouse Labs by AMRI; in addition to DSM Pharmaceutical Products, MOVA Pharmaceutical Corporation, Banner Pharmacaps, IRIX Pharmaceuticals, Agere Pharmaceuticals, Gallus BioPharmacetuicals and its Ferentino, Whitby and Cincinnati Operations by Patheon; and Esoterix, USLabs, Litholink, Tandem Laboratories, Monogram BioSciences, Orchid Cellmark, Genzyme’s genetic testing business and Sequenom by LabCorp.

Smaller and medium-sized service providers are also busy acquiring their counterparts with technologies and capabilities in order to better serve customers developing niche products. In some cases clients prefer these smaller firms over bigger providers because they can be more responsive, are often easier to work with and their production equipment is on a scale more suited to small-volume products.⁵

Examples of this type of consolidation in the CMO/CDMO space over the past several years include:

• Par Pharmaceuticals’ acquisition of JHP Pharmaceuticals;
  
  
• Siegfried Group’s acquisition of Hameln Pharma and BASF’s API business;Consort Medical’s acquisition of Aesica Pharmaceuticals Limited;
  
  
• Piramal Enterprises’ purchase of Coldstream Laboratories and Ash Stevens;
  
  
• WuXi PharmaTech’s acquisition of XenoBiotic Laboratories;
  
  
• Recipharm’s acquisitions of Corvette Pharmaceutical Services Group, Mitim S.r.l., Nitin Lifesciences, a Flamel Technologies facility in France, Lusomedicamenta and Kemwell in the US, Sweden and India;
  
  
• Capsugel acquisitions of Bend Research and Powdersize;
  
  
• Catalent’s acquisitions of R.P. Scherer Eberbach, Rethly Labs, Micron Technologies, PharmaPak Technologies, Aptuit’s Clinical Trial Supplies business and Redwood Bioscience;
  
  
• Lonza’s acquisitions of Vivante GMP Solutions, Genentech’s Porrino operations, UCB Bioproducts, Cambrex’s bio businesses, Xcelience and recently PharmaCell (for cell and gene therapy manufacturing in Europe);
  
  
• JSR Life Sciences’ acquisitions of KBI Biopharma and very recently Selexis;
  
  
• Packaging Coordinators Inc.’s (PCI) acquisition of Penn Pharma;
  
  
• Fujifilm’s acquisitions of Merck & Co. biopharmaceutical operations in the US and UK and Kalon Biotherapeutics, forming Fujifilm Diosynth Biotechnologies;
  
  
• PolyTherics’ acquisition of Warwick Effect Polymers and Antitope to form Abzena, which then acquired PacificGMP and The Chemistry Research Solution;
  
  
• Brammer Biopharmaceuticals acquisition of Florida Biologix to form Brammer Bio, which then acquired a cell and gene therapy manufacturing plant from Biogen; and
  
  
• The acquisition by CDMO Frontida BioPharm, which was formed by CRO Frontage Laboratories, of solid dosage manufacturing facilities and related pharma products from a wholly owned US subsidiary of Sun Pharma.

The latter is an interesting example of a CRO looking to leverage its existing pharmaceutical customer base with expansion into the CDMO market.

There have been, of course, numerous small and medium-sized CRO-CRO acquisitions as well. A few examples in this area include:

• Charles River Laboratories’ (CRL) acquisitions of Galapagos NV, Celsis, Oncotest GmbH and WIL Research;
  
  
• INC Research’s acquisitions of the Global Clinical Development business of MDS Pharma and Kendle International;
  
  
• Quintiles’ acquisition of Novella Clinical;
  
  
• InVentiv’s acquisitions of PharmaNet and i3;
  
  
• Chiltern’s acquisition of Theorem Clinical Research;
  
  
• Icon’s acquisition of Aptive Solutions;
  
  
• Evans Analytical Group’s (EAG) acquisition of Analytical Bio-Chemistry (ABC)
  Laboratories; and
  
  
• SGS’s acquisition of Quality Compliance Laboratories.

Partnerships Are Important Too

One of the drivers for consolidation in the contract services market is the growing
preference among pharmaceutical companies to form longer-lasting, more strategic partnerships with fewer providers. Indeed, over the past four years, respondents to Nice Insight’s CDMO⁹ and CRO¹⁰ surveys have indicated that the percentage of projects contracted to strategic providers has increased, while those contracted to tactical and preferred providers have remained nearly the same or declined. In addition, the total number of respondents interested or very interested in forming strategic partnerships with CDMOs and CROs has increased from 2015 to 2017.

M&A isn’t the only mechanism for establishing differentiation. The way in which service providers are willing to work with their customers is also changing — creativity is an important aspect of all relationships. CDMOs are “finding new ways to deconstruct their value proposition and reassemble the elements into new offerings more tailored to individual client requirements,” according to Jim Miller of PharmSource.⁵ Examples include offering dedicated suites equipped with client-owned systems; operation by CDMOs of pharmaceutical manufacturing facilities without ownership changing hands; and CDMOs acting as general contractors for management of the supply chains for pharma products.

One example of a long-term strategic partnership in the CRO space is that between Covance and Sanofi, which was established when Covance acquired two of Sanofi’s European sites in 2010.¹¹ Another is the strategic alliance between MedImmune and WuXi AppTec to support biologic R&D efforts for AstraZeneca in China.¹¹ AstraZeneca also has the option to acquire the WuXi AppTec facility. In a third case, Siena Biotech took a minority stake in Aptuit’s Italian operations and made Aptuit a provider of choice for its drug development efforts.¹¹

Close collaborations between strategic partners can, in fact, lead to acquisitions. Catalent, for instance, acquired Redwood Bioscience after working with the company for approximately two years. Close working relationships provide great insight into the technology, culture and potential of a company to be successful in the future. As a result, these acquisitions tend to be smoother and provide more value-add.¹² Close collaborations are also becoming more important as the complexity of the pharma pipeline continues to increase while expectations for accelerated development times and lower costs are growing.¹

What Does It All Mean for the Pharma Industry?

The consolidation that has occurred to date has certainly changed the contract services market. Service providers that offer an integrated set of capabilities to support pharmaceutical clients regardless of their therapeutic targets, development needs, formulation and production requirements and intended markets can help their customers not only simplify their supply chains, but also benefit from economies of scale and gain access to differentiating technologies.¹³

Indeed, the fact that service providers are employing advanced, state-of-the-art technologies that in the past would likely have been kept in-house at pharmaceutical companies (and left unused) is increasing the level of innovation across the entire pharmaceutical industry.¹³ One consequence of consolidation, then, has been the greater spread of technologies and innovation, according to Tim Scott, President of Pharmatek, which is now part of Catalent.¹² The rise of creative partnerships and collaborations has been another result, if indirectly, of consolidation that ultimately facilitates innovation and accelerated drug development and commercialization.

Consolidation is expected to continue at a heightened pace as the drivers outlined above remain in play. Some providers will continue to grow and transform, while others are consumed or exit the market. Private equity investors will continue to play a role as they seek to leverage their investments. The result: a market that will look quite different even just a few years from now. One constant, however, will be the increasing importance of innovation and the development of novel, advanced technologies to solve the production and formulation challenges presented by increasingly complex small molecule and biologic drug substances.

References

1. Tim Tyson. “Innovation And Partnership Through Experience And Acquisition.” Pharma Outsourcing. 15 Mar. 2017. Web.
2. Louis Garguilo. “M&A Crucible In Contract Drug Development And Manufacturing.” Outsourced Pharma. 6 March 2017. Web.
3. Jason Monteleon. CRO Consolidations — Does 1 + 1 = 3? Pivotal Financial Consulting. Rep. 28 Nov. 2016. Web.
4. Chad Moore. “Are More CRO Transactions Near?” Contract Pharma. 2 Jun. 2016. Web.
5. Jim Miller. “Five Themes That Will Drive the CMO Industry.” Pharmaceutical Technology 40.11 (2016). Web.
6. AMRI Bought for $922M. AMRI. 7 Jun. 2017. Web.
7. Thermo Fisher Scientific to Acquire Patheon, a Leading Contract Development and Manufacturing Organization (CDMO). Thermo Fisher Scientific. 15 May 2017. Web.
8. “LabCorp reportedly planning $8B buyout of CRO.” MedCity News. 6 Feb. 2017. Web.
9. 2014-2017 Nice Insight Contract Development and Manufacturing Surveys.
10. 2014-2017 Nice Insight Preclinical and Clinical Contract Research Surveys.
    
11.  Jansen Jacob. “Trends in the CMO Landscape.” Pharma Ventures. Mar. 2016. Web.
12. Pharma Copycats In CMO Acquisition Strategy. Outsourcing Pharma. 11 Nov. 2016. Web.
13. Rita C. Peters. “Under New Ownership: Consolidation Reshapes Contract Services Market.” Pharmaceutical Technology. 1 Feb. 2016. Supplement 1(2016): 34-36. Web.