What’s driving consolidation in the pharmaceutical contract services industry?

By Editorial Team for CPhI Worldwide Special - Fintan Walton, CEO of PharmaVentures

In a year when pharma R&D has accelerated rapidly and global supply chains have come under increased scrutiny, contract services demand has rarely been so buoyant. With CPhI Worldwide nearly upon us, event organizer Informa Markets spoke to Dr. Fintan Walton, CEO of PharmaVentures, about his CPhI Worldwide Conference session on the driving forces behind both acquisitions and mergers, as well as on which types of facilities, technologies and companies are most desired.

Can you give an overview of the present pharmaceutical contract services market?

FW: The CDMO landscape has been growing considerably in the past 10-15 years. There are two key drivers for this, first is the move by pharma companies to outsourcing more of their manufacturing, and second is the emergence of biotech companies who have adopted a virtual business model which depends on outsourcing. Outsourcing by pharma provides them with both flexibility and access to innovative manufacturing processes. Historically, manufacturing – particularly within China and in India – was originally focused on low-cost small-molecule drugs. But what we’re now seeing is more novel drugs, biologicsand cell & gene therapies which introduce new challenges for manufacturing.

A particular recent example is the emergence of COVID-19 vaccines that have utilized mRNA technology and so CDMOs with these skill sets are potentially in a very powerful position, especially as some pharmaceutical companies don’t have these manufacturing technologies.

An additional factor is the fact that pharma companies will often get better efficiencies through contract manufacture than trying to undertake it in-house. All these factors mean we are seeing tremendous growth in contract services, which is driving very high EBITDA multiples for the best companies.

What are the strategies behind acquisitions?

FW: The main driver of acquisitions is still to build a much more diverse company, with broader capabilities. Therefore new technologies play a key role, for example, gene therapies, but it is also often overseas companies looking for a foothold in new regions. Then from the big pharma side, we continue to see a divestment out of manufacturing, and selling to the CDMOs. This is often where they have facilities they no longer use, and from a CDMO perspective these are often ideal targets for acquisition as the valuations are likely to be lower and there are often guaranteed contracts that go with the sale.

Do you think the industry is too fragmented at the moment in terms of CROs and CDMOs?

FW: That’s a good question; whether it’s too fragmented. Fragmentation is more often a good problem because you’ve got more competition. So, from a customer point of view, the more options you have the better, and the more you can negotiate on price. However, from a CDMO’s point of view consolidation reduces the competition, increases efficiencies and therefore increases profits. Thus, you can capitalize as best you can on that growth. There are two types of consolidation that I see going on in the industry: one is consolidation of similar types of organizations, so CDMOs buying CDMOs and getting bigger in the CDMO space; and then an alternative type is companies acquiring different services. For example, you get companies like Thermo Fisher buying both CROs and CDMOs to create something much larger and potentially synergistic. I think my own view on this is that we’re going to see a lot more services players doing more acquisitions, so that means CROs buying CDMOs or CDMOs buying CROs in order to increase the services that they can provide.

What recent acquisitions have caught your interest?

FW: Catalent have been very active on the acquisitions front in the cell and gene therapy space, acquiring both MaSTherCell and Paragon Bioservices in the past two years. They have been acquiring companies very frequently as they are looking to make their pharmaceutical services as broad as possible. Another deal that really caught my eye was the private equity company EQT’s purchase of Swedish manufacturing company Recipharm recently for over $2 billion. Recipharm is now expanding rapidly through acquisitions.

Do you think we will see the larger CDMOs ensuringthat they have their manufacturing sites located in the three major continents (i.e. just in case a pharma customer has a preference on manufacturing location)?

FW: With the largest CDMOs, yes you do see this, but there are often different and specific reasons for geolocations. Ireland, for example, is very famous for having low manufacturer costs in part thanks to the nation’s tax benefits. However, manufacturer facility location also depends on the availability of skilled individuals, so Ireland was able to build a strong manufacturing capability not just only because of tax but because they started to invest in educating people in this specialist area of expertise. There are lots of courses in pharmaceutical manufacturing, and many young people have undertaken specialized courses, and then moving straight into manufacturing upon graduation.

What do you think will happen in the next 5 years; do you think the CDMO industry will be dominated by much large players?

FW: Yes I think you will see that. But with such strong demand, I do also envisage new CDMOs emerging, as we know of individuals, companies, and private equity houses that are aligning to grow in that space–everybody’s seeing this as an opportunity.

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