CDMOs Add Capabilities to Build Strategic Biopharma Capabilities

This has been another big year for acquisitions in the contract development and manufacturing organization (CDMO) industry. In the first three quarters of 2017, there have been 25 deals in which a CDMO was the acquisition target (see Figure 1). With just three months left in 2017, the final number of deals is likely to trail 2016 (34 CDMO acquisitions), but the total value of the transactions is likely to exceed $20 billion, which will far exceed 2016’s total. Average deal multiples look to be about 13.5x EBITDA (earnings before interest, taxes, depreciation, and amortization), a big premium above the 10x multiple at which private equity investors typically value acquisitions; a number of deals have come in at multiples in the 15x-25x range.

Figure 1: Bio/pharma acquisitions in 2017, as of October 2017. SM is small molecule. (Figure courtesy of author)

Aside from the sheer size of the transactions, deals in 2017 are most notable because they may have finally created some CDMOs with the scale, breadth, and financial wherewithal to be strategic manufacturing partners to global bio/pharma companies. Global bio/pharma companies represent the last frontier for CDMOs: they outsource only approximately 25% of their drug product manufacturing requirements, compared to 70-80% for small and mid-size bio/pharma companies, and they use CDMOs to manufacture fewer than 15% of their biologics products. 

CDMOs are fighting ingrained culture and deep pockets when trying to get global bio/pharma companies to outsource more of their manufacturing requirements, but they are also handicapped by scale and scope. An average size global bio/pharma company (top 25 by revenue) has approximately $20 billion in revenues and $3.5-4.0 billion in cost of goods, plus as much as another $1 billion for developing and manufacturing clinical candidates. That means the manufacturing requirements of that average global bio/pharma company are two to three times the revenues of the three largest CDMOs, which all had revenues of $1.5-2 billion prior to the latest round of acquisitions. Even those largest CDMOs had limited capabilities (only API, no dose; or strong solid oral dose, limited injectable, and API), and companies in the next tier of CDMOs ($500 million-$1 billion range) had even more limited capabilities and/or significant financial issues.

Global bio/pharma companies are struggling to manage complex supply chains with hundreds of vendors, but the limited scale and scope of most CDMOs left the global companies with few choices for consolidating their supply base without becoming too big a piece of a given CDMO’s business. Thanks to the latest round of acquisitions, however, the industry now has some participants that, either on their own or in concert with their parent companies, have the scale, scope of capability, and financial sophistication to be taken more seriously by global bio/pharma companies. Consider the implications of some of the major deals in 2017.

Lonza-Capsugel 

Capsugel’s $1 billion in revenues pushes Lonza’s total revenues past the $5-billion threshold, giving it manufacturing scale equivalent to a $25 billion bio/pharma company. It also expends its scope by bringing dose form capabilities, including softgels and solubility-enhancing technologies such as spray-drying, and its market-leading hard gelatin capsule business; all of those are key inputs for prescription pharmaceuticals and nutraceuticals and a big part of any bio/pharma company’s procurement spend.

Thermo Fisher–Patheon

Combining Patheon with Thermo Fisher’s clinical supplies business fills a major gap in Patheon’s service portfolio and creates a CDMO with $3 billion in revenue, comparable in size to Lonza’s pharma and biotech segment. Patheon is now better-positioned in the market for clinical development, manufacturing, and packaging services, which is becoming more important as a feeder into a CDMOs commercial manufacturing pipeline. As importantly, Patheon is now a significant part of a $20-billion supplier of life-sciences products and services to the bio/pharma industry, rather than a $2-billion standalone CDMO. 

Carlyle Group–AMRI

Acquisitions by private equity firms aren’t usually viewed as strategic, but a deal with a firm of the size and reputation of Carlyle could be transformational for AMRI. Carlyle will bring more financial savvy and operational focus to the company, which should strengthen it for the long term. The transformational opportunity will come about if Carlyle is able to bring in an executive team of significant stature and experience to drive the company to the next level, as Blackstone did for Catalent and JLL Partners did for Patheon.

Catalent–Cook Pharmica  

Catalent’s acquisition of Cook Pharmica, despite its nearly $1-billion price tag, is not as transformational as some of the other recent deals: the company already has a growing biomanufacturing business, and the near-term revenue increment is much smaller than in the other cases. However, the deal makes Catalent a more complete provider in the biopharmaceuticals market as the addition of North American injectables and biomanufacturing capacity complement its existing biomanufacturing and analytical capabilities. 

Eurofins–multiple CDMOs 

Eurofins is worth noting not because of any one large deal but because of the way it has built a CDMO offering through a series of small acquisitions. Eurofins built its GMP analytical services capability around its acquisition of Lancaster Laboratories in 2011, but in the past two years, it has broadened its chemistry, manufacturing, and controls (CMC) portfolio into process development, formulation, and clinical manufacturing services by acquiring companies like Sinesis Life Sciences (Netherlands), Advantar Laboratories (USA), Alphora Research (Canada), and Amatsigroup (France and Belgium). Eurofins, with revenues exceeding $2.5 billion, may be able to leverage its strong position providing analytical and bioanalytical services to global bio/pharma companies to get more of its clients’ development business.

The current financial market environment has been favorable to large-scale acquisition activity, and one might expect to see a few more large deals that consolidate the top end of the CDMO industry. However, the number of large and attractive acquisition targets is limited, which will limit the number of transformational deals in the near term. There is no doubt, however, that creating large-scale suppliers will be crucial to cracking the global bio/pharma market.