The outsourced manufacturing sector is poised for robust growth, expansion, and evolution in 2020 and beyond. Since our last review of the market in the beginning of 2017, we have seen a record number of new molecular entities in development; we’ve also seen gene and cell therapies finally making it to market, providing valuable, tangible benefits to patients. With the viral vector market expected to be the fastest growing segment of the contract development and manufacturing organization (CDMO) industry, CDMOs with those capabilities are receiving considerable attention from industry players.
Our newest white paper1 provides insight into the fundamental drivers of the outsourced CDMO sector, with implications across discovery, product development and characterization, clinical and commercial manufacturing, logistics, distribution, and regulatory support — a robust cocktail of business functions and market opportunities that are also driving up valuations, resulting in increased opportunities for mergers and acquisitions (M&As).
Size Dictates Need
CDMOs are proving to be highly valuable to the pharmaceutical and biotech industries, offering potential capability and cost advantages over in-house manufacturing. Overall, we see a strong correlation between company size and outsourcing. Small and medium-sized enterprises (SMEs) operate with fewer stakeholders and fewer organizational barriers in the decision-making process, allowing for a more streamlined partnership with CDMOs. Beyond reduced organizational complexity, SMEs are often reliant on CDMOs to manufacture their developmental products, owing to a lack of technical expertise and production capabilities. Additionally, time and cost implications usually prevent SMEs from creating a manufacturing infrastructure of their own, as they lack the required cash flows before having a commercially launched product. Large pharmaceutical companies suffer from inherent structural complexities, with multiple decision makers and budget owners contributing to a procurement strategy that may not always neatly align with outsourcing activities. However, big pharma increasingly aims to consolidate suppliers and form deeper strategic partnerships, widening the lane for growth in the CDMO space.
The Pharmaceutical Sector at A Glance
The global pharmaceutical sector will reach $1.52 trillion in annual sales in 2023, driven by factors such as global economic growth, a growing and aging population, and new product launches. Small molecules comprised roughly 78% of the total pharmaceutical market in 2019 by sales, and we estimate that this segment will continue to have the highest market share percentage, despite modest growth. The largest component of this sector is originator prescription drugs, but generics are growing three times as quickly, driven by a substantial number of drugs coming off patent in the next few year. Although product volume in the large molecule sector is considerably smaller than in the small molecule sector, these drugs (biologics, biosimilars, and cell and gene therapies) are the fastest growing market segment — particularly cell and gene therapies (CGTs). Pharma views CGTs as key growth drivers due to their potential for ground-breaking scientific advances that may cure conditions that have traditionally been incurable.
CDMO Market Overview
We estimate the total CDMO market to outpace growth in the pharmaceutical market through 2023, largely due to a continued overall increase in outsourcing activity. In order to satisfy the growing demand for outsourced manufacturing services, CDMOs continue to heavily invest capital in expanding capacity to support growth, especially in areas of the market where there are capacity bottlenecks. While commercial manufacturing owns the lion’s share of the CDMO market, clinical trial services, including clinical manufacturing, is key in locking in products early in their life cycles. We examine the roles of CDMOs in clinical- and commercial-stage services, as well as their impact on biologics versus small molecule manufacturing. This study also explores the impact of key industry trends on recent M&A activity.
Fragmentation Working Against Consolidation
Two-thirds of companies in the CDMO sector are generating less than $50 million in revenue, and the top ten companies hold less than 20% market share. This can be attributed to a number of factors, including relatively low barriers for new entrants in undifferentiated segments of the sector, market/product specialization, captive CDMOs, and a large number of private and family-owned companies, to name a few. As such, overall market consolidation has not occurred over the past four years, despite robust M&A activity. The consolidation that has occurred is mainly due to large, public CDMOs that have access to the capital required for significant transactions, and shares of public CDMOs have outperformed the wider market by a large margin since the last recession. Our research takes a more granular look at the key players and market evolution in the sector over the past five years, with thoughts on likely future M&A activity and sector consolidation.
M&A Activity and Industry Developments
M&A valuations have increased considerably since 2012 and have reached record levels, as competition for desirable assets has increased from strategic and private equity acquirers. While median deal valuations were about 10× earnings before interest, taxes, depreciation, and amortization (EBITDA), they have increased to 15× since 2016, with transactions regularly and significantly exceeding this multiplier. We evaluate transactions, such as the acquisitions of Brammer Bio by Thermo Fisher and Paragon Bioservices by Catalent, to further illustrate the increase in M&A valuations, evidenced by both companies being valued in excess of $1 billion and well over 20 × EBITDA.
Another key consideration for M&A strategy involves the pursuit of the one-stop-shop model, whereby leading CDMOs aim to seek and fill capability gaps through acquisitions. CDMOs offering a multitude of services provide convenience, time savings, and cost efficiency due to the inherent nature of dealing with a single entity. The relationship also creates opportunities for the CDMO to sell more services to the same customer, as well as locking in products at earlier stages of their life cycles. Additionally, scale and full-service capabilities carry valuation premiums, as a shortage of high-quality assets exists in the market. Another aspect of the CDMO M&A strategy capitalizes on the fact that big pharma continues to divest manufacturing assets in an effort to reduce their manufacturing footprint. Pharma asset divestments are seen as an attractive acquisition opportunity by many CDMOs, as ex-pharma manufacturing facilities are generally high quality with a well-experienced workforce.
All Things Considered
CDMOs have become a vital part of the drug development and manufacturing process, with the majority of SMEs and an increasing number of big pharma relying on outsourced services. The CDMO sector is continuing to perform strongly with growth ahead of the underlying market, leading to increasing market penetration, albeit from a still relatively modest position of less than 30% for the overall CDMO sector today. With a positive M&A environment, substantial ongoing investments, and attractive forecast growth, our outlook for the sector to 2023 remains very positive. Our updated white paper provides in-depth analysis of all of the aforementioned topics and more, painting a thorough picture of the CDMO sector today and in the coming years.
Bottomley, Kevin and Achim Newrzella. “Outsourced Pharmaceutical Manufacturing 2020: Current trends & future prospects.” Results Healthcare. 2020. Web