September 15, 2017 PAP-Q3-17-NO-001
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.
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.
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:
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:
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.
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:
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:
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
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.
Mr. Walker is the founder and managing director of That’s Nice LLC, a research-driven marketing agency with 20 years dedicated to life sciences. Nigel harnesses the strategic capabilities of Nice Insight, the research arm of That’s Nice, to help companies communicate science-based visions to grow their businesses. Mr. Walker earned a bachelor’s degree in graphic design with honors from London College of Communication, University of the Arts London, England.