Who's Left to Acquire in CDMO Biomanufacturing? A Select Few.

Who's Left to Acquire in CDMO Biomanufacturing? A Select Few.

June 24, 2022PAO-06-022--NI-12

Publicly funded biotechs have experienced drastic reductions in market value in recent months, while private companies continue to attract financing and are in-licensing technologies and expanding staff. With the slower economy, companies are often expected to drop early-stage projects to focus on more advanced lead candidates. These changes will impact demand for CDMO services beginning in late 2022. The M&A market could also be further affected, given that there are already limited CDMOs optimally situated for acquisition. We look at a few recent deals and which companies might be on the block.

Some Recent Noteworthy Deals

Much of the investment activity in the past year has been in the cell and gene therapy (CGT) space. In fact, nearly 20 CGT CDMOs were acquired in the last 9 months alone. Some of these deals were typical, with companies in the biologics and even the CGT space expanding capacity and capabilities. Examples include the acquisitions of OXGENE by WuXi Advanced Therapies and Xpress Biologics, a plasmid DNA producer, by ArchiMed.

Others were more interesting, such as Recipharm’s acquisitions of microbiome CDMO Arranta Bio and viral vector CDMO Vibalogics, which move the company from a historical focus on small molecules and sterile manufacturing into the CGT space.

The $350 million investment of SK Inc. (SK pharmteco is the holding company for the SK CDMO business based in California that comprises AMPAC Fine Chemicals, SK biotek, SK biotek Ireland, and Yposkesi) in the Center for Breakthrough Medicines (CBM) is also notable. CBM will use the equity financing to create what it claims will be the world's largest end-to-end cell and gene therapy CDMO supporting plasmid DNA, viral vector, and CGT manufacturing.

Once CBM is built out, that organization will probably be the largest independent group in the United States. It will face competition from FUJIFILM Diosynth Biotechnologies, however, which recently announced that it is doubling the existing lab footprint at its Research Triangle Park BioProcess Innovation Center through a collaboration with sisterFUJIFILM company, FUJIFILM Wako Chemicals U.S.A., Corp.

Other Japanese conglomerates have been active as well. For instance, Asahi Kasei recently acquired Bionova. AGC Biologics purchased a state-of-the-art CGT commercial manufacturing facility in Longmont, Colorado, from Novartis Gene Therapies. KBI Biopharma, which is owned by JSR Group, is another large Japanese organization; although it has not made any deals in the last couple of years, it seems likely to be considering opportunities.

Another company that has been busy in the conventional biologics space is Curia, which continued its expansion efforts with the acquisitions of LakePharma and Integrity Bio.

Keep In the Context of the Public Pounding

All of this recent activity must be looked at today through the lens created by current economic conditions. The biggest change has been the dramatic reduction in stock prices — in some cases as much as 95% — for publicly funded biotechs. There was a small bounce back in May, but 90% drops remain common.

However, the same isn’t true in the private sector, where almost no softening has occurred. The valuations of these organizations have come down, but the 100+ multiples seen with public companies do not exist, and funding is continuing to come into the private sector. Biotechs with private funding continue to grow, in-licensing new technologies and expanding staff. A good example is Inceptor Bio, which has in-licensed three platforms based on CAR-T, CAR-NK, and CAR-M technologies.

Next Up: Closedown of Early-Phase Biotech Investment

The slowdown in the economy will affect internal biopharma investments, according to That’s Nice’s Director of Advanced Therapies Jason Rahal, who has 25 years of experience in the CDMO biologics and CGT spaces. With funding dropping off — following an absolute explosion in 2020 and 2021, biotechs are focusing on their latest-phase development projects and moving them into clinical trials. Nearly all of the funding for multiple preclinical and early-phase trials will be pulled and shifted to support their lead candidates in phase II. Outsourcing of preclinical and early-stage clinical materials will be mostly stopped.

This movement will really take effect in Q3/Q4 2022 and Q1/Q2 2023. Beyond that, if inflation continues to rise, and interest rates continue to increase such that the prime rate reaches 6%, most company debt will be debted out at 8 to 8½%, and a complete closedown of biotech investment in pre-IND activities can be expected.

Opportunities Remain Massive Though

Early in 2022, deals were setting a new ceiling of 10 revenue. Despite the decrease in biotech valuations, recently — whether biopharma CDMOs focused on old-school mammalian and microbial technologies or new modalities — acquired businesses that were realizing annual revenues of $2–5 million sold for 15–20 revenue. That is completely disproportionate with regard to how the biotech market is moving, but the opportunity is obviously massive and explosive.

Life Science Industrials Still Sexy

One sector that has remained particularly strong is life science industrials. It makes sense when considering general trends in personal investment during up and down economies. When the economy is strong, and interest rates are low, people are more willing to take risks to achieve higher earnings and invest in new ideas and innovative companies. When there is a downturn, however, the tendency is to invest in established firms making staple products — a “bricks and mortar” mentality, as it were.

Similar behaviors are being observed in the biopharma space today, which is why life science industrials are still sexy from the perspective of investment and acquisition. Companies providing the tools and services in support of CRISPR gene editing and similar technologies continue to be heavily funded, for instance. Mesenchymal stem cells (MSCs) and extracellular vesicles (EVs) secreted by MSCs is another frontier attracting significant attention.

Exciting Time for mRNA CDMOs

The success of the COVID-19 mRNA vaccines has demonstrated that this technology can work in humans. As a result, there is now massive interest among biopharma companies large and small to develop RNA-based therapies and vaccines. That is creating a massive opportunity for mRNA CDMOs.

Surprisingly, as of yet there have been few announcements of investments in this area by CDMOs. Vernal BioSciences, the first dedicated mRNA CDMO, is one company making news with a recent $21 million investment led by Ampersand Capital and supported by Dynamk Capital. At least two or three other CDMOs can be expected to be created as pure-play mRNA drug substance companies, which will add excitement to this space. Not only mRNA, but other nucleic acid, oligonucleotide, aptamer, and similar novel modalities that involve complex chemistry are new frontiers that will lead to new therapeutics and which everyone should watch.

That includes companies supporting all aspects of the drug manufacturing process, including delivery vehicles, such as lipid nanoparticles (LNPs). Avanti Polar Lipids, a manufacturer of high-purity polar lipids used as delivery systems for complex next-generation pharmaceuticals, was acquired by Croda International Plc in August 2020. That deal was perfectly timed given the demand for these lipids for the production of the COVID-19 mRNA vaccines.

Companies are also emerging that offer improved approaches to the production of LNPs. One example is the small firm Diant Pharma, which has developed a jet-mill technology for the production of much more uniform LNPs. Dramatically reducing the variability of the LNP particle size provides a more consistent in vivo release profile.

What we are seeing in this space, in fact, is that equipment manufacturers are working with nanoparticle excipient companies who are working with drug substance companies, all with the goal of delivering optimum mRNA therapies and vaccines. CDMOs will have a key role to play in uniting these efforts and getting new drugs to market.

A Few Conventional Biopharma CDMOs Might be Available

Excitement isn’t limited to mRNA, even though the conventional biologics space is quite mature. There are some companies that present attractive opportunities for the right buyer.

Emergent BioSolutions is one. It has lost 90% of its market capitalization, but, as a biodefense contractor, Emergent has fairly large capacity for both drug substance and drug product manufacturing, much of which is state-of-the-art. The company’s culture is broken, however, and the only way forward is to take on a new management system run by a new team that is backed by a new owner. Emergent’s earnings multiple for 2021 was between four and six, when the industry average was 20–40. That significant depression in valuation makes the company an obvious acquisition target.

Goodwin Biotechnologies is another. Founded over 30 years ago, it was one of the first biopharma CDMOs in the United States. The company was slow to invest in new capacity, technologies, and modalities and struggled to grow into the leading Florida-based biomanufacturing CDMO. It is still an independent firm, although Signet Healthcare recently made an investment, and we expect Goodwin to be on the map as a rejuvenated company in Q2 2023. Once the commercial capacity is online, Goodwin will be one of the last target acquisition opportunities.

In Europe, Northway Biotech, which is located in Lithuania, is an obvious target as well. This organization has been around for more than 15 years. In addition to the owner, the Lithuanian EDC has invested in the company. Richter-Helm is a biopharma company that makes innovator products but has recently expanded its CDMO services and could be attractive to some buyers.

Back in the United States, one exciting new company is INCOG Biopharma Services, which was founded by a team with a track record of establishing CDMOs and then selling them to leading players in the market (Baxter Biopharma Solutions and Catalent). INCOG is well funded and has a great management team with really strong experience. It has already signed an agreement with Resilience to provide integrated process development, drug substance and drug product manufacturing services. Given the history of INCOG’s founders, this company will likely be acquired very quickl.

Viral Vector CDMOs Possibly on the Block

There are several viral vector CDMOs that can be viewed as attractive acquisition targets. In the United States, Genezen Laboratories was recently acquired by Ampersand Capital and is investing in a large-scale GMP buildout. It is already attracting interest from potential buyers and will likely be on the block in 2023. South Korean firm CHA Biotech’s U.S. CDMO affiliate Matica Biotechnology just opened a new GMP viral vector plant in Texas.

In Europe, Biomay, Biovian, FinVector, HALIX, and PlasmidFactory are all potential targets. PlasmidFactory is particularly interesting as a potential target for North American firms looking to gain a foothold in Europe on which they could build GMP capabilities.

A Few Final Words about the Sterile Fill/Finish Space

It is worth taking a look at the sterile fill/finish space, given that COVID-19 vaccine manufacturing contracts will be expiring at the end of 2022. These fill/finish capacities are very large-volume systems designed for large-scale commercial filling.

There are few biologics products on the market today — and even fewer candidates in development, given the increasing focus on orphan indications and personalized medicines — that require such high-volume fill/finish solutions. As a result, we are just starting to see some overcapacity and changes.

Currently, however, there are few if any fill/finish CDMOs on the market. The last big deal involved the acquisition of Lyophilization Services of New England (LSNE), which sold for more than 50 EBITDA, by PCI Pharma Services at the end of 2021. In the United States, one company that is officially not for sale is Argonaut Manufacturing Services. In Europe, Cenexi, which has fairly decent capacity across multiple facilities, came on the market in June 2022.

In the coming months, it is likely that a few smaller CDMOs with sterile capacity will be acquired by some of the larger CDMOs. This will take place as soon as biopharma companies looking to outsource smaller fills for clinical runs realize that the available high-volume capacity is too inefficient for their applications.

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